Affordability is Relative

by Deepa Venkatraghvan

[box]The next time you set your heart on something, think again if you need it, advises Deepa Venkatraghvan. [/box] [author] [author_image timthumb=’on’]https://sparkthemagazine.com/wp-content/uploads/2010/12/deepa_book-opt.jpg[/author_image] [author_info]Deepa Venkatraghvan is a Chartered Accountant and the Personal Finance editor at web18 (www.moneycontrol.com). She is also the author of the CNBC-TV18 Bestsellers “Everything you ever wanted to know about investing” (which was later updated and released as, “Everything you wanted to know about investing in difficult times”) and “What your financial agent will tell you and why you shouldn’t listen”. Her writings have also been published in “Chicken Soup for the Indian Soul” and “Chicken Soup for the Indian Teenage Soul”. [/author_info] [/author]

So, what did you buy for this New Year? With all those offers that stores have been announcing in the wake of Christmas and New Year, it is hard not to be tempted. There have been offers on everything – apparel, electronic gadgets, furniture and what not! Thanks to cleverly crafted ads and marketing techniques, businesses today are more or less successful in wooing you – their prospective customer – into buying their products. In addition, companies lure you even more by announcing tempting tie-ups with banks for instant loans and other equally attractive options, primarily involving credit cards.

Well, the year has just begun and sellers have not just one, but many, many reasons through the year to attract you into buying something!
There’s no denying the fact that some of these will be the best bargains you can ask for. However, festive season or not, whenever you decide to buy something, there is one aspect that you need to look at seriously. And that is your affordability.
One question that people often ask me when seeking investment advice is whether he/she can afford a specific purchase. According to me, affordability is relative. If I have Rs 10 and want to buy a chocolate worth that much, the answer is very obvious – sure I can. The issue really is where this purchase stands relative to my other needs.
To understand this better, let’s take the case of 22-year-old Mayank. Mayank has just started working and earns Rs 5,500 per month. His monthly expenses are Rs 3,000. He lives with his parents in their own house. His parents earn about Rs 75,000 per month.
Mayank’s parents – like most – are strict, and the 22-year-old often complains that they do not do anything for him. Like any of us, Mayank has been yearning to buy something for a while now – a Portable PlayStation.
This is his question: “I have a saving of Rs 1,500 so far. Can I buy myself a portable playstation? It costs Rs 9,500. I can get it on an EMI of Rs 1,000 per month.”
Now that he has started earning, Mayank is raring to go ahead with his dream buy. Can he afford it? Yes, he can. He saves Rs 2,500 per month from his salary. He can afford an EMI of Rs 1,000 per month.
Should he buy it? That is where relativity comes up. Are there other important things he needs to save for? If he loses his job, does he have a fund to fall back on? These are questions he should answer before he makes a decision.
It’s probably the same for you and me; just that the stakes are higher: should I buy a small car or big car? Should I buy an iPhone?
What is important here is to detach yourself emotionally from the decision. If I have my eyes set on a car, I will find every reason to justify my purchase. However, here are some questions you should ask yourself and answer honestly if you want to buy something:
1. Do I really need it?2. Will I use it optimally?3. Can I buy a cheaper alternative?4. Have my investments so far been on track? Do I have a savings back up? Do I have insurance? Am I saving enough for my retirement, for my child’s future?
The first two are driven by emotion while the other two are driven by pure finances. If your answer to the last two are ‘yes’ then maybe you could indulge even if your answer to the first two are ‘no’.
The problem arises when your answers to the first two are a ‘yes’ and the next two are a ‘no’.
The bottom line – the next time you are dreaming of buying something, you shouldn’t forget to set a minute aside and question yourself!