Choosing between spending on luxury and necessity

Consider this. You have enough money to go on an exotic vacation. But you can also spend that money on your house repairs as well as refurbish your home with all the modern-day electronics gadgets. Which would you prefer?

All of us are forced to make such difficult decisions every day. Why? We are always aspiring to improve our standard of living. This means that we will often not have enough money to buy all things that we desire! For, we have to invest from our current income to fulfil our aspirations. You have to, therefore, manage your present lifestyle within the current income less the savings. And that means choosing between exotic spending and buying things that make your everyday-living more comfortable. The question is: How will you choose between the two?

The decision may not be difficult from a purely economic perspective. You will analyse if replacing your household gadgets and the leaky roof is more important than going on an exotic vacation. You may spend 10 memorable days at a beach resort but the fact is that you have to come back and live in a leaky house with all the household gadgets that rarely work when you want them to! If you are rational, you will spend on the house and the appliances and postpone your vacation for a year, at which time you will be forced to take a similar difficult decision.

But from a behavioural perspective, your decision will be based on different variables. Life is full of emotions. And emotions are driven by memories. It is highly unlikely that you recall the last time you visited the electronics store along with your spouse to buy the latest Smart TV! You will, on the other hand, recall years later the precious moments that you had at an exotic resort in Spain, if you choose to take a vacation. The experience will be priceless. You will take the vacation, arguing that there is never enough money to do everything. The leaky roof can wait for now!

Yet, we sometimes choose exotic spending and at other times, prefer spending on life’s necessities. Why? The reason, perhaps, has to do with our state of mind. If you feel secure in your employment or when your investments have large unrealised gains, chances are the feel-good-factor will prompt you to choose exotic spending. If you are, however, nervous about your current income or if your investments have large unrealised losses, chances are you will spend on necessities. Choosing between exotic spending and necessities is, arguably, an emotional decision. Even if your leaky roof needs to be fixed!

(The author is the founder of Navera Consulting. Feedback can be sent to >knowledge@thehindu.co.in )

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