By IndiaHub 
This couple quarrelled at the end of virtually every month. They ran out of money before the next salary arrived and indulged in blame games about how it was spent. Pause and read the arguments to see what is happening: ‘You decided to put the child in an expensive school. Don’t kids who study in other schools do well? ‘You run the air conditioner all day and run up the electricity bills. Did we not live through hot summers earlier?’. ‘I knew this house and EMI were too much for us, but you did not listen to me.’ What is the pattern?
The quarrels are about what we know in personal finance as ‘mandatory expenses’, for which we take the trouble to work and earn an income. A household that suffers from an inability to meet these basics, like school fees, EMI, and utilities, is facing one of these two issues: income inadequacy or lifestyle creep, or both.
It is tough facing up to the possibility that one’s income is not adequate. However, addressing this issue calls for real work—qualifications, certifications, skill development, keenness for feedback to improve at work, and so on. There is no easy solution to the issue of finding more income, but supplementing existing income with an added enterprise can be a good start.
Lifestyle creep
Lifestyle creep is a bigger problem. It arises when income is steady, even if it is not increasing over time. The confidence that comes with regular income leads to miscalculations about what one can afford and what one might leave for other competing needs. A household that struggles with mandatory expenses cannot afford to keep income low and expenses high for too long and hope for peace.
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Another couple, out on a holiday, seemed to be out to ruin the fun for themselves and their children. If the husband was upset about the places the family had chosen for dining out, the wife was upset about the husband’s desire to maximise the activities the family had undertaken for the day. One was trying to make the most of what he saw as money already sunk into the holiday, the other was trying to extend that spend further to ensure it was worthwhile.Expenses incurred over and above what is mandatory to run a household are called ‘discretionary’, a personal finance terminology indicating that such spending need not necessarily be incurred. Discretionary expenses have a lot of power in signalling the financial well-being of a household. Social approval drives most of the decisions about where to shop, dine, or go on a holiday. The problem with such expenses is that they seemingly have no measurable limit that everyone in the household can agree on. Many such expenses also tend to be unplanned and impulsive, raising the emotional quotient needed to avoid incurring these. In turn, these lead to more unresolved arguments and conflicts.It is not difficult to guess that the saving ratios of such households will suffer from inconsistencies. Lack of control and agreement over discretionary expenses will affect a household’s ability to save, invest, patiently let investments grow over time, and build long-term wealth for its own well-being. The lack of discipline to build assets and wealth will also impact asset allocation.
Compulsory saving
Recognising their lack of financial control, many households turn to ‘compulsory saving’ as a way to enforce discipline. This often takes the form of overzealous tax-saving, random investments with lock-in periods, or buying insurance policies that promise unrealistic returns, only to struggle later with premium payments. Buying a house so that the EMI works as a compulsory saving is another mistake young households make, in hopes of reigning in their discretionary expenses. Soon, they find themselves stuck with too little to spend as their family grows, or end up with all their wealth concentrated in one large asset.
The motivation for saving and investment should ideally be well-defined, long-term financial goals. This ensures that the household sticks to its strategy, uses control over spending as a tool for persistent saving, and builds assets over time. A knee-jerk reaction to careless spending by using methods that seem like forced constraints might lead to more arguments and acrimony.
A retired couple lives in their own house and has a small but steady pension income that covers their monthly household expenses comfortably. They also have their retirement corpus invested in fixed deposits that earn them a supplementary interest income. However, they frequently argue over repairs to their aging house, travel to attend family functions, and gifts to buy for children and grandchildren. They are too frugal to the point of compromising their quality of life.
Need for diversification
In most cases, this turns out to be an extreme case of risk aversion to any growth investments, as well as a conservative strategy of spending income and keeping principal invested intact. They do not see it as an asset allocation problem because anything that may risk their retirement corpus is unacceptable to them.
Diversification in equity, even a small percentage, can actually bring their portfolio risks down. They could also leave behind more wealth than they could comfortably use in their own lifetime. An asset allocation problem thus persists and manifests as an unwillingness to spend. Many senior citizens are more wealthy than they care to acknowledge, but are simply incapable of spending due to fear of losing their wealth.
If we pause to consider repetitive patterns in our own personal financial behaviour, we may be able to see where the problems lie. Within the realms of the personal financial framework of income, expense, saving, and investment, realistic solutions that reduce the burden of repetitive disagreements can be found.
The Author IS CHAIRPERSON, CENTRE FOR INVESTMENT EDUCATION AND LEARNING