Kolkata-based Prithviraj Dasgupta, a 34-year-old entrepreneur, is not sure what compels him to spend 70 per cent of his monthly income. He just spends it. "I have cash in hand and there is nothing to do with the money. Spending has become a habit," he says.
It is not difficult to empathise with Dasgupta. Remember the time you just had to buy the latest watch even though you already had three? Or when you used the stock dividend to snap up the latest MP3 player ignoring the fact that everyone in your family had one? All the pleasures of the world fade in the face of the pleasure of owning what you set your eyes (and mind) on. Psychology experts have strived to identify the source of this unique pleasure—is it the satisfaction of ownership? Is it the need for instant gratification? Or does it enhance self-worth?
Swot analysis
Strengths: Ambitious about life. Determined about what they want.
Weaknesses: Impulsive and hasty in making decisions. Need for instant gratification. Careless in accounting.
Opportunities: Can channel quick thinking and determination towards investments.
Threats: Can take uneccesary debt. Can lose sight of the big picture.
The answer doesn't really matter as long as you enjoy retail therapy in small doses. But some people go overboard and regularly spend far more than is good for their financial health. There is no arbitrary limit of expense to decide whether you qualify as a spendthrift. However, experts sound the alarm if expenses, excluding rent, exceed 50 per cent of your net income.
Dasgupta is a case in point. He spends about Rs 28,000 a month on clothes, accessories and fine dining—discretionary expenses that do not have high utility. By spending almost everything he earns, he is losing out on precious time to create longterm wealth.
Says Deven Shah, business head, Money Mentor: "Such people have a low sensitivity to the pain of parting with money while paying for something." Unfortunately, it is a trade-off: either you feel the pinch of foregoing extra expenses now or suffer big financial losses in the long run.
According to research by professors of Carnegie Mellon University, US, in 2007, among the users of credit, spendthrifts are three times more likely to be in debt than tightwads. Their chances of having a corpus less than $10,000 (about Rs 4.4 lakh) is also double than that of the latter.
The financial implications of high-rolling extend beyond messing up the cash flow. For one, because there is no surplus, spendthrifts invest randomly and do not align investments with their goals. As a result, there is an inadequate corpus for important events like children's education and retirement.
High-rollers have little idea about what eats up their income. So, instead of being prepared for it, they are shocked when they come up short. Not that this tames the shopping monster. A spendthrift would rather let an insurance policy lapse and use the money to finance a short-term need. Or else, loans and credit cards come to the rescue. This is why they are more likely to become debt mongers in future. Dasgupta sums up the effect of extravagance accurately: "My finances are very disorganised. I don't know how to start putting things right."
The answer is, in the mind. If you are a spendthrift, start with acknowledging that you must spend less. Make a list of your expenses and classify them as necessary and discretionary. Next, sort out those expenses which conventional wisdom does not consider necessary. For instance, dining out twice a week is not a necessity.
You must stick to the budget you have made. However, going to a mall with the resolve to spend, say, less than Rs 2,000 is not the way to do it. A better idea is to go to the mall with less than Rs 2,000 (and no plastic money) in your wallet. No money means no expenses. What if you are motivated enough to go to the bank and withdraw cash for what you want to buy? Well, make sure that there is no money in the bank for such indulgences. This is the most important rule of planning for spendthrifts: income minus saving equals spending. The idea is to hide the money from yourself so that it can be used in a more financially prudent way.
For this, first set your financial goals and figure out how much you need to save for them. Match your surplus with the amount of investment required every month. If the difference is too high, go back to the budget and cut back further (yes, it is possible).
To take your money to the final hiding place, investments, use automatic bank transfers. Opt for SIPs in mutual funds and Ulips for the day after your salary is deposited. You can also transfer money to debt investments for building safe havens.
What you definitely cannot build is an emergency fund. By definition, it means handy cash, which never stays with spendthrifts. One option is to shift some money to another account and hand over the ATM card and cheque book to a trusted friend in the same city. In addition, cut up all credit cards because they are the highway to debt.
A great tip for high-rollers comes from an unexpected source, Oscar Wilde, who said, "I can resist everything but temptation." In your case, keep it at bay.
