FESTIVALS are a good time for making expensive purchases as banks offer various loan options, such as lower downpayments and reduced interest rates, during this period. However, as an investor, you should exercise caution as any impulse purchase might impact regular investment cash outflows.
Impulse purchasing is unplanned, the result of an exposure to a stimulus, and is decided on the spot. Impulse buyers make a purchase decision without searching for information or evaluating alternatives.
The major reason for impulse buying is that your unconscious mind is driving your spending habits as a consumer.
Under the influence of basic evolutionary drives, combined with the substantial price reductions, offers and discounts offered by retailers, one is compelled to buy something that may not be used very often later.
So, how should one avoid impulse buying and keep a spending discipline?
Avoid carrying credit card
If you plan to go for shopping and are susceptible to such impulse buying, leave your credit card at home and pay for everything in cash/cheque. Using a credit card enhances your impulse buying, as you feel that you can spend up to the limit and pay before the due date. This is something that rarely happens.
Carefully examine limited period offers
Marketers around the world have learned that you are very susceptible to the loss-aversion concept. Loss aversion describes our innate concern to avoid feeling bad in the future. For instance, we often think that “do I feel bad if I buy this and do not have the money for something else?” But add in a discount that we have been offered and that too for only a limited period of time, our unconscious focus switches to the fear we could miss out on the deal. So, it is essential to thoroughly examine the limited-period offers.
Avoid using heuristics
We all know that most shopping is too tough and time consuming. Imagine if every item that you bought was cross-referenced with every other product available in the market, meaning which you would need to look at price, product composition, reviews and, maybe, even the quality of customer service supporting it. Even if you could find all information in comparable formats (which is available of late) it would take hours to buy one item. So, instead, we use heuristics, unconsciously held rules of thumb that help us make quick decisions that we have learned generally worked out in the past. Obviously, companies take advantage of this by packaging products as bulk buys, or including ‘free’ extras. We get the impression that it must be good value, and we go with this feeling rather than researching any further.
Fix a monthly cash outflow
It is always advisable to go out shopping only after making a list of things that you need to buy and focus on those items. Avoid making unnecessary additions to your list; for instance, replace your existing phone with a new one only when it is really beyond repair. Make a budget and stick to it. Stick to the budget as much as possible and whenever you could not strictly adhere to the same, get yourself to pay a penalty, such as cut down on your eating out plan, go to work via public transport, and so on.
The writer is associate professor of finance & accounting, IIM-Shillong