Sunday, February 15, 2009

”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.


Indian Home Maker said...

This was interesting! Very interesting in fact :)

And this makes me think we fall into more than one kind of spenders, although I always thought we were kind of thrifty ... now I think maybe we aren't spending as little as we thought :)

Some expenses like the number of Newspapers and magazines you take and how often you eat out ... are sometimes just the way you have lived and then you just continue like this.

manju said...

Mavin, Nice analysis of factors affecting spending behaviour.

The age of the decision-makers in the family will also have an effect, won't it? 'Younger' families will perhaps spend more due to peer pressure than 'older ones.

Vinod_Sharma said...

Very professionally written and logically argued article. "Many personal and social factors" impact spending habits and the aim of financial literacy is to help us better understand how the "resultant surplus" may be handled. How well said. Most of us go through life without even realising that a proper understanding and analysis can make a huge difference to our financial position.

Keep educating us Mavin with these gems of financial wisdom.

Mavin said...


I was only trying to depict how small decisions impact us financially.

I guess it is important once in a way to review our spending habits just as we do spring cleaning and throw away unnecessary clutter.

There is a fine dividing line between using these examples and preaching. May be the preaching stuff can wait for another post which should be discussing about how to live.

Mavin said...

Hello Manju,

Yes - you are right.

Families with children have different needs and families with three generations will have definitely higher levels of spends.

These are dynamic factors and keep changing all the while.

Mavin said...

Hi Vinod,


This is just to highlight that our way of living has a great impact on our financial situation.

At the end of the day, incomes are finite (whether in business or service) and expenses do have a tendency to exceed incomes.

They tend to become a habit - infact a bad habit. I guess a periodic review would not hurt anybody.

The whole idea is to keep focus on the formula Income - Expenses = Surplus in hand.

Going beyond this could sound judgmental on people or invasion of privacy to some sensitive ones.

anyway, we try and we try to get the message across.

Gopinath's "Artickles" said...

Keeping a check on expenses is an important aspect of our financial standing. Very often we can get carried away and spend unnecessarily and extravagantly. Once this becomes habitual, you get used to a lifestyle which you find difficult to shrug off. But if you are conscious of this aspect, even a family which is on the rise can lead a simple life and build a fortune over time. Oh the virtues of simple living! Your post brings these facts out so clearly!

Mavin said...

Hi Gopi,

That's right. Spending can be very addictive.

I am right now sticking to the financial planning part and not getting into how to spend. That is the prerogative of every individual to decide how he/she should spend.

But "aamdani aathani and kharcha rupaiya" has never helped anyone.

Indyeah said...
This comment has been removed by the author.
Indyeah said...

A beautiful article sir....and quite objective which helps me understand it better..:)

yes,the behaviour and upbringing play a huge role in it I I know that I sometimes spend a lot when I feel a bit down ,sad or depressed...

or how a person who has gone from rags to riches can go either way..either he will continue to be a miser..because old habits die hard..or he/she will be really generous because of the newly acquired money...

and yes,even seemingly small things/expenditures like newspapers and magazines affect the budget of a family..

PS:-thank you for the very kind words ..:)

Mavin said...

Thats right....should I say...Abhi

Indyeah said...

yes sir Abhi is just fine:)just saw your reply today:)