Remember the good old days?
Back then, most people had very few wishes and financial goals. These included saving for their children’s education, buying a house one day and retiring into a frugal life.
But as disposable incomes rose over the years, so have the aspirations and the desire to upgrade lifestyles. Post-liberalization, the share of aspirations has increased when it comes to what drives Indians towards choosing their financial goals. And easy availability of debt, the increasing influence of the internet and peer groups have been adding fuel to this ‘aspirational fire.’
New generation’s goals
Now, people don’t just look at saving for basic goals such as children’s education, purchasing a house and saving for retirement. It’s no longer just about necessities. In addition to these basic ones, aspirational goals such as buying (or upgrading to) a new car every few years, periodic foreign vacations and gadget hopping are all part of people’s so-called new goals.
All this is fine. Who wouldn’t want to have a ‘better’ life? But one also needs to look at the ‘aspirational’ goals from a financial perspective. Things don’t come free and we all know that.
So, if people don’t plan properly, get restless and take shortcuts (i.e., start taking loans) to upgrade their lifestyles, then that can be very damaging.
This is not to suggest that you shouldn’t upgrade your lives and give up your aspirations. That’s not the intent. Just that such aspirations have costs and we need to prioritize and plan for them accordingly.
Let’s take a simple example.
Suppose person A is planning for basic needs: Child’s education Rs 25 lakh, House purchase Rs 50 lakh, Retirement Rs 2 crore. His saving requirements are Rs 20,000 (child’s education), Rs 35,000 (home loan EMI) and Rs 25,000 (retirement savings). A total of Rs 80,000 monthly.
There is another person B who has more aspirational needs/goals: Child’s foreign education Rs 50 lakh, House purchase Rs 1 crore, Retirement (with better lifestyle) Rs 4 crore. His saving requirements are Rs 40,000 (child’s education), Rs 70,000 (home loan EMI) and Rs 50,000 (retirement savings). That’s not all. He wants to go on a foreign vacation once a year for Rs 3 lakh (or ~ Rs 25,000 monthly), buy a new phone every year Rs 60,000 (or ~ Rs 5000 monthly) and upgrade his car (loan EMI Rs 25,000). This aspiration-driven lifestyle requires a total of about Rs 2.2 lakh monthly.
Impact on finances
It is clear as to how aspirations put more pressure on your finances. And this is what people need to realize.
Aspirational goals are fine, but they comes at a cost. You should have the income numbers to support them. But if you don’t and if you resort to loans to fund your aspirational goals, then you will face problems eventually.
New goals and rising lifestyle inflation are the new normal now. But can we keep up with it? The answer will be different for different people. Some would be willing to work harder and earn more to fund those aspirations. Many others won’t find it feasible.
For most people, splurging once in a while is fine. But it’s necessary to know the amount needed to be saved for basic goals first. And if and once there is any surplus money left, then it can be diverted towards aspirational goals. Or, if you consider ‘live-today’ as your motto, then you may postpone saving for some basic goals and spend money on aspirational expenses first. This is fine if you can make up for the delay with higher investments later on. But remember that it is bound to have a bearing on your future goal-related investments.
Another side effect of prioritizing newer aspirational (but discretionary) goals is that people do not give retirement planning the importance it deserves. Most people truly underestimate what they require for their retirements. And one should not forget that unlike for all other things, you won’t get any loans for retirements.
New types of goals are a new reality and there is a need to tweak your financial planning to handle aspirational goals with the basic ones. If not done properly, it will lead to unnecessary overspending and investors getting caught in a debt trap. If you are unable to figure out how to fund your basic goals without compromising on aspirational ones, then maybe it’s time to talk to a good advisor.
(The writer is the founder of StableInvestor.com)