How much should you spend on a smartphone? The cost has 3 parts
Every expense would have three components— the basic mandatory spend; the discretionary spend; and the lifestyle spend. The distinctions between the three are not rule-bound. As incomes increase, what was a lifestyle expense might become mandatory.
The son announced he wanted to buy a new phone. There are just too many choices, he rued, and asked if I had any pet theories on the matter. One can never let go a teaching moment. If it involved the son, it only got sweeter.
So, how long do you intend using the phone, I asked. Why would that matter? The cost of the phone looks large, but it is amortised over the period of use. If you spent Rs 1 lakh on it and used it for four years, you are expensing Rs 25,000 a year. That is about Rs 2,000 a month. You can compute this as a percentage of your income, to determine whether it is too large or small.
He told me he would use the phone for two years. I immediately disapproved, as most righteous moms would. Isn’t that too short a time? His argument was that new technologies come in so fast, that a phone becomes obsolescent in about that time. Then I made the cardinal mistake of telling him that I do not change my phone as often.
That is a territory I shouldn’t have veered into, given his sharp memory. He reminded me about losing my Blackberry in 2007; my adamance about getting a similar replacement; then the iPhone’s entry into the market and the husband’s gift; the move to a new city and the new phone; then the swap with the son’s phone since I liked it; and the one I have now which is a gift from the daughter.
You used six different phones in 11 years, and your average looks a shade poorer than mine, he smiled. I was about to argue that gifts won’t count. Then I thought better of it as I know when to submit to irrefutable data.
We returned to the question of cost amortisation. He told me it would not help him. With a two-year assumed life span, we were looking at Rs 4,000 a month. Not a large sum that would be a burden. He told me the formula was useful for big ticket items like a car, but not very helpful with the phone. Point taken.
We returned to the basic question and I asked him if he had finalised the features, the brand and so on. He told me his basic homework was in place, but the toss up was between the two price points he considered. One was low and the other was high, and he wanted a framework to evaluate how the decision should swing. Isn’t that a personal finance problem about spend, he asked. I admitted it was and offered the next dose of gyan.
Every expense would have three components— the basic mandatory spend; the discretionary spend for personal preferences; and the lifestyle spend for vanity. I offered to explain with an example. If the basic need a phone must fulfil is making a call (eye roll!), then the mandatory spend is a small amount. Since the phone has to support data, and be smart, and since it is impossible to wade around ordinary everyday existence in India without the smartphone, the mandatory component is the cost of one such device.
To that cost if you added preferences that matter to you, such as lightweight, bigger screen, and so on, you are now increasing the spend to accommodate discretionary features. Though you can take the train to your chosen destination, you prefer a flight, since you prefer to save the time on the travel and utilise it for other matters, I added, trained to provide examples. That choice is not a discretion, it is mandatory, he asserted. I told him we will stick to the phone.
If you add costs that come from having a phone that reflects a certain status, if you want features that signal your wealth, then you are incurring lifestyle expenses. You may decide that the phone you whip out of your pocket must make a statement or match what your cohorts carry. These are lifestyle expenses. He made the mistake of asking me what lifestyle creep was and gave me the scope to hold forth further.
The distinctions between the three components are not rule-bound. They can blur and merge easily. As incomes increase, what was a lifestyle expense might become mandatory. Haven’t we heard of people who brag about not taking public transport any more? Or can’t fly long distance unless it was business class? These are instances of lifestyle creep, where what was once a preference has become mandatory.
Shouldn’t they enjoy their ability to spend, the son asked. Absolutely, as long as they are confident their incomes will accommodate these choices well into the future. And they are nonchalant about allocating a large portion of their incomes to themselves. A goldplated shower set is vulgar, not a lifestyle choice. We so approve of one Mr. Premji travelling economy for that reason, I added.
So, how does the cost of the phone split under these heads, I asked. The son did his math and told me that mandatory elements of the phone are no longer high. The discretionary elements also are reasonable. The lifestyle component seems to be high in both cases, so he would settle for the lower end. Why pay so much more for vanity, he reasoned.
Before beaming like a proud mom, I asked whether he did not care about making a statement and all that jazz. He said enough statements will be made anyway from the clothes, the perfume, and the shoes. There is no need for the phone to join in too; it can remain functional.
He ventured an explanation: If it is personal, and a choice that I make for how I felt and experienced something, I will spend a bit more on it. The clothes I wear are a matter of style and comfort; I have to endure the perfume all day; the shoes have to hold up to all the walking; but the phone is an object after all. The experiential quotient of the phone is smaller, and mostly satisfied in the first two components of the spend. It makes marketing sense for the seller to make a functional tool into a luxury product; but I won’t see it like that. The lower cost phone with a lower lifestyle quotient it is. Proud mom, indeed.
(The writer is Chairperson, Centre for Investment Education and Learning)