This is one of my favourite write-ups on personal finance and my increases my curiosity to understand the current generation’s thoughts on costly leveraged purchases (sometimes myself as well!). First of all, let us try to understand what is a ‘Leveraged spending’. For retail consumers such as ourselves, ‘leveraged spending’ means using debt or borrowed money to undertake any sort of purchase of discretionary items (Discretionary items are those that we can survive without, if the situation demands).
Have you ever wondered why young people who are just beginning their professions buy such pricey mobile phones? So many young people starting out on an income of less than Rs. 50,000 per month are using smartphones costing more than one lakh. One-third of the smartphones sold in India are now financed, and the more expensive the price of the phone, the greater the likelihood that it is being purchased on a loan. That is, financing options account for half of all premium category phone purchases (those costing more than Rs. 30,000).
One of the reasons individuals take out loans is the ease with which they are offered. But why do individuals continue to take out loans to acquire pricey phones when they know that these products will eventually depreciate? In addition, they also know that a new, presumably superior variant will be released soon.
The reason behind these costly purchases is that, it enables them to convey a sense of coolness and the notion that they have arrived in their life, and hence a cheaper smartphone with identical functionality cannot do. Furthermore, if everyone around them owns an expensive smartphone, simply fitting in becomes difficult. In that way, they think that a costly smartphone is an indicator of a person’s self-worth.
This does not end with smartphones. Another interesting example is that guys (nearly always) buy a specific type of motorcycle. Along with taking them from one location to another, it also allows them to portray a specific image, maybe macho. In many situations, the act of purchasing an electric car thereby portrays an image of being environmentally responsible. They want to portray themselves as cool since they are not driving some smoke-producing automobiles. Of course, the power needed to charge the batteries in such automobiles might have been generated by using coal, but this has no effect on them.
This mentality will lead you into a debt spiral. It’s like walking on a treadmill: it doesn’t get you anywhere, and you’ll ultimately return to your old emotional condition, even after purchasing the expensive products. For instance, if you buy the most expensive smartphone on the market, and in the following year or so, the company will release its next advanced-featured smartphone with better improvements; you will want that new model since you have now returned to the starting point of the treadmill. This applies to a variety of items, not just smartphones. It also includes cars, watches, jewellery, clothing, houses, etc., as well.
The point is that businesses have managed to put a price on our emotions, and we continue to bear the cost for it, which leads to a scenario in which many of us do not plan our personal finances well, resulting in meagre savings or no savings and a mountain of debt, which will make matters tough in situations of financial emergency.
Young people can acquire cheaper things with almost identical usage features and invest the extra money somewhere. However, if consumers just bought items for their utilitarian merit, certain businesses would never be able to generate their current profits. Interestingly, this is how capitalism succeeds. I am not opposed to capitalism, but young people should avoid taking out loans to finance their purchases, especially for depreciating assets such as smartphones, cars, bikes, etc.
