Saturday, January 29, 2011

Getting into the false financial belief

If you happen to take a walk down ION Orchard during the weekends, chances is that you will see long queues at high-end clothing boutiques such as Prada or Louis Vuitton. You will notice at Takashimaya - Louis Vuitton.

Take a closer look and you will be surprised - young female teenagers form part of the crowd, decked in short skirts, powdered make-up and high silhouette heels.

My wife and me like the Prada designs. It gives a classier and elegant outlook. So we join in the queue. Also, we will like to observe the spending power of the young.



The doors are opened and voila! We enter the Prada boutique. Right in front of us, flanked by 4 parameters are young people (assuming they are local polytechnic students) happily browsing through the latest designs. Their looks give me the indication that they are about 18-23 years of age (of course, looks are deceiving but then not their youthful vibrancy right? - some young girls carry Hermes bag on one hand) And they don't just scan around. Very soon, they open up their purses and a thick wad of dollar notes appear; if not a "blink blink" credit card. As you know, banks do offer credit cards to students, as long as you are above 18 and they are many perks to it. Sometimes their boyfriends will be shelling out their cards to impress. Apart from this, we also have the foreign PRCs walking in the boutique since we understand the rich Chinese are getting more affluent.

Years back, I do not recall young students shopping at Prada. Not in my times. When I was a little boy, I had to earn my financial power. I worked at Mrs Field for a mere $4.50 per hour. I do not have the financial dollars to spend and yes, I will pass by Valentino, Hugo Boss as such to envy the classy designs. My lunch consists of McDonald's. Now, times changed.

So what does this means?

Are we on the verge of spending too much on luxury goods and getting into a certain sense of false financial belief in spending? The false financial belief - we have too much cash on hand and spending "a little amount will not hurt me, or just a minor purchase only" mentality.

Yes, we spend to pamper ourselves, some may say. But do they have the discipline to spend, the habit to control and the acute vision to plan for long-term retirement?

This brings me to the topic of discipline expenditure



It is always easy to spend, not easy to earn. So discipline to monitor your expenses helps. Every individual is unique. They bring their personal norms, beliefs and attitudes that shape their expenditure patterns and hence; the perceived value of spending. For example, some feels that spending a pair of Jay Chou tickets are a complete waste of money. Not for the die-hard Jay Chou fans.

What we hope to avoid is the false dependency that the value perceived overrides your personal financial objectives, even if he budgets a certain $$$ per month.

Say, if one has a targeted plan to save $1,000 per month and he perceives that one pair of Levis jeans is only $150 odd. For $150, it's considered a small portion of his budget. Therefore, he starts to develop the mindset that every small amount is "OK" to him. What he may not literally realizes that each small amount is able to accumulate to a BIG amount. This is not very healthy because the little spending amount will cloud the person's financial judgment and hence, motivate him to keep spending without keeping a tab on his budget.

And this may well happens for the young people spending in Prada/Louis Vuitton boutique. They may feel "it's only once in a blue moon I spend". But the fact that it may soon develop into a habitual sort of expenditure, WITHOUT discipline.

If you have the financial capacity and able to sustain, go ahead. If not, do watch out into getting to the false complacency.

So what could we do to minimize that false financial belief and maintain the financial discipline?

Here are my 5 personal pointers for one to think before you fall into the situation of only a "one time expenditure, only a "small amount":

1. Do you have the financial capacity to buy, such that you will NOT feel remorse?
2. Can the item purchased changes the way you live or impact you one way or another?
3. What is your personal financial objective/s in life? Affect you upon spending?
4. Your financial belief? - spend then wait for income? too much $$$ then spend?
5. Is your reason to buy valid or just influenced by trends, ads and peer pressure?

Personally, my answers for the 5 pointers are:

1. Yes. I bought Prada in Europe during our honeymoon. It's a special occasion and I am able to afford WITHOUT feeling remorse. In fact, this is my first time buying Prada. I earned my financial keep till this day

2. Yes. Taking the example of Prada, I do like the classy design. I am also in the people business, so in fact, the first impression counts.

3. I have a specific objective in my financial goals. In 2011, this is to earn a certain amount of passive income monthly through investments and will contribute to my end goal when I reach the age of 35. So before I spend, I will think if it really impact my financial strategies? Because if it does, each dollar spent - I have to earn each dollar back and this is not easy - easy to spend, not easy to earn. The conclusion is that I do have spare cash to spend and will not eat away my ability to buy into equities

4. Available $$$$ then spend. Yes, I have a budget. And I do not deviate away from my budget. Neither I go being cheap. So I spend for every little reason that my value perceived is VALUABLE but not harming my pockets

5. Personally valid. I am not a "Trend Chaser", so as to speak.

Once you acquire the discipline to spend, you will soon develop the habit to think before you spend (with the guidelines above). After this, you will realize that you have a certain degree of financial literacy to control your income and expenses.

Discipline ----> Habit ----> Financial Literacy ----> Financial Planning

Discipline curbs the false financial belief. Try it if you have not.

Good luck! :)

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