The festive season in India brings with it not just joy, but also significant expenses. These additional costs often lead to mounting credit card bills or personal loans, which can push families into financial distress. The biggest challenge during festive shopping is making poor financial decisions under the influence of emotional spending and time-limited offers.
Attractive discounts and eye-catching advertisements can tempt us to splurge on things we don’t actually need, adding to financial stress. In this article, we will explore simple yet effective strategies to help you shop responsibly during the festive season and avoid falling into a debt trap.
Psychology Behind Festive Spending
Most festive-season purchases are driven more by emotion than logic. According to Salesforce, 80% of shopping decisions are emotion-based, while only 20% are rational.
Sellers often use psychological tricks to encourage people to spend more. For example, under the framing effect bias, offers are presented in a positive light, highlighting the benefits first and mentioning the price later.
In the case of the anchoring bias, a high price is shown first, often an inflated or imaginary one, followed by a significant discount to create a false sense of savings. Similarly, under the loss aversion bias, offers are made to appear urgent, with phrases like ‘Last day!’, ‘Buy one, get one free!’ to make customers feel they are missing out.
Understanding these tactics can help you take a step back and make more mindful spending decisions.
5 Ways to Avoid Falling into a Debt Trap
1. Budgeting
Budgeting is essential to stay financially stable, especially during the festive season. Start by creating a realistic budget that factors in your income, essential expenses, savings, and any existing loans. Set aside specific amounts for gifts, decorations, and celebrations.
Remember, EMIs should ideally not exceed 30% of your net monthly income. Prioritise loan repayments, and stick to your budget religiously. This will prevent unnecessary borrowing and help you keep your finances in check.
2. Credit Card Management
Credit cards can be helpful, but misuse during the festive rush can lead to long-term debt. Limit your usage, and always aim to pay the full outstanding amount before the due date to avoid interest. With monthly interest rates ranging from 3.5% to 4%, even a small balance can snowball into a major liability.
Avoid cash advances altogether, they come with steep interest and extra fees. Spending beyond your limit not only attracts penalties but also damages your credit score. Use your card only when you are confident you can repay on time.
3. Avoid Impulse Buying
Festive sales are designed to trigger impulse purchases. To counter this, prepare a shopping list in advance and stick to it. Buy only what’s necessary. Experts recommend waiting at least 30 days before making a non-essential purchase to gauge whether it’s truly needed or just a passing desire.
Also, don’t be fooled by inflated discounts, retailers often hike prices before sales to create the illusion of big offers.
Whenever possible, opt for cash or debit cards instead of credit cards. It helps keep your spending within limits and avoids the debt spiral.
4. Managing Existing Debt
If you are already in debt, managing it wisely is crucial. Speak to your bank about switching to lower-interest options like gold loans, loans against securities, or home loan top-ups. These generally have better terms than personal loans, which can carry interest rates as high as 18%.
Alternatively, consider borrowing from family or selling an underutilised asset, but weigh the long-term consequences carefully. The goal should be to reduce the interest burden and avoid accumulating more debt.
5. Long-Term Financial Planning
It is easy to lose sight of long-term goals, like retirement, buying a house, or your child’s education, during the festive buzz. But this is exactly when you should stay disciplined. Continue your Systematic Investment Plans (SIPs), and increase them if possible. Market dips during this period may even present attractive investment opportunities.
Also, focus on reducing long-term debt. Making additional payments towards your home loan principal helps reduce overall interest and shortens your loan tenure, bringing you closer to financial freedom.
Wrapping Up
While it’s natural to celebrate the festive season with joy and generosity, taking care of your financial health is just as important. Budget wisely, manage your credit card use, avoid impulse buying, handle existing debts responsibly, and stay committed to your long-term financial goals.
As Warren Buffett aptly said: “If you buy things you do not need, soon you will have to sell things you need.”
Spend smartly this festive season, so you can enjoy the celebrations without compromising your financial future.
*The article is for information purposes only. This is not investment advice.
*Disclaimer: Teji Mandi Disclaimer
