Is peer pressure leading you to debt?

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Your friends and peers influence your life. Wikipedia explains that

Peer pressure refers to the influence exerted by a peer group in encouraging a person to change his or her attitudes, values, or behavior in order to conform to group norms.

Peer pressure often starts at very early stage in life and it never stops. The term “peer pressure” has come to connote a very negative thing (as the cartoon above indicates), but it can be a significant positive force also. (example1, example2)

There is no doubt that everyone needs a peer group to act share one’s emotions and feelings. But, the problem begins when one starts changing their behavior or act according to peer group, just to remain “fit” in the group. This is also a very common complaint from parents, when confronted with un-acceptable behavior from their children.

The most vivid memory that I have of dealing with peer pressure is during my college days. I come from a poor family and it can be easily seen from my cloths or my bi-cycle wherein my classmates used to come dressed up impressively or in their two-wheelers/four-wheelers. I felt extreme pressure to match up but never had the money, and so I could never “fit” or got accepted into the peer group.

I recently shifted to a new apartment (just few months back) and started interacting with my neighbors, and I realized that there are many folks who have a habit of “showing-off”, making them prone to financial debts. So their wives will sport an iPhone, spend Rs 2500 on window-shopping randomly every week, esp on apparels (and despite that they dress shabbily), keeping a full-time servant, chauffeur (without any real-need) or commuting daily by cabs (wouldn’t it be cheap to own a car) or spending evenings in lavish restaurants (I know for sure that these are not their company paid facilities).

The motivation for these actions is not any real need but peer pressure to fit in the group. If we are surrounded by people who are rich (or showing-off that they are rich), then we would also feel the need to upgrade our cars, cloths or throw lavish parties. The whole problem with why we succumb to peer pressure is because we feel the need for acceptance.

Peer pressure can lead to significant waste of money and it's not just ourselves who we have to worry about. If you have a partner or children you'll also suffer financially whenever they come under peer pressure. So at one end you may want to reduce your monthly expenses but on the other hand you may be forced to spend unnecessarily on useless things just to satiate your family’s emotional needs, so they be part of some crappy peer group.

It is extremely difficult to fight peer pressure, since it can come in from variety of ways:

  • Keeping up with others in terms of buying big cars or expensive plasma TVs or mobiles
  • Impressing your girl-friend/wife/in-laws in terms of expensive gifts to justify your love or caring not only to the concerned person but also to everyone in your peer group.
  • One of the biggest pressure for newly married folks comes in the form of this question, “So where are you going to honeymoon?”. Most folks will burn-out their entire saving just to mention that they went to Singapore/Bangkok (crowded place) rather than an idyllic Kerala/Darjeeling.
  • Buying bigger houses just because everyone in their peer group has bought a house. This is especially true in Bangalore, since most people coming here are in some kind of strange hurry to own a house. It is termed as “biggest investment of your life”, even if it turns out to be crappy decision. I totally oppose it.
  • Sending their kids to expensive schools (I was aghast when I got to know that my neighbor’s one year kid goes to a school whose fees is 15 lakhs a year) or throwing a totally unnecessary lavish party as a show-off. How can a one year kid distinguish whether his birthday was celebrated in a high end restaurant or their own house? The consolation given by parents – I want to give my kid the best I can afford. Duh.

So how to handle peer pressure and how to stop yourself from bleeding financially? How to stop accumulating debt by resisting peer pressure? Here are some pointers

  • Stop worrying about what “others think about me”. Others are probably busy thinking the same thing and don’t have time to think about you.
  • Trust your own instincts rather than following the herd. If you are convinced about your choices and reasoning behind them, then stick to it. You can only decide what is best for you. You should have the confidence in what you believe and the boldness to stand for it.
  • Recognize peer pressure. If you are trying to spend money on something, ask yourself critically, as to why you are buying it. If you really need it, then only go ahead with the purchase.
  • Be absolutely clear about your monetary priorities and be honest discussing it with friends. Remember that everyone’s priorities will be different, so there is no “one fit for all” solutions in financial world.
  • If some friends are just putting pressure despite your resistance, then ignore them and find new friends. A friend who does not care about your opinions is not worth friendship.

Remember that if you don’t want to get under any peer pressure influence, try not to put anyone (especially your friends) into it as well.

Financial Risks of Social Networking

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There has been a huge spurt in the social networking sites and the number of people addicted to it. If you just look at the Facebook statistics, it is mind boggling, check the screen-shot below

image Facebook has more than 300 million active user (note that these stats might be a bit out of date since these are not dynamically updated). It is also estimated that young people are more attracted towards these social networking sites, as indicated below

image These networking sites are great, but with the number of users growing enormously, the end-user is getting exposed to so many risks. It is growing like a jungle, where at each turn, you may encounter someone sitting with a trap to get on to you.

How many user, who subscribe to Twitter or Facebook actually read the privacy policy while signing-up? As an example, Twitter recently updated its privacy policies and I doubt any of the current user even knew about it. (Here's a link to the updated policy and a link to the old policy.) The twitter policy is way much simpler and easier to understand than say Facebook’s policy. It is extremely difficult to wade through this mumbo-jumbo of legal terms, so probably even if someone brave enough tries to makes sense of it, will fall flat on his/her face.

You would think, why someone should actually read or bother about these policies. Google has warned about privacy issues on social web in a paper [PDF] presented at the Web 2.0 Security and Privacy 2009 workshop.

There are multiple aspects to the risks associated with social networking sites and privacy is just one of them. The risks ranges from someone hacking into your profiles to the risk of infantilizing the human mind.

One of the significant aspects of privacy on such websites like Twitter is the website utilizing the data generated by their users. There is absolutely nothing from legal standpoint to prevent this usage. These types of applications are not that far-fetched, given reports of tools to analyze someone's social network and assess their credit worthiness ("Rapleaf") or psychological profile ("TweetPsych").

But how would these lead to financial losses (which is the main focus of this post)? Well these social sites can lead to huge financial losses to the users by

  • Making you loose your job, similar to Heather Armstrong or @theconner
  • Making you loose your insurance benefits similar to Nathalie Blanchard.
  • Data misuse after hacking your personal information including degrading your credit rating.
  • Making you have legal liabilities for using trademarks with-out following the rules. You may use some trade-mark symbols/names into your own merchandise (like this) or your website.

So it is extremely important to keep your eyes open about these risks when interacting socially. Any data that leaves your computer can come back to haunt you.

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How to reduce your monthly expense?

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I recently got a stealthy email from my a very good buddy. The content of the email was crisp asking me for some 15,000 Rs, he was short this month and needed to pay-back someone. I helped him out, but it got me thinking why he got himself into such a situation. He is earning decently (I would imagine around 20 Lakh PA), do not have any family responsibilities (all his sisters are married off) and just has one kid.

As per me, this is definitely not a good sign when you have to borrow from your friends. I am not against borrowing money, after all  friends are for helping you out, but it should be for a genuine reason.

Why so many educated people fail to manage their personal finance?

The single underlying principle for managing money is

Make your expenses lesser than your income

Is this so difficult to understand, that to save money, your expenses should be less than what your earn.  Yet, I find so many people struggling to maintain this equation, eventually letting themselves buried into debt.

So how exactly we should implement this in our daily life? How to spend less and save more? How to reduce expenses? The answer lies in getting into “good financial habits”. If you are single, you need to develop these into yourself, if you are married you need to share these thoughts with your spouse and inculcate these within both the partners. It is more difficult with kids, if you have any, but once these become part of your family, it will go a long way in helping your children in their lifetime.

Here are some great techniques to reduce your expenses:

  • Start on 1st day of the month and every night note down all the money you spent that day. You can do it as a combined list of family (preferable) or you can do it separately for each family member. I assure you that this is extremely painful to start with since it wont bring any immediate relief but do it diligently without fail. Note down every detail of what you spent through cash, credit card, online purchase or any other mechanism. Also note down the channel you are paying through. You can use some software on your desktop or mobile to keep track of you expenses or use just a plain paper

                  You can also use application like this for iPhoneTravel Tracker - Apple Store Trip Example

  • Once you have this list (the hard-work has to give you some benefit) ready, then it is the time to walk through it and arrange the items in following categories
    • Must-Haves like rent, electricity bills, food bills
    • Emergency Purchases like medicines,
    • Casual/Impulsive Purchases like clothing, mobile phones, books, eating out etc
    • Social purchases like gifts
    • Useless purchases
  • Then, go through these monthly bills or recurring expenses and see if there is something that you really need. For example do you really need to buy these costly books every month or you could just subscribe to a near-by library in your locality. I have actually reduced these expenses in my budget (I am a voracious reader). I used to buy books/novels worth more than 20K per year, this is exorbitant (not only in terms of buying but also in terms to keeping them, I spend more when I have to relocate since these books make those so many extra cartons). So I joined one of the local libraries and I have reduced by expenses to mere 1K per year along with gaining immense variety of books. There are hundreds of such expenses that you can cut-down without sacrificing your living standards or the returns in terms of value that you are getting.
  • Some of the expenses can be saved just by tweaking your daily habits. You would be amazed that simple habits like switching off lights, fans or chargers can provide significant savings. We did that by switching off chargers or TV switch (not just switching off from the remote, but actual switch). These have given me a saving of as much as 100 Rs per month on my electricity bills (i.e. 1200 Rs per year). It may sound like too much pain for saving such miniscule amount, but think of it as serving to the society, doing this in the larger interest of the country. You can install CFLs instead of those big bright tube-lights or don’t run those geysers only when needed and not for long period. These are non-renewable energy and such saving by millions of people can be simply huge.
  • One of most effective tip that I use consistently is to store my all credit cards in least accessible places like in the locker or a suitcase which is stashed away. The idea is not to keep credit cards at places where you can quickly pick up before going to a shopping mall. I also have a credit card with a credit limit of not more than 10K, this helps me to gain the real advantage of credit card (use it to so that you don’t need to keep the cash with you and useful during emergencies). So why keep those other credit cards with huge credit limits? Well they would be useful when I want to travel or for making those big purchases so that I can convert them into equated monthly installments with a small fee or to get those discounts at specific services (e.g. I get one ticket free when I buy two movie tickets on a ICICI platinum cards in PVR cinemas).
  • Never buy on impulse, one of most crucial principle for money saving. The entire idea of those glitzy shopping malls and front displays is to attract the consumer and make him buy impulsively. Some people justify that impulsive buying is good sometime since you can get good bargains. I absolutely dis-agree, impulsive buying can never be good. What is the definition of impulsive buying:

An impulse purchase or impulse buy is an unplanned or otherwise spontaneous purchase. This can metamorphise into a serious disease.

  • So if the purchase was not planned, it means the consumer actually do not need it and hence even if the product is free, it is a bad bargain. So it brings to another point is that when-ever you go on shopping make a list of items that you intend to buy and just stick to it. No additional purchases should be made even when it is so much necessary (it will automatically inculcate better habit of planning ahead more carefully for the next trip)
  • I recently got invited to a birthday bash of a 1 year kid from my neighborhood. I was totally amused that how a 1 year kid would know at-all the difference between a small @ home birthday party vis-a-vis a lavish party in a fancy restaurant. It was an absolute useless expenditure and it was coming from the urge to show-off (I have loads of money or I care for my child etc etc) rather than a genuine focus on the child. I would rather invite only kids with their mothers in a small party at home, since seeing so many kids playing around will probably be more entertaining for the kid.
  • Un-clutter your house, because clutter saps energy and money. Christopher Lowell says “Clutter is dandruff on the shoulders of your room”, so don’t give excuses for not de-cluttering your life. You need to get rid of “can’t-get-rid-of-that-because-it’s-valuable” gene, it is so harmful. check out this 9 Tips for Decluttering (Zen Habits)
  • It is important to give up those harmful habits like cigarettes, alcohol or drugs. These not only save money in short-term, it also saves money in long-term by improving your health and reducing medical bills over the years. Invest that in a gym or personal improvement programs.

At every step in your life, while dealing with money, keep in mind that “Expenses have to be lower than what you earn”, and even after so many efforts in reducing your expenses you are hitting the debt, then it is time to look for earning more. That would be of-course another post.