Spend Now, Achieve your Goals Later
Apr 15, 2011

Author: PersonalFN Content & Research Team

When you make a financial plan, one of the first things you will find yourself putting a rupee value to is the amount you spend on ‘Discretionary items’.

This is the one type of cash outflow that people find difficult to define because some items that may technically appear to be discretionary in nature, are things that we are so used to having that they are practically a ‘household expense’.

So let’s start at the definition and see what the different types of expenses are.

Expenses (not investments, only expenses) can broadly be categorized into 2 silos:

Necessities

A necessity is something that s essential to your family’s and your survival, that you cannot, or should not, do without. Necessities include things such as:
- Rent / Home loan EMIs
- Groceries
- Regular Travel / Fuel
- Utilities - Electricity, gas, phone
- Medical expenses
- Children’s school / college tuition
- Life, health insurance (and car insurance if you own a vehicle)
Luxuries

Anything that is not a necessity, that is not essential to your family and you, is a luxury. Luxuries are expenses such as:
- Eating out / entertaining / movies / books
- Vacations
- Shopping – clothes, shoes, watches, bags etc
- Snack foods / junk foods
- More expensive means of transport (like taking a taxi or driving instead of taking a train / bus)
- Very expensive white goods such as a fancy computer, TV, washing machine etc

...and much more.

Like we said before, anything that is not a necessity, can count as a luxury. However in our day to day lives, we have become accustomed to a certain lifestyle. These can be considered our ‘Comforts’.

For example, there are people who consider television to be a luxury because it is not essential, however a lot of people would feel like life without a TV would be very difficult. So a television can be classified as a comfort.

Comforts and luxuries are your discretionary expenditures.
These are things that you can definitely survive without. These are also the items that tend to increase in purchase cost at a higher rate of inflation than regular household items.
Which is why, when planning your finances, you need to be very aware of what your discretionary expenses really come to each month, and how much you can cut them down.

Consider this simple test:

Q1: How much do you earn in a year? (Consider fixed income sources, like salary / business income, and rental income if any)

Q2: How much do you think you spend each month? (on household expenses, necessities including EMIs if any, and comforts only – do not include your luxuries)

Ans1 – Ans2 should be your investible surplus. Keep this figure in mind. Lets call it X. Now,

Q3: How much do you invest per month, and so, per year?

Is Ans3 less than or equal to X?

For most people, the amount they actually invest per year is much less than the amount they should be able to invest per year, simply because they are spending much more than they think on luxury items.

And even if you spend Rs. 5,000 per month on luxuries, that’s Rs. 5,000 per month that you are not investing towards your goals.

Over 20 years, this Rs. 5,000 lost per month means a whopping Rs. 76 lakhs lost to expenditure on luxuries.

So the next time you whip out your credit / debit card, pause and ask yourself if this is really a vital purchase, or can you do without it.
That simple thought will help you save, and invest more, and will help you achieve your goals faster.

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