With Diwali round the corner, the temptation of good offers and good times may be hard to resist. You may even end up spending more than what you planned for, thanks to hidden costs of festivities that may seem small but can add up and put a strain on your budget. In that scenario, financial indiscretions are not uncommon—whether it is using your credit card more than you should or availing of that easy loan with attractive EMIs. Then there are social pressures, such as FOMO (fear of missing out) and the “lifestyle creep" effect, which demands that you have a better celebration than you did last year, to deal with.
If you have gone about the right way in planning your expenses for the festivities, all that won’t bother you. But if you are looking forward with dread to a post-festivities financial hangover, then there is a problem.
If you have been undisciplined with your spending, you will see the signs in your finances later. The credit card outstanding will be much more than what you can comfortably meet, and you may consider suspension of or withdrawal from long-term investments to meet liabilities.
To start with, make a detailed recovery plan to get back on track. Your primary concern should be to pay off the debt. Paying just the minimum required is not going to get you out of debt as quickly as you should. Have a debt repayment plan in place. Take care to include all that you owe, even if it is an informal loan from a friend or family.
Deal with high-cost debt first so that the interest does not drain the scarce resources. Financial advisers agree that dealing with high-cost debt arising out of unplanned expenditure is about opportunity cost and making the best of a bad situation. “If income is stretched or there is a large credit card debt to deal with, then it may warrant suspending periodic investments such as SIPs and even pulling out of investments with the least pain in terms of penalties and taxation," said Priya Sunder, director and co-founder, PeakAlpha Investments.
“Look for low-cost funding such as loans against investments and even personal loans to meet high-cost credit card debt," said Lovaii Navlakhi, managing director and CEO, International Money Matters.
The next priority should be to quickly make good any disruption in the emergency fund and long-term investments. If you have a budget, then look at where you can find more savings that can be applied towards the recovery plan.
Cut back your discretionary spending ruthlessly. “You have to claw back to where you were. And for that you have to tighten your belt. Cut back and postpone discretionary expenses, use all bonuses and extras to build back the portfolio," said Sunder.
Planning ahead for expenses that are likely to be incurred each year can make celebrations truly enjoyable. It is good to do this exercise every year since income and expectations keep changing.
The first step is to do a hotwash of the holidays just gone by to understand what went right and what went wrong. Was it the lack of a budget and lists or the inability to stick to it? Were the expenses budgeted too high for the income to bear? Were expenses left out that added up to a large amount? This exercise will give you an idea about how to plan for the future.
However, be clear about how much you can spend on celebrations. Last year’s actual expense can be a starting point which you can increase or decrease depending upon how you see the following year playing out. Another way to set a limit is to decide on a percentage of income you will use. Arrive at this percentage after considering all the goals and needs you are saving for. “The amount they are planning to spend has to be seen in relation to their income and goals. Once they understand the repercussions of overspending, they will be more amenable to controlling it," said Sunder.
Include all the expenses in the budget and not just the large spends such as those on gifts and clothes. Make a list of big and small expenses and explore ways on how to minimize the costs so that it stays within the budget. Assign a rupee value to each expense and try to stay within this value. Start purchases early so that you have the time to compare costs and get good deals.
Stick to your list to avoid impulse buys. “Even if you don’t have a separate budget for the festivals, include the expenses in the annual budget under different heads so that you can be sure of providing for them," said Navlakhi. Sunder points out to the tradition of giving that is part of Diwali and other religious festivals and how it can be built into the overall financial plan.
Once you know what the budget is, start saving for it from the beginning of the year. A liquid fund is a good product to accumulate through the year. “When expenses for the year are planned ahead, we recommend an SIP into a liquid fund so that the money required for these spends is accumulated and can be used as and when these expenses come up. And since it is a rolling SIP, the money gets replenished every month," said Sunder.
If you are falling short and believe you may need to resort to debt, then have a repayment plan in place. Put current finances under the lens to check if you will be able to meet the repayment obligations without harming your investment plan for other goals. It also acts like a check against indiscriminate spending. “One effective way to set a limit for your expenditure, even in this digital age, is to put the money you think you can spend in an envelope and stop spending when the money runs out," said Navlakhi.
Last but not the least, savour the memories and traditions. “Even if you have been indiscreet in your spending, look at the bright side and learn from the mistakes," said Navlakhi. Don’t regret the expenses. “Financial planning is not only about budgeting, saving and putting away for the future. Money should give you happiness today too," added Sunder.
Focus on how you can make next year less financially stressful, and bring back the joy to the festivities.