Big Question – How to utilise available Funds?

In Last two weeks I came across two incidents. This incidents compel me to think from some different aspect about how Indian public looking at their financial life.

1^st Incident – One of my colleagues purchased a brand new Mobile Phone – Samsung S4 at whopping price of Rs. 41000 (which is actually more than his monthly take home).  He is not that techno savvy.  Still he purchased such gadget. Asking about why such expensive mobile phone? He given very interesting answer –

   1. 0% EMI scheme with 15% money back offer (thanks to consumer finance & marketing strategies of MNC’s)

       2. Due to his girlfriend. She insisted him to purchase a stylish mobile to suite his status!!! OMG!

2^nd Incident – I visited my childhood friend last Sunday. He is just married. He is busy buying home appliances & required stuff for his Ghar Grihasti. He showed me recently bought new LED television. As a typical middle class person, I asked him about the price. To my utter surprise, he purchased it at Rs. 70000. This time I was bit serious and ask why such expensive LED? He also had his set of reasoning –

      1. 0% EMI scheme

      2. His Brother in law (Jijaji) insisted him.

      3. You don’t buy such stuff every now and then. So buy the good things only once.

As a Financial Planner I was completely disappointed by such kind of crazy consumerism. In second incident I was equally surprised & disappointed by Friends decision. But then I try to decode this consumerism.

Below are my findings –

     1.  Increase in Income level – After the Liberalisation, Privatisation & Globalisation (LPG) in 1991 all of us witnessed phenomenal growth in Indian Economy. India is a young country. Number of earning members in Indian household increased thereby increasing General Income level. 

     2.  Availability of Easy Finance – As India become a part of free economy, many MNC’s set up there shops. In order to grow the business various marketing strategies were implemented by this MNC’s.  0% EMI scheme is one of those strategies. This strategy works very well in todays Indian Market context. 

      3. Plenty of Option to Purchase from – Indian consumer is exposed to consumer goods & other services like never before.  There are plenty of things to lure you. 

      4. Me too approach – Everybody is spending & buying various so called necessary goods and Status symbols. In such social scenario person with a good income get into the rat race in order to show case his financial well being. 

      5.  Influence from near & dear one’s - This is another consumer psychology related aspect. As per marketing concepts, consumer mostly influenced by his near & dear one’s while making any buying decision.  In above both the incidents – My Colleague & Childhood friend both were influenced by there near & dear ones while making buying decision but they fail to understand that they were spending form there own pockets. 

      6.  Quality Purchases – As I mentioned in 2^nd Incident, a typical middle class mind set compel to buy expensive stuff.

 “Bar Bar to lena nahi hain to ek bar hi acchi Cheez kharidhate hain! “ While this reasoning holds the ground but in above both the incidents this is irrelevant at given price points.  You want to buy a gadget which comes with its own technological expiry. So when you are spending 70000 for a Smart TV, no one can assure that they are going to use such an expensive TV for next 15 years same like our parents did! (go to flash back) I think this “Ek hi baar lena hain” attitude means you are not going to upgrade. But if at first point you know that you need to upgrade your TV or phone sometime in future, try to purchase stuff which is relevant to you as per today’s requirement. With the purchase of such expensive gadget, you are setting up a benchmark for your next upgrade. So think & spend wisely!!!

As Financial Planner I also want to add some more thoughts –

In Above incidents – Both of the person are in there late 20’s belongs to very moderate background. Both of them are salaried and earning average salary (35000).

Both of them recently bought an Apartment & servicing the home loan EMI.

For such profile – I think purchasing any Premium or high end Gadget should be big NO!

Now let me explain you concept of Opportunity Cost - With Every rupee that we hold we can do many things but one at a time. E.g. If I have 10 rupees – I can Buy a Snacks or Drink or chocolate! So when I spend 10 rupees buying Snacks for me, I am sacrificing another option of Drink or chocolate. 

This is called as Opportunity cost.

For person with above profile – buying a phone worth Rs. 41000 or Buying a Smart TV worth Rs. 70000 means scarifying many things. 

So If I want to discuss case of my Friend – He don’t have required furniture required by a married couple. So how he should have wisely spent hard earn Rs. 70000?

Following were his requirements –

1.    Color TV

2.    Sofa set for Living Room

3.    Double Bed

4.    Wardrobe

Now following chart will illustrate Opportunity Cost based spending –

Particulars	His Spending Attitude	Opportunity cost based model
Color TV (LED)	70000	32000
Sofa Set	Nil	14000
Double Bed	Nil	10000
Wardrobe	Nil	14000
Total	70000	70000

As a Financial Planner – I supposed to be act as Advisor and not as a Broker or agent. In above illustration, No where I talked about investments. As my friend started his married life so few necessary things need to be purchased. I understand in such phase of life. Investments take a back seat. But as per his spending attitude he is no where starting saving & investing in near future. His necessary wish list will not be completed due to premium spending on TV set.

Feel Free to comment on my blog. Your comments are appreciated.

Regards,

Prateek Patani

prateekpatani@yahoo.co.in

+91 95 95 41 77 38