Making a tradeoff between current and future needs

Jan 25 2013, 08:57 IST
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SummaryMost of us have a peculiar habit of saving hard for a number of months and spending the accumulated savings at the end of the year in options of our choice.

adding additional units in its operations, these units put together cross the relevant volume range and, thereby, start giving additional fixed cost to the company, which is ignored by decision-makers. This phenomenon of ignoring additional fixed costs for additional small volume of sales is known as The Just One Fallacy.

If Mr Kumar decides to spend his accumulated savings on present luxuries than on avenues that would cater to meeting the future necessities, the better explanation for such the decision may perhaps be that he is in the just one fallacy, i.e, he may feel that he is spending the hard-earned savings on luxuries, but doing so only for this year and it does not impact his long-term fortune in any way. So, he keeps spending his savings on luxuries year after year, assuming that such spendings do not impact his future prospects. Assuming that he spends like that for next 20 years, then he realises he had wasted his hard-earned money on luxuries, which are not contributing to his post-retirement needs.

The takeaway of the discussion is that we need to examine whether the expense is required at all. If yes, then the next question is to find out the impact of the expense on the future requirements. If the expense is not required, then it has to be used for meeting the future requirements as one rupee saved is equal to one rupee earned. But it does not mean that one has to tighten as much as possible on his current requirements. As long as one is able to have a trade-off between his present and future requirements, he is not into the just one fallacy.

The author teaches accounting and finance courses at IIM Ranchi

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