The swanky ice cream shop (well it is more like a showroom) for Haagen-Dazs in the mall next door sees quite a footfall for scoops priced at ₹200. Walking past it brought me back to the days when the ₹2 orange bar outside my school in Delhi was the enjoyable ice cream experience we looked forward to.
I got to thinking about our casual spends: eating out, shopping, birthdays.... In my childhood, such things were always rationed. My father was in the armed forces-the Air Force to be precise-and despite all the subsidies that personnel and their families enjoyed, in the early-1990s, money was tight. The government salary of one earning member just didn't support the frills. The number of colas we were allowed to sign for in the officer's mess, was limited to one in a fortnight. Buying clothes was a coveted event reserved for festivals and birthdays. Vacations were always around where we lived. Picnics to nearby streams and hill stations were much fun! And if someone served you almonds and cashews, well, they must belong to rich ancestry; no way the Air Force was paying for almonds.
It is August 2016, and the 7th Pay Commission is being implemented. If you are one of the 10 million people, including pensioners on the government's payroll, who will enjoy a 2.5 times hike (in basic pay), it's good news. You may think about buying that car you wanted or book an overseas luxury vacation.
In the early 90s, the years before the 5th Pay Commission, a pay hike didn't automatically amount to a new indulgence. These days, as soon as we hear about a raise, the natural drift is to build in spending assumptions. And it's not just the individuals, market analysts, too, are busy building volume-growth assumptions for fast-moving consumer goods (FMCG) and other consumer discretionary companies, resulting from the 7th Pay Commission, which means the equity market likes it.
Coming back to the previous generation's financial management, notwithstanding the tight budget, by the time I was 18, my father had managed to buy a house, some land and make other investments. Those days, buying property didn't automatically equate to a loan. No high earnings and no loan meant there was only one place to hide-savings. My mother ran a tight ship and kept an account for each rupee (does that even now). Over the years, as savings built up, investments yielded returns and income improved, frills got added. Now their post-retirement refrigerator is stocked with many bottles of cola.
While saving was the mantra back then, consumption is fast emerging as the new mantra. Data from tradingeconomics.com shows that even as personal disposable income in India has gone up to 14 times in 20 years, personal savings have only increased 11 times. What's more telling is this number: 48.7 times-that's how much the personal loan portfolio of scheduled commercial banks has increased from 1996 till 2015 (Reserve Bank of India data). And we haven't yet looked at non-banking finance companies (NBFCs) and other unorganised sector lenders.
Equated monthly instalments (EMIs) are building up alongside consumption growth. Right from mobile phones to TV sets, most things are available on credit. I can even pay my term insurance premium online through credit card-linked EMIs.
What we are witnessing is a resolute transition from savings paranoia to a population that just never has enough to spend. Information deluge has meant we are becoming less discerning about what we buy. Moreover, there is the rise and rise of the great enabler that lets you buys more-credit.
The 7th Pay Commission should be about having more, not less. Rather than adding another EMI, the outcome should be to pay back a loan.
Maybe paying back that loan isn't going to be easy. I still remember the alarm in my father's voice when, in 1996, he realised we sometimes spent ₹35-40 on a cup of coffee at the new coffee shops. Spending that much on coffee is a disaster, he announced.
Buy a cup of coffee coupled with a snack today and you are looking at ₹1,000-1,500 in a working week. And you reason that if you need cash in hand, why not buy the ₹50,000-iPhone on EMI? Stop and ask yourself. Can you really afford that cup of coffee every day? Or that iPhone? Yes, you want them but can you afford them?
Finance 101 has to be about saving. Barring the top 1-2% of the Indian population, for the rest of us, at some point beyond 60 years of age, regular income will stop. By then, or soon after, you would want to figure out a house to live in. And even before that, if you have children, there are higher-education expenses to think of.
Let's not get stingy though, it's just as important to enjoy the benefits of an open economy. Spend on the things you want. At the same time, try to save more each year and invest to create wealth for when income isn't regular.
The flat you live in isn't an investment, plus the bank probably owns it along with you. Hard-earned money deserves your respect just as much as you deserve to have fun with your hard-earned money. The formula really is, save before you spend.
A ₹1,000 systematic investment plan (SIP) in an equity large-cap fund could potentially yield around ₹10 lakh in 20 years at 12% annualised returns. Adjust that for price rise, say 6% a year, you still have a value of around ₹4.5 lakh.
Thanks to my father's unsavoury remark about the coffee served by a smiling trainee, I cringe every time I visit the Starbucks outlet in my office building. After all, a cup of whipped coffee at home costs much less and if I add a dash of chocolate syrup, it transforms into a delicious cafe mocha.
Despite the guilt, I indulge.
In arrangement with HT Syndication | MINT
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