Off late, this is one of the frequently asked questions to me during the F.I.R.E discussions. I guess this could be because of the recent statement by the MD of a leading luxury car manufacturer who claimed that Luxury car sales in India are being impacted because of people investing in SIPs. My take on this statement is in my next post on changing customer behaviors.

For today, let me stick to the above question.

Well, there are no right or wrong answers here and I am by no means judging people who are/are not buying luxury items.

I try to explain my point to them purely on financial parameters and leave the decision to them.

Here is a pictorial depiction of what I share:

Assuming that you are investing in a luxury car worth 50 Lakhs in India, you can finance it easily by paying an EMI of around 35,000 INR every month

What looks pretty straightforward at phase value, translates into a behavior change where you start tinkering with your social life

1. You are now amongst peers who are at the top of the earnings pyramid. It is obvious that they will be having significant investments in luxury properties. To keep up, you might be tempted to upgrade your house. A 5 crore INR investment in Bangalore (God can only help people in Mumbai) can give you a decent uplift on this front. Well this comes at a cost – a yearly cash outflow of around 37 Lakhs in EMI

2. Expenses increase as you upgrade your lifestyle to match your peers – expensive gadgets, parties, and social meetings. Factor another 20 Lakhs per year on this

3. Your travel and vacations also become more lavish – you might start thinking about traveling business class, cut down on low-cost holiday destinations, and plan for exotic trips. Factor another 20 Lakhs on this.

4. finally, if you have a kid/kids, you might want to end up sending your child to schools where your peers are sending their wards. If they are International schools, you can easily be seeing a yearly cash outflow of more than 20 Lakhs.

So net-net: an investment of 50Lakhs to buy a luxury car can lead to you changing your lifestyle in such a way that you need to find around 97 Lakhs of additional income every year.

Again, this is just a rough estimate, you might spend more or less depending on what you choose. But if your intention to buy a luxury item is to announce your “Social Status”, you will have to factor in the other aspects.

Else – it might lead to a question – “Are you faking your Social Status?”

I usually wrap up my response here, as I do not feel it is correct on my part to influence a decision. End of the day, I just provide a point of view and leave it to the person asking the question to take the call.

Note: all these numbers can change significantly based on where you live.