Saving for a Rainy Day or Spending for Sunny Weekend?
One of my friend went shopping for a quilt to use as a comforter on a double bed. Interestingly, the majority items of the store was on sale. The regular prices were Rs.3000 for a king size, Rs.2500 for a queen size, and Rs.2000 for a double. In the sale time, all sizes were priced at Rs.2000. My friend could not resist but bought 2 quilt of king size bed.
Everything you buy is associated with an opportunity cost. For example, someone bought ticket of Cricket World Cup Final in advance for 1000 bucks and now sells it for 5000. It does not matter who sells and who buys. First person saw profit of Rs.4000 in his transaction while second person saw profit of being at world’s biggest cricket stadium. Both paid opportunity cost in different ways.
Mental accounting helps to understand the basic economic theory of the consumer. Sale, free offers, vouchers etc are different ways to attract more consumers in order to expect them to purchase from high value inventory. To that friend who went to buy a quilt, he could have easily settled for 1 quilt in Rs.2000 but failed in Mental Accounting so he bought 2 quilt and eventually spent more.
Daily we go through many opportunity costs such as cost of dining out or a new released movie or buying expensive lifestyle items, we fail in mental accounting. The world is moving from “Saving the money for a Rainy Day” to “Spend money for a Sunny Weekend”.
The problem of Mental Accounting is too complex for anyone to solve. Not every penny has to be saved for future or not every penny has to be spent for present comforts.
At Shalibhadra, we follow very basic principle for young investor who are starting their investment journey. Step up / Top up investments. Topping up SIPs is very effective and automatic tool to cater Rainy Days while you enjoy Sunny Weekends.
Nishit Siddharth Shah