Does India Know Where Its Money Goes?
Do we truly understand how we spend and why we spend the way we do in an increasingly digital world?
I recently came across a post on Nikhil Kamath’s Instagram that detailed the cost of living in India across both urban and rural setups. The post compiled various aspects of expenditure, primarily focusing on fixed monthly costs. While the numbers startled me a little, the law of averages has a way of making even bleak situations seem less daunting.
The post aimed to explore how spending habits in India are evolving and where our money is going. However, relying on sheer anecdotal evidence, it left me pondering in another direction: do most of us truly understand or even know where we spend? And, perhaps more importantly, why do we spend the way we do?
As Indians, we often take pride in being frugal and mindful about expenses. However, we frequently overlook basic financial principles and forget that financial success isn’t just about saving; it’s also about ensuring that your money works for you. Financial illiteracy is no secret in this country, but the problem seems to have evolved beyond merely not knowing how to save. We now face an equally critical issue: not knowing how to spend.
According to a survey conducted by the Robocash Group, about one-third of Indians frequently find themselves running short of money. Of these, 88% attributed this shortfall to gaps in their personal budgeting caused by a lack of financial planning. Notably, the survey's participants were individuals with steady jobs, highlighting that even financial stability doesn’t guarantee effective money management.
The UPI Revolution:
There was a time when leaving my phone at home felt liberating it wasn’t essential, and in case of an emergency, I could always borrow someone else’s. But now, my phone is more than a device for calls; it’s my financial lifeline. In India, with UPI at the core of daily transactions, my phone has become indispensable.
From groceries to rickshaws and, sometimes, even coffee, I simply scan, click, and pay. While I still dislike the constant need to have my phone on me, its presence is non-negotiable. It’s only recently that I’ve started noticing the true impact, those countless small payments that feel negligible in the moment but, when added up, paint a very different picture of my spending habits.
Before UPI, cash was king. Carrying cash wasn’t just essential, it fostered a sense of accountability. Many people would sit down at the end of the day or week to tally their remaining money, a habit that served as a natural check on spending. You knew where you had spent, how much money was left, and whether it aligned with what you expected.
Now, think about it. If you’re not in the habit of meticulously recording every transaction in a diary or an Excel sheet—and with no immediate need to physically count your money since it's all digital—do you truly know how much you've spent? Worse, do you realise how easily small payments can add up, slipping away like loose change from your pocket without you even noticing?
Paying with cash brought its own set of built-in checks and balances. The added steps- counting, double-checking, and sometimes even the inconvenience of the process, created a natural buffer between the decision to purchase and the act of payment; rather the “pain of paying” was very real. Moreover, watching your physical stash of cash dwindle served as a constant reminder that you were running out of money, encouraging discretion and mindful spending.
This might make me sound like a UPI naysayer or as if I’m demonising it, but I’m not. With great power comes great responsibility (yes, even Spider-Man can teach us financial lessons). A tool as powerful as UPI, which makes spending incredibly seamless, requires us to exercise constant vigilance (and no, I’m definitely not sneaking in a Harry Potter reference here... okay, maybe I am).
The Numbers Speak:
A recent study highlighted some fascinating insights into digital payment trends. The ACI Worldwide Report 2024 revealed that India accounted for a staggering 49% of global real-time transactions in 2023, driven by its innovations in digital payments.
Among South-East Asian countries, India topped the list of digital payment leaders, outpacing China, Thailand, and South Korea by the end of 2022 with 89.5 million transactions. Events like demonetization and COVID-19, coupled with reduced internet costs and growing UPI adoption, played a significant role. Internet penetration in India has risen sharply, from 14% in 2014 to over 46% by 2021.
The main survey offered a mix of affirmations and surprises. For instance, 95.2% of respondents found UPI payments extremely convenient. However, 75% also admitted that their spending had increased due to UPI.
Daily spending via UPI ranged widely among respondents, from as low as ₹50 (around $0.60) to ₹1 lakh (about $1,202.66). On average, 15.7% reported daily expenses of around ₹200 ($2.41). In terms of usage frequency, a remarkable 81.1% indicated they use UPI daily, while 15.6% used it weekly, 1.1% monthly, 1.9% occasionally, and only 0.3% rarely. These numbers underscore UPI's pervasive role in everyday financial transactions.
While anecdotal evidence from Reddit threads might suggest otherwise, there’s significant data to back up these trends. Another study, cleverly titled Less Cash, More Splash? A Meta-Analysis on the Cashless Effect, analysed over 40 years of meta-data and found that consumers tend to spend more when using cashless payment methods. Interestingly, the effect is strongest for conspicuous consumption but weaker for pro-social spending.
It’s safe to say that the ease of UPI has contributed to increased consumption in India. But the real question is: are we accounting for these expenses? Do we fully understand the implications of our spending habits in this new digital era?
Inability to Budget:
Another aspect of Nikhil Kamath’s post that resonated with me was the detailed categorisation of expenses, with budgets divided into numerous buckets. It felt validating to see this approach because, in my budgeting attempts, I’ve often found myself creating extensive categories for every expense. On one occasion, I was told I was overcomplicating my budget by breaking down annual expenses nto monthly amounts to track it across the year. On another occasion, I was questioned about my habit of annotating every UPI payment in painstaking detail. But seeing such meticulous categorisation in the post reassured me, it highlighted that understanding where every rupee goes isn’t overkill; it’s a crucial step toward smarter financial management.
In 2023, the Reserve Bank of India (RBI) conducted a survey to assess financial literacy across the country. The survey examined key parameters like knowledge, behaviour, and attitudes toward money. Of particular concern for this discussion are the behavioural findings related to budgeting, savings, debt management, and investments.
The field survey employed a structured questionnaire with 28 questions split into financial literacy and demographic identification sections. Over 45 days, 584 responses were collected from participants across various age groups, genders, occupations, education levels, and income brackets.
The results painted a concerning picture: a significant number of respondents did not maintain a budget or regularly track their expenses. Many also had limited savings and were not actively investing their money. These findings underscore a lack of financial discipline and highlight the pressing need to foster responsible financial behaviours, especially in budgeting and expense tracking.
I believe the latter half of the survey sheds light on the "why" behind this behaviour. Under the attitude variables, respondents were assessed on their financial goals and confidence in decision-making. While many expressed positive attitudes toward financial planning and goal setting, the results revealed a significant gap: a lack of confidence when it came to making complex financial decisions.
I think now this circles us back to a lack of financial literacy in India and which translates into a lack of understanding of various financial instruments and terms as well. The same survey also showed that many respondents struggled to answer questions related to compound interest, inflation’s impact on purchasing power, and the benefits of diversifying investments.
These statistics transcend a specific demographic or those with limited budgets, they provide a broader insight into financial habits across diverse groups. In 2024, Business Standard published a survey involving 1,727 individuals across four age brackets: 18–30, 30–45, 45–60, and 60+. The survey analysed knowledge and practices in six critical aspects of personal finance: goal setting, budgeting and taxation, loan management, insurance planning, investment strategies, and estate planning. Two findings in goal planning and budgeting were particularly striking:
Goal Planning:
The survey found that while 63% of affluent individuals and High Net Worth Individuals (HNIs) in India have clear financial goals and 69% are aware of their net worth, a significant 65% admitted to inadequate retirement savings. This points to a notable gap in long-term financial preparedness, even among the financially privileged.Budgeting and Tax Planning:
Around 40% of respondents reported insufficient emergency funds, and 27% acknowledged ineffective tax planning. These statistics underscore the urgent need for improved financial planning and disciplined budgeting, even among those who are otherwise financially secure.
The Ostrich Effect:
I remember growing up, I was never fond of things not going my way, actually, I’m still not. Sometimes, I’d just turn away and pretend the issue didn’t exist. On rare occasions, my father would get frustrated and exclaim, “You’re not an ostrich! Get your head out of the sand and into the game.” Years later, I realised this sage childhood advice had a formal name: The Ostrich Effect.
The ostrich effect is a financial bias named after the (false) belief that ostriches bury their heads in the sand to avoid danger, as if pretending the threat doesn’t exist will make it disappear. While ostriches don’t actually behave this way, the term is an apt metaphor for human tendencies, especially in personal finances. It describes the habit of ignoring negative or stressful financial information in the hope that everything will resolve itself without intervention.
This phenomenon arises from our brain's tendency to avoid unpleasant realities, particularly in times of risk or uncertainty. In many Indian households, for instance, open discussions about money, especially around debts or financial difficulties, are often avoided. This cultural hesitation mirrors the ostrich effect, where people sidestep financial realities such as rising expenses or poor savings habits to reduce discomfort.
Unfortunately, this avoidance can lead to a cascading effect. Without confronting the truth of their spending habits or taking proactive steps to plan expenses, individuals lose track of where their money is going. Over time, this lack of awareness jeopardises not just financial stability but overall well-being.
While I’m not a financial guru, pandit, or expert in the intricacies of finance, and the Instagram post got me thinking and, as usual, my thoughts quickly spiraled into a case of verbal diarrhea. That said, if you feel like you’re not fully aware of your financial habits, remember: it’s never too late to start. A simple pencil and paper, or even the notes app on your phone, can be powerful tools to begin tracking your expenses. In my opinion, it’s a great first step toward building awareness.
If you’re looking to deepen your understanding, there’s a wealth of reliable information available to enhance your financial knowledge. Personally, a few books have been incredibly insightful for me:
And if you have an elder sister, nothing ensures compliance with financial discipline more than her constant reminders. Seriously, they can be more effective than any spreadsheet or budgeting app!
Whether you’re a novice or simply looking to refine your habits, starting small and educating yourself can go a long way toward better financial health.
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Another quick note: I’m not a financial advisor, and the thoughts shared here are purely my personal observations. Any financial decisions or actions should be made in consultation with a certified financial professional. Always seek expert advice before making important financial choices.