Would you pay for something you haven’t bought? Vijayalakshmy Sunderrajan does. The Delhi-based government officer is putting aside Rs 3,000 a month for the second car she is yet to purchase. But why would she do so? Because she is a pretend buyer. She is among the growing breed of people who are resorting to a new strategy called pretend buying, wherein they keep aside amounts equal to the monthly instalment of a loan required to purchase the desired object. The exercise not only helps them test their ability to stick to the rigour of regular payments, but if they decide to go ahead and make the purchase, have a hefty amount ready to serve as a down payment.
“I need to be able to put aside about Rs 20,000 a month to get used to a home loan EMI,” says Mumbaibased Pravin Bhoir, who has been planning to upgrade to a bigger house for some time now. The cost: Rs 30 lakh. After selling the apartment in which he currently lives and liquidating his savings, he will have to borrow about Rs 20 lakh to fund the purchase.
The concept is best suited to the current financial environment, where asset prices are declining or stagnating, while interest rates are expected to go up. “The monthly outgo of the pretend buyer remains the same. It’s only that he starts thinking in terms of systematic investment plans (SIPs) instead of EMIs,” says Bharat Bhushan, a Delhi-based financial adviser.
Bigger Savings, Bigger Benefits
Bhushan has been advising clients to save aggressively while they go window-shopping for cars, homes and other big-ticket purchases. Which is perhaps why Delhi-based Manish Bindra has been saving nearly Rs 5,000 a month for the past four months to be able to go on a foreign holiday. “I will need about Rs 2 lakh for the overseas vacation. I had wanted to take a travel loan for the full amount but decided against it. I should be able to save at least half of this amount in a year’s time,” he says.
These pseudo-purchases offer several benefits. It’s very common to see people stuck with homes much more expensive than they can afford or cars they can’t pay for. Pretend buying is like a reality check for the individual. In six to eight months, he is able to figure out whether he can afford the additional EMI burden. If he is unable to put aside the sum regularly, he ought to junk his plans or at least downsize them to suit his wallet.
Bigger benefits await someone who is able to comfortably save the required amount every month. He will be able to make a larger down payment when he actually goes shopping. In times of high interest rates, this helps in cutting the borrowing costs considerably.
Also, a bigger down payment shifts the balance in favour of the buyer and allows him to dictate the terms of the deal. If you are planning to buy a house, you may be in a position to upgrade to a bigger house than what you had originally planned. The same is true for car buyers. You may have planned a hatchback costing Rs 3.25 lakh, but if you save about Rs 1.5 lakh, you could consider buying a bigger car or a higher (and costlier) model of the hatchback.
Better Asset Allocation
Where should this money be put aside every month? Since pretend buyers might require the money in the short term, they shouldn’t go for volatile options such as stocks and equity funds. “The golden rule is that equities are a long-term investment. Short-term money should not be invested in this volatile asset class,” advises P.V. Subramanyam, financial trainer with Iris.
Discipline is crucial here. Instead of investing in equities, consider opting for a short-term debt mutual fund that is not sensitive to interest rate changes. Also, make sure that there is no exit load applicable in case you need to withdraw the amount after three to six months. If you are completely averse to risk, you could go for a recurring deposit in a bank or start a sweep-in savings bank account, where excess funds are swept into a fixed deposit to earn a higher interest.
Goal-based Investing
In a way, pretend buying is similar to goal-based investing, where an individual invests for a specific goal. It’s a time-tested investment approach that helps segregate goals according to their importance and time available to achieve them. Goal-based investing involves a two-step process.
First, the investor identifies the financial goal and tenure. Then he chooses the investment option for that goal. Each investment goal is treated separately and has a specific portfolio. Financial experts say this not only simplifies the investment process, but also ensures a more suitable asset allocation than a traditional monolithic portfolio. For instance, Sunderrajan needs the money to buy the car in one or two months. So a liquid fund will suit her better than an equity-based fund or even a debt fund, which levies an exit load if the money is withdrawn before six months.
Cut Back on Wasteful Expenses
Pretend buying also prompts a person to cut back on needless expenditure and make his monthly budget trimmer. If you are paying an EMI (read SIP), there won’t be too much money left for you to go on a shopping binge or blow up on a party. “This concept will instil financial discipline in me. If I persist with it for six months or so, it will help me rationalise my expenditure and prune expenses that are non- essential,” says Sunderrajan. Which is why this summer the Sunderrajans shelved their plans for a foreign holiday and went on a Bharat darshan instead.
Of course, pretend buying does not work if asset prices are going up. This is usually true in case of real estate. The house you plan to buy may double in price in two years and bring to nought the savings from your pretend buying exercise. The real estate market is cyclical, so try to enter when it is at the bottom of the cycle, instead of when it is moving to the top. The present market might be an exception. Though the market has bottomed out, the thrust on affordable housing might keep the prices in check.
Advising a person to hold back on expenditure is not always easy. “It is very difficult to convince the younger generation of spenders to postpone an expense in this age of immediate consumption,” says Subramanyam. His advice: “Before one asks, ‘Can I afford it?’, one should ask, ‘Do I need it?’,” he says.
If your answer is still in the positive, don’t rush to the market right away. First calculate your EMI and write out a cheque to your mutual fund. Then sit back and pretend that you have already bought it.
