7 Apr 2016

What I Learnt About Money

Here’s how I think about money.

Before you buy anything, ask if it will really increase the quality of your life. Most products are advertised on the basis that they do, but they actually don’t. You’ll be shocked to learn that ever since I switched to Axe deodorant, I’m not being besieged by girls the moment I step outside my house.

We often buy things out of a desire to make us happy. There’s nothing wrong with that. In fact, it’s one of the best uses of money. Just make sure that you’re not buying an illusion created by advertising. Before you buy something, wear your skeptical hat, imagine yourself having that product, and ask yourself whether it will really make you happier.

Block ads: 99% of advertising is lying. I use an ad-blocker on my computers to reduce the risk of being manipulated.

You can’t completely avoid advertising or marketing. Since advertising manipulates you, you can’t grit your teeth and ignore it. Sooner or later, your willpower will run out, and you will succumb to it. The solution is to tell your own story, to do your own anti-advertising. When I see an ad saying that there’s 50% off on something, I tell myself, “It’s probably worth only 25% to begin with.” When I see a delicious-looking pastry in a bakery, I ask myself, “Wonder how much sugar is in it”. The point is not that I never eat anything unhealthy, but I try to resist other people manipulating me into doing so when I didn’t want to to begin with.

Start with the cheapest product and work your way up: When I shopped for a belt, I was unhappy and a little offended at seeing them priced at around a thousand or higher. Why should a belt be so costly? These people are trying to rob me of my hard-earned money! So I went to another shop, and then to a third. The point is not that you shouldn’t buy a costly product. Rather, before buying a costly product, check if a cheaper one works just as well. In this case, a ₹1000 belt does nothing a ₹300 one doesn’t do, which is hold my pants up. 

I don’t mind buying a costly product when I think it’s worth it. For example, I bought a ₹23K pair of headphones, because I thought they were worth it. But I never buy a costly product by default, or out of habit. 

When I asked for a belt, and the salesman showed me another thousand-rupee belt, I deliberately asked loudly, “What’s the cheapest belt you have?” Other shoppers turned to look at me. Rather than be embarrassed, I made it a point of pride that I’m not wasting my money. Shops, salespeople, advertisers and society at large trains us to over-spend, that it’s a sign of prestige or success, that buying the cheapest product is being miserly, and so on. Don’t live by society’s rules. Live by your rules. Counter other people’s disapproval by having your own point of view. As the shoppers around me turned to look at me and presumably thought of me, “Oh, what a cheap fellow!” I countered it by thinking to myself, “Ha! What idiots these people are, paying more without getting a better product.”

One important part of living by your own rules is avoiding zero-sum games. For example, I would gain a lot of respect and admiration if I had a BMW. But when you think about it, if two people are competing in a zero-sum game, one of them loses. Or, more accurately, when a number of people compete in a zero-sum game, most of them lose. Don’t play such a game. Buying a BMW doesn’t make you richer. It makes you poorer. If you don’t consciously think about avoiding zero-sum games, you may unknowingly participate in some.

One important part of living by your own rules is avoiding zero-sum games. For example, I would gain a lot of respect and admiration if I had a BMW. But when you think about it, if two people are competing in a zero-sum game, one of them loses. Or, more accurately, when a number of people compete in a zero-sum game, most of them lose. Don’t play a game you are likely to lose. Buying a BMW doesn’t make you richer. It makes you poorer. If you don’t consciously think about avoiding zero-sum games, you may unknowingly participate in some.

Sometimes, to choose between two models, I read reviews and see it in a shop and think about my needs and so on, but I still can’t make up my mind. At that point, it’s time to stop analysing and make a decision. When all else fails, buy the cheaper model.

Make your own estimate of what something is worth: I bought a couple of iPhones over the years, one in 2010 for the then high price of 43K, and then again in 2013 for 53K. When the iPhone 6 Plus came out, I wanted to buy it, but it was priced at something like 70K. I decided I will never pay more for a phone than I already have, which is 53K. After all, everyone else is making great phones for cheaper, and Apple is raising prices. Since Apple didn’t sell me the 6 Plus for that price, I didn’t buy it. And, looking back, I lost nothing. Make your own assessment of what something is worth, and refuse to pay more.

As another example, having traveled in a friend’s BMW, it’s a good car, but assuming it’s priced at 40 lac, is it 7 times as good as my 6 lac Maruti? No. In my assessment, the BMW is worth 10 lac. It’s only slightly better.

Every type of product has a sweet spot at which you get the most bang for the buck. Go beyond, and you pay 5 times as much for a product that’s only slightly better. One example is the BMW. Another example is a camera: a 2 lac camera is going to be slightly better than a 50K camera, not four times. Buy most of your things at the sweet spot. You can make exceptions when you want, of course, but by default, buy things at the sweet spot. Don’t make it a habit to unthinkingly buy products that are much costlier for being only slightly better.

Re-examine your habits: All of us have some habits that cost us money. For example, I was buying things at supermarkets without checking the prices, since I was earlier very busy, and that habit continued. So I started checking the prices. The point is that you shouldn’t coast on autopilot. You should keep periodically re-examining your habits.

We’re all human, so we can’t avoid forming these bad habits. What we can do is periodically re-examine our habits and try something new to see if it works out better.

As another example, I used to buy the biggest pack of essentials, thinking it’s cheaper. But I then decided to see if that habit was really working. I decided to form a new habit, which is to check the price per kg or liter. And I found to my surprise that sometimes things are cheaper in smaller packs. Or priced the same, in which case I buy two smaller packs to retain freshness longer.

You don’t know ahead of time which will work and which won’t. You need to keep trying new habits, new ways of doing things.

Once in a few years, try a different brand of whatever you buy. For example, I buy Lays chips, but I found that other brands like Bingo are cheaper (without having more of fat or saturated fat).

Avoid fees. For example, I found that I was paying an annual fee on my credit card, so I called up my bank and switched to a free credit card.

Don’t be penny-wise and pound-foolish. Know when to pay more. I work with an excellent financial planner whom I pay ₹15K a year, and in the first month, he saved me ₹70K.

As another example, when I bought an AC, I had to decide whether to pay extra for a three-star-rated AC, which is energy-efficient. I did a back-of-the-envelope calculation, and concluded that it doesn’t make sense, given that I use the AC only for 3-4 months given Bangalore weather. Similarly, I wouldn’t have paid extra for a fuel-efficient car, given how little I drive.

You should be able to calculate the true cost of a service or product. For example, both my credit cards cost me 7% when I use abroad. The unethical banks claim only 4%, but they also give me a poor exchange rate, which amounts to a hidden fee. If I buy something worth $100, I end up paying $107. So, when I go to the US, I now buy dollars in cash, paying only 2%.

I investigated prepaid forex cards, but they have the same fees as credit cards, so all they do is add bureaucracy and block my money (by forcing me to load it ahead of time). So I decided to skip them. If the industry doesn’t provide a product that works for you, don’t buy.

If a product or service has myriad fees and other conditions and limits and exclusions, it means only one thing: they are cheating you. They’re making it hard for you to know or calculate how much you’re paying, and to compare their service with competitors. A good service has only one fee. So what should you do? Pay no heed to this nonsense. For example, I never bother with credit card reward points or airline frequent flyer miles. I have frequent flyer cards with a couple of airlines, but I never make my decision based on that. I always pick the best deal for today. Let tomorrow take care of itself. I never buy a costlier ticket today or choose a longer flight or anything in the hope that I will earn frequent flyer miles. Airlines have devalued these in the past (one mile was suddenly worth less), so people who “invested” lost money. If you want to invest money, go with a mutual fund. As another example, credit card reward points come with a limited expiration date or, in the case of Standard Chartered, require you to pay a delivery charge when you order a gadget with your reward points. Redeem your points as cash, for greatest flexibility, even if you get less of it, rather than buying something you don’t really NEED, in the sense that you wouldn’t buy it otherwise.

Buy online. I needed an emergency light, and the cheapest one at the local supermarket was ₹900. But I found one on Amazon for less than ₹400 including shipping, which had excellent reviews. Reviews give you confidence in buying an unknown product from an unknown brand. In the absence of reviews, you tend to stick with a safe, costlier option. Amazon also lets you return a product if it doesn’t work well, or if you change your mind, or bought by mistake. I shop from Amazon as much as I can [1].

Don’t be stubborn about buying an apartment. You get a paltry return in the form of rent. You don’t need to own the place you stay in any more than you need to grow your own food or generate your own electricity. There is a market, and if you get a better deal renting, the sensible thing is to rent. Let’s say to own your car costs you ₹10K per month. If someone offered to rent you a car by the month, for ₹2K, would you not take the offer and save ₹8K? I don’t know why hardly anyone can think logically when it comes to buying an apartment.

I invest in mutual funds rather than buying property. I don’t have an obligation of an EMI. I can invest in a mutual fund when I want to, how much I want to. If I take a career break for 6 months, I won’t invest in that time. Keep your options open. Avoid commitments, like loans.

I read something interesting, which is that the best way to buy happiness with money is to use it to eliminate day-to-day irritations, like traveling in an AC Uber rather than an auto or, worse, a bus.

Small expenses add up. When I did my finances, I realised that I’m spending ₹1500 a month in fees related to financial services: investment advisor, tax consultant to file my tax return, debit and credit card fees, and so on. Unless you total things up and let the data speak for itself, expenses you think are insignificant add up to something substantial.

These are things I learnt over the past eight years, and have served me well. What are your money-saving tips? Let me know.

[1] Flipkart lets you return a product if it doesn’t work well, but not if you change your mind, or bought by mistake. So I prefer Amazon to Flipkart.

The exception is some categories like phones and home appliances, for which Amazon has a worse policy. Even if they are defective, you can’t return them. You can only get a replacement. Whereas Flipkart lets you get either a refund or a replacement. So for phones and home appliances, I’d buy from Flipkart.

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