World Thrift Day 2023: Addicted to EMI purchases for luxurious life? Experts list down potential risks

Frequently relishing meals in a fine-dining restaurant whose bills equal the cost of a whole month's groceries for a couple or purchasing an iPhone that costs a month's whole housing rent don't look like healthy financial actions. Yet, many of us choose to tread this path.

A few decades back, iPhones or even cars and other such luxury items were perceived as commodities for the rich. Today, the picture looks completely different. Aspiration and optimism emerge to be the key drivers.

Ahead of World Thrift Day 2023 which is celebrated every year on October 30 to raise awareness about the importance of saving, we sat down with financial and investment experts who reflect on the changing consumer behaviour in India and dissect the reasons behind the rise in aspirational buying.

Changing consumer behaviour
For everyone, regardless of their financial capacity, it's very human to want to be able to afford and spend money on luxury items. This want has always existed and isn't a novel trend to humankind. What has changed is the ability to be able to purchase those items due to numerous accessible credit methods.

"With regards to the changing consumer behaviour in India, I have observed that there is more aspiration among people to buy luxury items and willingness to use credit to fulfil those aspirations," says Ankur Warikoo, entrepreneur, author, online educator and content creator.

He adds, "India has witnessed 20-30 years of economic growth ensuring that the new generation does not have to fight to fulfil the basic needs of survival like food or shelter. These needs have already been fulfilled by their parents. The need now is to elevate yourself from where you are to where you desire or aspire to be. This is making the new generation invest in a luxury lifestyle."

However, this change in the behaviour of consumers does not reflect the whole of India's buying and consumption patterns. The Indian economy is broadly divided into three categories - the consuming population that forms a large part of urban and semi-urban India which makes up not more than 20 per cent of the Indian population, then, the working class having stable earnings. This includes office goers, traders and small shop owners. They make up a large part of the population. The last category is the agricultural population which also includes the daily wage earners.

All these three strata behave differently since their needs are very different from each other. However, each of these also behaves differently today as opposed to a few years back.

"I have witnessed major changes in consumer culture in the top spectrum of the population - the consuming class. These people want to spend heavily on themselves. They believe that the acquisition of luxury items such as SUVs, iPhones, or even branded clothing will provide them with a certain status and societal appreciation," says Anil S Nair, founder ASN Growth Consulting, and independent director Kalyan Jewellers.

The buying power in tier two of the Indian population is seeing a gradual increase. People falling in this category are now purchasing items they did not have the power to buy a few years back.

Expanding on this further, Nair says, "There has been a tremendous change in the consumer lifestyle of tier one population in India thanks to the proliferation of social media. People are experiencing FOMO (fear of missing out) and feel the pressure of fitting into a certain social class. The pressure of showcasing a luxurious life on social media is driving a significant rise in the purchasing of expensive items."

Adding to this Warikoo also highlights another crucial cause of the increase in aspirational buying. "The new generation today has more risk-taking ability as opposed to what our parents had. Our parents too wished to buy expensive luxuries but couldn't. By the time they could start earning a stable income and settle down, they had already reached their late 30s - a time when buying a house and taking on the responsibilities of children was much more important than spending on expensive luxuries. Now, a majority of the younger earning population achieve income stability and predictability in their mid-20s. Most of them are unmarried and free from key familial responsibilities. Further, not all have their parents' responsibility as today, parents themselves ensure their own future security. This makes purchasing expensive luxury items easier."

Easy credit accessibility
While there are many factors that lead to aspirational buying, one cannot overlook the credit payment system in India that has made purchasing heavily expensive products a cakewalk for every Indian having a stable earning.

"A majority of people purchase items using credit payment options as their income does not substantiate their wants. Further, the proliferation of non-banking institutions has also made things much easier," says Nair.

When asked what is driving people to opt for credit payment options like EMI, he comments, "Besides easy accessibility of finance, there is also a sense of optimism in the consuming class of India where people believe their income is going to increase in the future. This is giving them the confidence to borrow liberally against future income."

Equated Monthly Installments or EMI, personal or retail loans, and credit cards are some of the most common types of credit payments that make purchases of luxury items affordable.

"Zero-cost EMIs have allowed people to spread their expenses over a period of time - three, six, nine or even 12 months or more. They allow people to buy items in advance and pay for them over a period of time. Often the cost of it is borne by the financial companies. Personal and retail loans too are easily available that people opt for even though its interest rates are high," says Warikoo.

"Consumers are habituated to EMIs that are present in every part of our lives. Any expense that is outside of one's spending capacity is incurred with the help of EMIs," adds Nair.

Further, while credit cards are also one of the options that help in the purchase of expensive items, their penetration in the Indian population is considerably low. Nevertheless, those who have access to a good credit limit do make purchases using the card. The reason behind this is the luring deals, discounts and added points offered by banking institutions.

Warikoo says, "When used smartly, credit cards can be a wonderful option. It helps you get an interest-free loan for 30-45 days. It helps you build a good credit score and also gives you points for making purchases."

Risks of impulsive buying
Earlier, people used to accumulate money to make heavy purchases. This has changed drastically. People now are acquiring items first and then paying for them. This trend is rampant in the present times.

Nair says, "It's an extremely unhealthy financial habit for any individual. EMIs should not exceed 20 per cent of your monthly take-home income. Anything beyond that might put you at a financial risk. It also might not look good for your credit score as you end up owing banks more than you earn."

He adds, "If you divert all your income towards EMIs you will always find yourself struggling to pay money to financial institutions. It's necessary to curb this habit."

Similarly, Warikoo says, "Using credit payment options is a safe and healthy habit only if you have the money to pay for it. If you don't have the money and use EMIs and credit cards to pay for a luxurious lifestyle in the hope that you will accrue the money in the near future, then that is something that can land you in trouble."

Tips to find a balance:
Both Warikoo and Nair suggest some helpful tips to make safe purchases and find a balance between your income and spending on luxury items.

1. Always have the money before you make any credit purchase.

2. Have a monthly budget. Follow the 50-30-20 rule. Spend 50 per cent of your monthly income on your essential needs like rent, bills, groceries, and transport. Use 30 per cent for fulfilling your wants and desires. This is where you spend. If 30 per cent of your monthly income isn't enough to acquire those items, save 30 per cent of your income for a few months and later make the purchase. The remaining 20 per cent of the income must be used for savings and investments.

3. Curb impulsive buying. Avoid using EMIs for purchase of non-critical or want-based goods.

4. Maximise the utility of all the luxury items you buy instead of upgrading to newly launched products.

5. Think before making an impulsive purchase. Ask yourself, "Do I really need it right now?"
This will help practice restraint.

6. Educate yourself about the advantages of investments. Investing from an early age can yield great results in just about 10-15 years. This will help elevate your lifestyle in the long run.