The art & science of spending.Lecture Series One
By writingforfun, 13th Feb 2012 | Follow this author
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Posted in WikinutMoneyEconomics
A lot has been written about how and why we spend money.Why some of us are spendthrifts and others misers.Well there is a huge interregnum of consuming behaviour that is scientific and calculated and also irrational and devoid of thought.This tends to bundle all in one sane bundle that corresponds to current theory on consumer behaviour.
Who are we?
An individual who is adult has what I call full blown set of 'basic needs'.Food,clothing,housing being the most commonly understood of them. Then depending upon our lives and views about our lifestyles we add one,two or many needs that fall in this category. Ideal example for this would be 'deviant behaviour'.A drug addict would have fixed dosage as a need. What is not need is a comfort or even luxury.This need,comfort,luxury set may alter over time depending upon my income and wealth levels.Over riding fact is 'life time wealth' attained at any point of time. Life time wealth is sum of all those assets that either return or do not return but are standing in my portfolio as good and working standing. If junk in my attic has market value then even this is a part of my wealth. However,core and active part of life time wealth is those assets that are vibrant ,earning or working for me and my dependents. The level of this life time wealth gives me an 'expending confidence'.It works as an overriding decision variable in my spending decisions amongst a host of other variables.
Can i stay on roadside? can I make my dependents stay on roadside? Can I wear tattered clothes in minus zero temperature? Can I see my dependents do likewise? Can I eat garbage food like a beggar along with my dependents? Obvious answer would be a big NO to each of the above question.Allright if I cannot stay at roadside then what Do I want. A shelter, a home. Options are I rent or own. In either case what kind and where? A small cheap room in which i cram ten family members or a ten room bunglow in which each member has his or her private life. In case I rent, my current liquidity must be steady enough to be able to pay rent on each timed demand. In case I wish to own is my own wealth enough to purchase or I have to borrow.If yes,then how much and at what rate of interest.
Consider a case of a lottery winner.This winner won an apartment whose fresh mortgage retailed for $1 million. However,federal taxes and other charges later it was revealed that the winner has to shell out nearly $400000 from his pocket ,upfront,to be able to lay claim for possessing the said apratment. His current liquidity at $2000 per month income and all bank balances put together of $30000 and fixed family liabilities left him no alternative but to borrow. This winning was a huge fillip in his life time wealth.But he was least prepared even to accept a windfall. Borrowing at 18 percent or more $370000 would destroy his current liquidity completely and throw him in a debt trap.If he were to move in his plush apratment it would be like a beggar residing in a palace.It was unlikely he may be able to maintain the status of his neighborhood.Can anyone of you help him plan his spending/borrowing(as borrowing is essentially spending on interest) decision.?
to be contd
Comments
13th Feb 2012 (#)
On hidsights have you heard the story of the clerk who had got promoted to officer and ordered expensive paisr of suits,shoes,cufflinks,ties,scents and all those that officers go by.In addition he spent most of his time in office looking at the shine of shoes ,intensity of his perfume. As a result of which he was demoted in six months back to clerk. His investments for being with the joneses in these six months impaired his life time wealth level so much that for next three years he had to struggle three times to be able to remain at the level he was when he was promoted.
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13th Feb 2012 (#)
Excellent. I like your codicil in the comments too. Insightful and thought-provoking,
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13th Feb 2012 (#)
codicil hahahahahaa
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16th Feb 2012 (#)
You really have a surprising quality in that you are able to include hard facts with amusing insight. I enjoyed this page. Well done!
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16th Feb 2012 (#)
oh thanks these in fact are hard facts of life..lovely comment
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