August 31, 2021
Finance
How I've Stayed in My Financial Lane And Avoided Spending More Than My Means
August 31, 2021
Finance
It's enticing to buy the latest gadgets launched every year. In some cases, necessity drives the desire to buy. But in most cases, it's the allure to own the latest piece of tech regardless of whether we need it or not. Before jumping in line to get the latest gadgets, it's wise to be aware of one's financial situation. And to stay in the lane. Living on the edge is not recommended. A few unexpected expenses can wreak havoc on the financials in such a case.
I have spent my fare share on products I could've lived without. I wrote about how my spending habits evolved over the past few years, but never to a degree of carelessness. Over the years, I've adopted some principles that kept me in a decent financial shape with a significant emergency fund. There are some more tips that could come in handy in future.
Getting money is one thing. Keeping it is another.
– Morgan Housel, The Psychology of Money
This is a good rule of thumb to make sure you don't bite more than you can chew, barring necessities. If I can't buy two of something, I consider that purchase to be beyond my means. This incorporates a margin of safety to be able to replace the item in worst case scenario. It may come in handy for necessities.
A few years ago, a friend of mine got his phone snatched. Today, phones are more of a necessity than a luxury, to some extent. With a safety margin, it is possible to get another phone in case of a mishap. This would help reduce the heartbreak of losing something as personal as the phone.
This self-imposed rule has prevented me from buying an expensive television, assembling a gaming setup and more. The only time I broke this rule was when I got a laptop a few years ago. But even then, it was a calculated expense, and more of a need.
We can extend this rule can to even more expensive purchases. A bike or a car for instance.
It's safe to assume that most gadgets such as mobile phones, laptops etc have a shelf-life of 3-4 years before they start showing their age or start getting significantly outdated. It's justified to upgrade to newer models of such a device every 4 years or so. To enable that, we should start investing or saving up with that 4 year timeline in mind. And then upgrade without any guilt.
Let's take an example. To buy a Macbook Pro that costs around Rs. 2,00,000 ($2,700), we'd have to keep aside roughly Rs. 4,000 ($54) per month to add up to that amount in 4 years. If we decide to invest that amount, even better.
With my personal experience, EMIs and Loans are like a financial prison. They take away the financial freedom and reduce the ability to take risks in one's careers, or life in general. Often, it acts as a monthly reminder of a not so smart decision that we're stuck with for the duration of the payment cycle.
Exhibit A: I bought my current Macbook Pro a few years ago on a 12 month EMI plan. The monthly instalment was a significant chunk of my in-hand salary at the time. Soon, the purchase started feeling like a burden and regret to some extent. I vowed never to make such an expensive purchase on EMIs. And even if I need to (and I have), no longer than 3 months.
To get around this, I prefer to reverse the entire process by trying to save up some amount every month (eg. Mutual Funds/Recurring Deposits) leading up to the purchase instead of being imprisoned by EMIs after buying something I don't need. This artificial waiting period often makes me aware of the stupid decision to buy whatever I was planning to buy. This way, I've avoided buying a Logitech G29 Racing Wheel (~Rs. 29,000) for my F1 gaming/sim-racing pleasure. It turns out, I don't play racing games as often as I think I do.
Money’s greatest intrinsic value—and this can’t be overstated— is its ability to give you control over your time.
– Morgan Housel, The Psychology of Money
In his book "I Will Teach You To Be Rich", Ramit Sethi advocates for a Conscious Spending Plan. This plan has four parts – Fixed Costs, Investments, Savings and my favourite, guilt-free spending money.
He suggests directing 25-30% of take-home salary to spend on fun things, guilt free. These could be going out on weekends, movies, travel etc.
In my case, I keep aside a budget of roughly 10-15% of my take home pay as a "Luxury Budget" every month. I rarely spend all of it though. This luxury consists on buying a new product that I want, but not necessarily need. It doesn't hurt to treat yourself every once in a while.
(Update: I've bought a TV, 4K Monitor, Standing Desk under this self-imposed policy, but not at the same time)
Kevin Hart has this comedy set where he describe why he avoids hanging out with athletes. They spend their money lavishly and without much thinking. And Kevin finds it difficult to keep up with their spendings, but he has to. Because he's Kevin Hart.
In S02E05 of F.R.I.E.N.D.S., Joey, Rachel and Phoebe struggle to keep up with high-income trio of Ross, Monica and Chandler. After dining in an expensive restaurant, they suggest not to split the bill equally as they barely ordered anything.
The moral of the story is to avoid the temptation of keeping up with our peers. Being in our own financial lane is crucial. I've been guilty of spending more than I should've just to keep my pride intact, or not to be left out of group chats.
Spending money to show people how much money you have is the fastest way to have less money.
– Morgan Housel, The Psychology of Money
I am on a quest to improve my writing skills. If you have any suggestions, resources or just want to yell at me, please share via Twitter or LinkedIn. 🙌
