Your financial well-being depends a lot on your ability to draw the line between your needs and wants. Here is some help for you with the process
A medium-sized departmental store in Mumbai has stacked a range of imported eatables such as Oreo Cookies, Kraft cheese slices, Pringles, and Tobleroneon in the front rows of its shelves. It seems like the store manager has smartly hidden desi products such as Parle G, Amul Cheese or 5-star behind the foreign goodies to earn on the differential pricing. But the store keeper has a different explanation for the display. He pins it down to customer preference for these products over their Indian peers. Whether his explanation seems convincing or not, the fact is that aspiring Indians are moving more towards a want-based spending pattern than a need-based one.
Needs vs wants
It's easy to differentiate between the two if you go by a textbook definition. But in reality, the distinction is difficult and has been getting narrower over the past few years.
Today, a car has become an emotional need despite the existence of an efficient public transport system. The need for a car has transformed from a status symbol to a luxury to a basic necessity now. The same logic applies to food. From home food to a fast food joint, today customers expect a fine dining experience and not just good food. This ambience comes at a premium and people just don't mind paying for it.
The fact is, wants are unlimited and often the lines between needs and wants get blurry. Hence, one needs to get into introspection before giving into the urge to splurge.
Let's assume a family of four spends Rs 8,000 on food, Rs 25,000 on shelter (Home loan EMI), Rs 20,000 on education and Rs 10,000 on transportation in a Metro. Now calculate the difference between your expenditure and the above example. All you have to do is to write the basic price list and the cost of living in your city and compare the areas to give you a realistic picture.
If you need a mobile because you have a field job, it's a need. But if you insist on the latest gadget which you can really afford, it's a want. That was an easy pick. But it gets difficult if you have to trade off a washing machine for a refrigerator or substitute a radio with a home theatre-cum-music system.
Additionally, enlist the recurring expenses such as utility bills, transportation and mortgage payments/rent and trim such expenses. They have a higher impact on your overall budget.
Are you saving enough?
It's not wrong to give into wants or aspire for a certain lifestyle. It has to be backed by a sound bank balance after providing for future and other necessary expenses. The thumb rule is to save at least 25% of your take-home income. Otherwise, there's a serious problem with your lifestyle. At this stage, you have to critically evaluate every need and examine if it's really a need or just an impulse buy.
Everyone aspires to own a huge house in a dream location. But you have to question if you need it and if you can afford such a big house at that prime location in the city.
Why does it matter now?
A few years ago, people were constrained by their salary levels. More often, the companies would save on their employees' behalf by putting a substantial portion of their salary into PF, gratuity, etc. Now the employees are enjoying a higher disposable income without realising the downsizing in the PF and other saving components. Year 2009 was a particularly difficult one with job losses and paycuts. Hence, you should be financially equipped to handle such circumstances in future.
Retail therapy
Sneha Dharmarajan, a Mumbaibased psychologist, explains. This is a new term coined for people who treat shopping as a mood uplifting exercise. Often people say they feel euphoric after shopping even if they had a not-so good-day at home or work. But what they don't realise is that many do not feel so happy later as it's just a temporary feel-good defence mechanism. At such times, you should just distract yourself with a favourite activity like listening to music or reading a book, which has longlasting distracting effect, she adds.
What implications does it have?
It could be a root cause for personal finance disasters. By earmarking higher funds to tangible wants, people are unable to save or invest their money for future needs. Every rupee value has an opportunity cost, which is gained or lost, depending upon where you have deployed it. The opportunity cost is highest if invested, high if saved, lower if repaid and lowest if spent.
