Some incentive tricks to curb that urge to over-spend...
I want to make an anonymous confession – I am a compulsive spender. I have had a well paying job for about six years now, but my bank balance and my investments are negligible. Towards every month end, I am forced to dig into my credit cards to stay afloat until the next month's salary. I will be turning 30 this year and plan to get married. Lately, the fear of not having saved anything before starting a family is beginning to drive a chill through my spine. But this only makes me indulge further to forget the situation. I think I need some serious help to break my habit. Can you help me?
I think the very fact that you have realised that there is a problem is something to celebrate, so you can stop being so down! Scientific research has uncovered evidence that spending and saving are ingrained habits – that are visible even in early childhood and tough to break. Is it genetic? – that's still an open question, but if you think you'll feel better, I guess you can always blame it on the genes. Of course, this doesn't mean, we can't do anything about it. Just that it may require extra effort and some tricks.
The best way to change human behavioural patterns is through “incentives” (is this the result of the ape gene in us?). If there's any learning from the recent global financial crisis, it is about how strongly incentives can drive human behaviour. It's a different matter that these incentives (particularly bonuses in sophisticated financial institutions) were so skewed that they fuelled the betting and selling of highly risky financial products, which ultimately led to the collapse of many institutions – not to mention the possibility of entire countries going broke.
The key reason why over-spending is easy (especially by salaried professionals), is because we evaluate the current price of the item that we want to purchase and compare it with our current salary. If you earn a good salary, a lot of items would look cheap to you if you look at the price-tags from this perspective. It is worse if financing is available for the items of our desire; then we tend to look only at the monthly EMI and compare it to our take home salary, blissfully forgetting that the actual cost of the item is not equal to the EMI, but a large multiple of it.
The incentive trick that you could apply whenever you are about to make a purchase decision is to calculate the future value of money, assuming you choose not to purchase now, and invest instead. Now compare this future value of money to the current cost of the item. Is it worth the price? Imagine what else you could buy today with the future value of money, as an inspiration to save.
Here's an illustrative example. Let's say you want to buy a fancy high-end laptop worth Rs 80,000, mainly for gaming. If you choose to invest this money, instead of purchasing the laptop now, the future value after 5 years (assuming a conservative equity return of 15 per cent p.a.) would be Rs 1.6 lakhs. Now think - is your new laptop worth Rs 1.6 lakhs? If you consider the life expectancy (or depreciation) of the laptop, the calculation gets even more revealing. A laptop's life is a maximum of five years, after which it would be worth close to zero. Is it better to have zero at the end of five years or Rs 1.6 lakhs? Now ask yourself, what else could you buy using this Rs 1.6 lakhs? A Nano, may be? Sounds more cool than that laptop, doesn't it?
Similarly, you could use longer range future projections to make your current purchase decision even less attractive. How much would the money saved be worth after 10 years? 15 years? Once you can vividly see the future rewards possible, the vision comes alive. You can see, touch, smell, and feel it. You go from “I think I want it now” to “I can probably wait for something better”. This is the secret to controlling spending habits - to be able to visualise the immense potential and attractiveness of delayed gratification. Continue to follow this simple principle and over time, your purchases will reduce to the items you really need and the charm of instant gratification would wane.
In a study conducted at Stanford University, delayed gratification has been found to be the key to future financial and emotional well-being. The earlier we learn it, the more fulfilling our lives will become.
Finally, it may be a wise idea to return all your credit cards and switch to debit cards. This way you can avoid unnecessary temptation for binge spending beyond your means. Good luck!