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Are you an emotional spender? Here's how to control it

Last updated on: November 29, 2012 11:44 IST

Are you an emotional spender? Here's how to control it

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Ranjeet S Mudholkar, CFP

While quite challenging it is not impossible to overcome emotional spending. Here's how

Emotional spending occurs when you buy things you don't really need. Essentially it is due to an impulsive state of mind. This occurs in the moments of happiness, stress etc. There is nothing wrong with spending money on oneself as long as one can afford it and the finances are in order. The problem arises when one starts struggling to find the cash to pay the bills or clear credit card dues. Learning to recognise and control emotional spending is essential in financial planning and the onus lies on the financial planner to make the client understand the importance of the same.

While it is challenging to avoid emotional spending, restricting it with the help of financial planner and imposing some discipline in the spending pattern may really help in increasing the investible surplus which could be utilised towards the attainment of the financial goals. It must be clearly understood that emotional spending can only happen in discretionary expenditures as the non-discretionary expenditures are essential in nature. However putting a control on the non-discretionary expenditure can surely be a positive way of controlling your impulsive behaviour.

The writer is working with Financial Planning Standards Board India (FPSB India) in the capacity of vice chairman and chief executive officer. The views expressed here are personal, and do not necessarily represent that of the organization. FPSB India is the sole marks licensing authority for the CFP marks in India, through agreement with US-based FPSB Ltd. 


Photographs: Dominic Xavier/Rediff.com

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With the growth of the economy, there has been an increase in the purchasing power and the number of avenues for spending money and prudence needs to be exercised in all the expenditure decisions. The table below gives the distribution of monthly income in India with regards to various expenditures based on a survey conducted by Credit Suisse in 2011.

As we can see from the table below on an average an individual is able to save 16 to 17 per cent of his income while spending the rest on both discretionary and non-discretionary items. This proportion needs to be taken to a level of 33 per cent and cutting down in discretionary expenditure could help towards the same.

This would be synonymous to our savings rate of close to 30 per cent as per the prevalent data. Thus one of the first steps in financial planning is budgeting and cash flow statement analysis which one has to do in consultation with a financial planner.

These statements and the continuous updating and monitoring of the same will ensure that the expenditures are under control and do not overshoot the monthly budget hampering the journey towards the achievement of financial goals.


Photographs: Dominic Xavier/Rediff.com

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Following principles of financial planning, if suitably followed will help to ensure that spending stays in manageable proportions:

  • In terms of income distribution one-third part of the income should be dedicated to expenses, investment and debt repayment respectively
  • There should be a limit on the expenditure which do not have salvage value. Example: holidays

Higher middle class and higher income categories are more susceptible to emotional spending as there is ample liquidity and availability of credit options like credit cards which are not easily accessible to lower income groups.

The expenditure which have been gaining popularity and may be responsible for increased spending include the following:

  • Holidays
  • Cars
  • Electronics
  • Jewellery and personal effects

While it would be inappropriate to say that any of the above mentioned items is not required, but affordability, viability and financial impact need to be studied before spending any money towards any one of them. Seeking the services of a competent professional like a certified financial planner or CFP professional is highly warranted who can help individuals sort out their income and expenditure conundrums.


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Some steps that may help an individual control such spending are mentioned below:

Discretion

Discretion needs to be exercised while making a buying decision. There is plethora of options available in the market place and one needs to analyse the alternatives on different parameters like need, want and affordability.

Impulse purchases

Impulse purchases happen when one goes for buying x things, and ends up buying x+y without intending to buy y in the first place. This can be restricted by consciously making a decision to wait and think the first time the thought of buying something which was not originally intended occurs. Even after waiting, if one wants to buy the things but cannot afford it then the decision may be postponed to a special occasion when the financial position permits the same.

Accountability

Accountability in these decisions is desirable and it envisages analysing the decision to spend in relation to the entire financial position. One must be able to evaluate the financial impact of one expense and its fall out on other necessary expenditures.

Finally, it can be said that the goal of financial planning is not to dissuade people from buying aspirational items or to stop them from spending money on entertainment and fun but it is to establish a pattern to acquire desirable items as part of one's overall life goals, which should be driven in a disciplinary way rather than being a mere sporadic activity.


Photographs: Dominic Xavier/Rediff.com
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