Mitesh has eaten his marshmallow!
In 1972 researchers at Stanford University performed an experiment with a group of children. These children were given a marshmallow. The children could eat that marshmallow immediately or wait for 15 minutes when they would get one more marshmallow. The children were then left alone in the room and observed. Most of the children could not resist and ate the marshmallow that was on their plate.
Mitesh is all of 22 years of age. 8 months old in his first job. He couldn’t resist the temptation to buy the new iPhone as soon as he got a job.
The Stanford researchers observed the same children in the experiment through their college years and adulthood. They found out that the children that resisted the temptation to eat the marshmallow and waited for the stipulated time to earn the second marshmallow, were much more successful in life. They scored better in education, had superior social skills, better response to stress and were generally better off in other areas of life. The conclusion was that delayed gratification leads to a better life.
Mitesh stares at his credit card bill. Outstanding amount is Rs.60,000. He is wondering how he can buy the new iPhone 6s. The advertisements are all saying that it has so many new features. Besides, many in his office circle already have bought one.
He could not resist the gratification of immediately buying what he desired.
But in a few months time he is already contemplating of giving up the phone and buying the latest one. He is missing out the fact that he is already in debt- being charged almost 36% per annum on the outstanding amount! His salary is not enough to support his love for fancy gadgets, and he is not doing himself a favour by having zero savings. In a few months the spiralling credit might put him in a position where he will have to ask his parents to settle the outstanding debt on his credit card.
Mitesh was actually bowing down to the peer pressure and getting in to buy things that he could not afford. He wanted the acceptance from his peer group which he felt he would not get if did not have the latest gadget that everyone in the group has.
There is another quiet thing happening in the background that Mitesh does not realise. Since he now has a high end phone, he wants to step up his lifestyle to suit the phone that he carries. His clothes, his shoes, his outings, the restaurants that he goes to, all are getting impacted by that one factor- the phone in his hand! There is a scientific term for this. It is called the Diderot Effect
Are you like Mitesh, getting into these kind of psychological spending traps without realising it? One of the reasons is that you are getting pulled is that the environment around you is designed to attract you to spending. Your generation is a huge market. You cannot escape the marketing blitzkrieg. It is everywhere-from the sponsors at your college festival to the ads popping up on your social media sites. It is tough not only for people like you who are at the beginning of their careers but also for college going youngsters who are still dependent on their parents. Their parents are also getting impacted because of the increasing demands to keep up the lifestyle of their children.
While it is not a crime to want to live a good life, it should not create a negative impact on you or your parents in the long run. Several problems might crop up if you do not realise this early:1.Getting into a debt trap
: You will keep buying things on your credit card and will keep paying heavy interest. The stuff that you bought would most likely be thrown away even before you are able to repay the debt you incurred to buy it! It can become a vicious cycle and you might need professional help to get out of it, unless your parents decide to chip and bail you out.2.Not being able to build up savings
: You will be spending all that you earn and not have any savings to support goals later in life. You might want to pursue some specialised courses or take a vacation, or buy a house. All these need substantial amounts of money which take time to build. If you don’t save, you don’t build!3.Continuous distraction
: All kinds of apps and social media available on the phone will continuously distract you leading to lower productivity at work or in studies4.Increased spending
: Most online stores now sell though mobile apps. The ease of buying will lead to increased spending and push you further into the spending/debt cycle.5.Family financial goals getting affected
: If parents have to pay for your lifestyle expenses, other goals like funding for higher education/retirement might get impacted due to reduction in savings
If you can think a little rationally on what you really want, you will be able to avoid all these problems and make better decisions. 1.Why do you want to buy it?
Do you really want an iphone, or you are looking for acceptance? What if your group moves on to the next big thing, a car or a big house? Will you be able to match it again? Let people accept you because of who you are and not based on what you own. Improve your knowledge and skills that will improve your career prospects. With time you will be able to buy good things for yourself without getting into debt.2.Can you delay the gratification?
Can you wait to accumulate money to buy the phone? As research showed, delayed gratification is a good thing to have!3.Will another smartphone do?
There are several smartphones in the market which work very well, are cheaper, though they may not have the same status as the iPhone.4.Is there any way you can enhance your income?
You should not be borrowing on your credit card for lifestyle items. If you are a student you can probably take up some work on weekends to earn. If you are already working can you do some additional work/projects to earn more. There are many online portals that allow you to freelance and earn if you have skills that are in demand. Many small and medium enterprises require help on part time basis for admin related work, they might even want someone savvy with technology to help them in routine work. There are many ways to earn if you are willing to work hard and scout around.5.Can you save more?
Can you save a big chunk of your pocket money or your salary? You can opt for cheaper options like watching the morning show for movies or waiting for the second/third week when the prices fall. You can dine out less often, instead have home parties. There can be several smart ways like these to cut down on your expenses.
Calculate how much you will need to spend to buy the desired phone. And how many months you will need to save for it. Use some automated saving mechanism to ensure you save. You can look at recurring deposits at a bank or even SIPs into debt mutual funds. They will help you direct your savings to create the fund for buying your phone.6. Can you buy used phone instead of a new one?
Many people change phones frequently. Look for a good second hand deal. But be careful about buying stuff that is technically bad or you will end up spending more on the repair. You can check within your circle of known people if anyone is upgrading and buy their old phone.
Not only with a phone, these things can help you plan and make your purchases for other items too. You will save and spend wisely if you keep the points mentioned above in mind.Kiran is a member of The Financial Planners’ Guild , India ( FPGI ). FPGI is an association of Practicing Certified Financial Planners to create awareness about Financial Planning among the public, promote professional excellence and ensure high quality practice standards.