”Expenses”……Further Insight

We have seen that expenses are continuous and irrespective of our incomes tend to be more or less fixed unless some event acts to “shut the tap” so to say.

Why do people spend their money the way they do? This is a fascinating subject of study for all behavioural scientists and more recently to all followers of “Behavioural Finance” too. Is there a link between our spending habits and our mental make-up? Whilst the new sciences do believe that there is a definite and deep link, many rationalists would pooh-pooh this. Their theories are based on a presumption that a human being is a rational person and all financial decisions taken are rational and in their own considered self interest.

Do we see this playing out so simply in real life?

I had shared my observations in the previous posts about how one’s upbringing, amongst other factors, influenced the approach and attitudes of people. This and its link to their financial position or more specifically to income earning capabilities are widely seen.

Similarly, one’s unique conditions in life and upbringing, education, values, amongst others, influences how one handles money earned and spends it. Other factors that deeply impact our spending are those relating to family. Large/ smaller joint family units impact in different ways. Independent nuclear units may have more moderate expense budgets whilst those with elders would necessarily mean larger outlays.

A modest background in childhood may manifest into a moderate expense outlay later. Yet, another family with a similar background may develop a need to spend much higher so as to be seen as prosperous or “accepted” if you will, in their peer group. At the same time a wealthy family may live simply and not feel the need to spend beyond their requirements.

To cite some examples (I have tried to eliminate subjectivity to the extent possible). A double income family believes that eating outside every weekend is a good way to spend quality time with the kids and gives every one a break and a change. Yet another family would eat at home believing that was the best way things were done.

Result : Expense levels are different.

Another example – a family subscribes to one English daily newspaper and a couple of magazines. Another requires two English dailies, one business daily, a regional language newspaper and a few magazines, one of which is an international magazine.Result: Expense levels are different.

Let us take an example of asset acquisition. One family with staying in their family home or a house that has been a legacy/gift is on a different level, whereas, another family with similar income levels may need to take on loan commitments to acquire a house for themselves. Result: Outflows may be different affecting the surplus in hand.

Why are there such differences?

This is tricky and definitely more complex. You will see here that apart from levels of income, many personal and social factors leave their influence and contribute to unique spending habits. It is not the objective of this post to analyse any type of behaviour and pass judgment on the desirability or otherwise of such behaviour.

Our study is to understand that at the end of the day, Incomes and Expenses eventually determine the quantum of surplus that one has at hand. Our effort to increase financial literacy is directed towards understanding how this resultant surplus may be handled. It is, however, important to understand some of the many factors influencing financial position. This helps the person or his/her advisor get a proper perspective whilst reviewing their financial health card and in their planning exercise.

If you reflect on this, you will realize that smart marketing and product positioning is a way to exploit these vagaries of the human mind and get a person to spend. This is, however, the subject matter of another post.

We take this forward examining how this resultant surplus may be handled.