We normally talk about planning for the long run and being a rational saver as well as investor. This time let’s talk about spending.
Let’s take that premium mobile phone or bike most of you might be eyeing. What would be a really smart way to buy something that you really want but can’t afford immediately, and without maxing out your credit card?
Here is a step wise approach to funding your next big buy, and something that takes into account your financial well being:
#1. Know your target amount
From a financial perspective, a luxury product is luxurious normally because of its rarity, price tag, and cost of keeping that luxury. If you can afford to pay the price, it isn’t a luxury, at least for you. The first step, therefore, to buying expensive necessities/luxuries is to know exactly how much you need.
Knowing a number gives you a target which you can plan towards. So if you want to buy a smartphone that costs Rs 50,000, then Rs 50,000 is your goal amount.
#2. Split the target amount into equal parts
Meeting bigger goals begins with meeting smaller goals. Split the seemingly large figure into smaller bits. On average, divide the amount by 12 months. This tells you how much you need to cater for every month, to meet your target amount.
In this test case of Rs 50,000, we are looking at a monthly target of Rs 4167. Save this much each month, to accumulate the money you need for your phone.
#3. Now that you know your monthly target amount, how to fund it?
This is the tricky part. You can save this amount from your regular inflows such as salary, and then keep it in the bank account, or you can invest it. Depending on when you want to make the actual purchase you can actually invest in such a way that you can end up with a better phone model then you planned for.
If you keep the 4167 in a bank, the maximum you can get is maybe 4% interest on it. In a liquid mutual fund (a kind of debt fund), you could be looking at something like 9% annually. So you could end up with about Rs 430 more at the end of the year versus about Rs 200 odd.
These amounts might look small, but they can save you the money you require for a case or screen guard.
#4. What if the big buy is really big?
The example we used was for a phone worth maybe Rs 50,000. What if you want to buy a sports bike worth Rs 2.5 Lakh?
Now, it becomes even more important for you to invest your savings. Rs. 2.5 Lakh translates to a need to save about Rs 21,000 every month if you intend to buy the bike in a year or more realistically about Rs 8333 in two and a half years.
The interest from a liquid fund here could translate to about 8000 or an entire month’s savings in a year. You are, basically, accelerating towards your target amount. If the money stays in a bank, what you are ending up with is about half that amount.
It pays to save AND invest rather than just save.
So what is the smart approach to buy short term luxuries without taking on credit card debt or personal loan?
Step 1: Set the target amount
Step 2: Divide the amount into equal parts by dividing it against 12 months or multiples of 12 if it is a big amount.
Step 3: Save the “instalment” each month and invest in either a Liquid Fund (if you are planning to buy within a year) or a debt fund if you are planning to buy in 3 years or more. These are among the safest of instruments along with Bank Fixed Deposits.
To understand more about Debt Funds go here.