We don’t know if we have enough to spend. Many want to fulfill the wants of their household and are embarrassed about not having enough money. Others fall prey to debt traps in an attempt to create a false image of their true incomes and spend recklessly. There are also children who have spending habits that seem out of line with the actual financial capacity of their family. Parents behave as if the child must enjoy a lifestyle, education, or hobby interest disproportionate to the household’s funding capabilities. They think they are raising standards for their children even though it may be detrimental to the household.
Members of a family who are unable to make financial decision together will have difficulty making firm and confident spending choices. Why is it so difficult to make spending decisions? These decisions are often tainted with regret and guilt. In the India of the 1960s & 1970s, a middle-class family did not have enough money for the entire month. We children knew by the 25th of each month that our father, a fun-loving man, would suddenly become sour and withdrawn. We learned years later that he would eventually run out of money, and we preferred not to reveal this. He kept meticulous records of every rupee spent, as would my mom. It was common to say no to children’s demands, large or small, by simply saying that we couldn’t afford it. Life was difficult back then. I shudder to think of going back, even if nostalgia is a comforting feeling.
In today’s India of prosperity for the middle income household, and the swelling upper middle class, spending is tough because there is enough money left over after meeting the essential expenses. No doubt that all expenses are mandatory, even if the income is sufficient to cover them. As it was in our childhood years. Simple spending decisions can become more complicated when there is a surplus month after month. It is now a matter of making a decision about how much to spend.
You have many choices. Guilt and regret are inevitable outcomes. Upgrading your car today will mean that you have to postpone your vacation. At first, eating out for the weekend looked great. But then a friend shared his experience driving out to the new suburb resort. If money were unlimited, these choices could be made quickly. Choice theory states that when there are too many options, people choose inertia. However, this does not apply when it comes to spending because that is where happiness is found.
Because of the conflict between the joys and guilt of wrong allocation, the choice theorem can be complicated. If the joy is less than the pain, which can be difficult to measure, the decision is not bad. This level of complexity must be considered if the tradeoff is acceptable. The pleasure of spending comes immediately, while the guilt and regret of being wrong come later. These decisions can lead to poor decisions if you don’t have enough information about the household income or other options.
However, these choices can have a negative impact on the overall well-being of the household. Do we know how to fix this? There are some classic ways to return to the old ways: Be clear with your family about your financial goals; communicate with them; make joint financial decisions; and keep records of expenses. These methods should work, as they help households achieve their potential, priorities, and allocations most of the times. Our experience has shown that not every household can solve all of these. There are other options.
It is worth thinking about spending audit. You can print the bank statement for the last month and categorize the spends as E, D and L. These are the essential spends. It is possible to make desirable purchases after careful thought. Luxurious purchases are those that require thought, and should be delayed until a more thoughtful decision is made. The classification should be a family affair, so that you can identify areas of agreement and areas where there are disagreements. Talk about it.
Were all our fees, dues and groceries paid off? This is a good place for you to start, as it helps you identify the easy and common spends. Next, move to the Ds. Recognize that these can be essentials at times and luxury at other times. It will be clear to each person’s perspective if you audit them. Everyone around the table will know that it is better for everyone to have some rules. It is worth taking an hour to look at 30-40 items in a single statement. A household must be able to identify the item, assess the process, and recognize that rules can simplify the decision.
We suffer because it is difficult to have open discussions about things we don’t like. We do not like to be asked questions about rules. We believe in balancing being flexible and indulgent with being firm and unyielding towards others. This behavior can be inconsistent and could send contradicting signals to other members of the household. We try to keep a portion of our spending in the common pool and a portion private, so we don’t need to be accountable. We argue about our intentions and don’t like to discuss our actions.
This means that an important personal financial component of a household does not need to be subjected to any strategic process. However, it can be swept under the carpet in case it causes conflict or confrontation. How can we make sure everyone feels confident and joyful about spending decisions?
(Author: CHAIRPERSON. CENTRE for INVESTMENT EDUCATION & LEARNING.