We plan for regular monthly expenses. We call it budgeting. We plan for long term goals through a diversified asset allocation portfolio. However, we tend NOT to plan properly for non-monthly but periodic expenses. Common examples are:
- Insurance premiums
- Travel and Vacations
- Birthdays and Anniversaries
- Vehicle maintenance
- Gadget purchases
- Annual Subscriptions
We know that these expenses will come every few months, but we don’t really get down to saving for them. We will cross the bridge when we get there.
How Do You Fund These Expenses?
If you have not been planning diligently, you will either use a credit card or take a personal loan to fund these expenses. I use Personal loan as a generic term for all kinds of credit requiring EMI based payments. This includes Buy Now, Pay Later (BNPL), No-Cost EMIs, and Instant Merchant EMI schemes available on merchant websites.
Credit card expenses will require full payment within 15-45 days. Thus, if you are using a credit card, I just hope you have your cash flows sorted and can make full payment. Or you can convert the purchase into EMI, albeit at a high rate of interest.
You Could Have Planned Better
Now, these are not unplanned expenses. You could have seen these expenses coming to you months earlier. I understand gadget purchases and home appliance purchases can sometimes be unplanned. You may lose your phone, or your laptop or television can conk off suddenly. You can’t do much about these things except drawing from your contingency fund or taking credit.
But if you have been postponing the purchase of a new refrigerator or TV to get discounts during Diwali season festival sales, then where is the plan to fund this expense?
Think about insurance premiums, subscription payments, anniversaries, and travel. For insurance premiums, you know that you must pay the premium on November 15th for the next 20 years.
While not all debt is bad and provides flexibility, unnecessary debt must be avoided. You save Rs 10,000 per month to save Rs 50,000 OR you spend Rs 50,000 on loan and pay Rs 10,000 over the next 5 months to the bank. If you can spare Rs 10,000 per month to pay the EMI, you could very well have saved Rs 10,000 per month to fund the purchase.
How to save money for purchases?
#1 Plan and Make Systematic Investments Yourself
You can start a RD for a few months. Or do an SIP in a liquid or a money market fund. For instance, you know you need to pay the life and health insurance premium totaling Rs 60,000 after 6 months. You can simply start a Recurring deposit of Rs 10,000 per month for 6 months or an SIP of 10,000 per month in a liquid fund. When the insurance premium comes due, utilize the RD maturity proceeds, or redeem debt MF investments to pay the premium.
Alternatively, if you have a lump sum amount with you and you know that you need a part or full amount to pay the kids’ school fee in a few months, put the requisite amount in a bank FD or a liquid fund. You can leave the amount in the savings bank account too, but it is a common pool. There is a good chance that this money will get utilized elsewhere.
This is the simplest mode, and you have the most control over your money.
#2 Deposit Installments with the Merchant
Let us say you want to gift gold jewellery to your sister for her wedding. The wedding is planned after a year. You approach the jeweller. The jeweller asks you to make monthly payments for the next 12 months. At the end of the 12 months, you can use the accumulated amount to purchase jewellery.
What are the merits?
- Once you sign up, there is forced savings. Hence, you end up saving for the gift.
- The jeweller sweetens the deal for you by offering you a discount. Say, while you have accumulated 1.2 lacs over 12 months (Rs 10,00 per month for 12 months), you can use this to buy jewellery up to say Rs 1.35 lacs. Hence, some discount for you on the final purchase.
Tanishq used to offer such gold schemes (Golden Harvest Scheme and Swarnanidhi). Not sure if such schemes are still around since there is always this uncertainty due to deposit-taking nature of these products.
What are the demerits?
- You take the credit risk on the merchant. If the jeweller shuts down for any reason, your money is gone.
- You carry the gold price risk. Since you buy only at the end of the 12th month, the gold price at the end of 12th month will be applicable. This can hurt if the gold price has gone up secularly over the past 12 months.
- You become a captive buyer. You can’t use this accumulated credit at any other jeweller. You must buy gold jewellery from the same jeweller (and not even gold coins or gold biscuits). What if you don’t like any design on offer at the time?
- If you don’t utilize the accumulated amount for jewellery purchase, you will be refunded the entire money without interest. In fact, the discount mentioned as a merit is a way to compensate you for non-payment of interest on such products. You could have kept this money in a RD and earned interest. Or if it is about buying gold, you could have put money regularly in gold MF/ETFs or gold bonds. You can sell the gold ETF/MF/bonds at the time of use and go to any jeweller to purchase the jewellery.
Demerits are much bigger than merits here. Hence, I will not be keen.
I have just given the example of a jeweller. Such a model can work for any kind of purchase or any merchant.
#3 Save Now, Buy Later (SNBL): Mix of (1) and (2)
Now, let us bring in a fintech company that does the following.
- Reaches out to brands and tie up for discounts as in (2). The brands get more business and may thus offer better deals/discounts to fintech and its customers. The fintech firm can pass on these benefits to customers in the form of discount, rewards, or cashbacks.
- Reaches out to customers. Promotes tie-ups with brands. Offers a simple way to invest in liquid funds or money markets. Safe products. Slick interface to specify purchase goals and invest money. The customer gets discounts/cashback on purchase of products.
There are entities such as MultiPl, Tortoise, and Hubble that offer such a facility. I have not used apps on any of these fintech. I got to know about these apps after reading an ET article. Do due diligence before using any of these apps.
The fintech firm can make money from advertising and commissions or a cut from the share of sale, upselling or through any other way. And we must understand how the entity makes money to get an idea about business sustainability.
This looks like a win-win for everyone. You plan properly and avoid taking unnecessary credit. There are savings, discounts, and cashbacks too. The merchant gets business and the fintech earns commissions. However, there are a few questions you must ask.
Where is your money kept? If your money is invested in a mutual fund or bank FD/RD in your name, then there is no problem. You have complete ownership of your money, and you also earn returns on your investments even without any discounts/cashbacks.
However, if your money is kept in some pool account, I will be a bit worried about my money. Who is responsible for that money? OR Your money is captive for a merchant. Say, you cannot use money saved for MakeMyTrip expenses for purchasing on Croma, we have a problem just as we had in (2). While the fintech gets you 5% discount on purchase from a merchant, the same merchant is offering 10% to everyone. So, you lose out on returns (you were ok since you thought discount would make up for it) and you could have got a better discount without this intermediation.
Save Now, Buy Later (SNBL) is a common practice Indian households have used for ages. It is a prudent approach but nothing new about it. I would prefer to retain ownership of my funds and maintain flexibility as in Approach (1). Whether you need a Fintech for intermediation and better deals is your choice. However, do get a sense of flexibility and who controls your money.