InvestorQ : We are always told that we must save for the future. Are there occasions when it is better to spend than to save?
Rutuja Nigam made post

We are always told that we must save for the future. Are there occasions when it is better to spend than to save?

Rutuja Nigam answered.
3 years ago

You must have surely heard about the impact of inflation and how this inflation actually eats into your savings. Let us take an extreme case! If your money is parked in a bank FD at 9% rate of return and inflation shoots up sharply due to food shortage caused by bad monsoons, then what happens? The answer is; you may end up in a situation where your savings are earning 9% but the inflation rate is 11% resulting in negative real return of (-2%). That means you are actually paying your bank to deposit money with them and that is hardly a very smart scenario for you to be in. In such circumstances it may make more sense to spend money than to save. Or at least, you must look at smart investment options that can earn more than inflation.

Let us consider another scenario where the economy is going through a slowdown. Prices may be coming down and that means you may be getting salivating bargains on purchases. For example, your Goa Holiday that was costing Rs.100,000 for your family is now available at Rs.70,000, then you are certainly better off spending on your holiday rather than hoarding the money in the bank. In an economic slowdown, most investments tend to underperform and hence you will be better off spending on bargains.

To summarize, there are 3 other instances where spending may be more worthwhile than saving your money.

· We all know that “Internet of Things” (IOT) is emerging as a major game-changer in technology and business. If you have a choice whether to save Rs.30,000/- or spend on an IOT seminar, what should you do? These are examples of intangible benefits that could be long-term in nature. These are less of expenses and more of professional and intellectual investments. Spending on the IOT seminar may actually make more sense in terms of career advancement than saving that money.

· Second is the case of high-cost debt outstanding! Today your personal loans carry interest rates of 15% and credit cards carry as high as 35%. If you have surplus cash of Rs.50,000, should you save the money or pay off your credit cards. The answer is clear! You must repay your credit card debt. You will save 35% in the process and no saving instrument is going to give you that kind of returns.

· Thirdly, there is the case of spending on quality of life. This is a highly personal decision and people have to rely on their own judgement. But spending on enhancing your quality of life is normally considered a better choice than saving. There are some benefits that cannot be exactly quantified and this is one of them.