The Psychology of Spending: From Impulse to Investment

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Anshu Bahanda: Welcome to Wellness Curated. This is your host, Anshu Bahanda. And as you know, the aim of this podcast is to help you lead a healthier, happier, more hopeful, and more fulfilled life. This season, we’re focusing on financial well being, and the subject of today’s discussion is the psychology of spending. So we have a very special guest today. We have Luis Miranda. He’s the chairman of the centre for Civic Society and Coro. He’s the founder and director of the Indian School of Public Policy, and he’s played a key role in establishing two renowned companies, the HBFC Bank and IDFC Private Equity. Welcome to the chat Luis, and thank you so much for taking the time to be here with us.

Luis Miranda: Thank you, Anshu. And for the record, I have subscribed to both: your YouTube channel and to your podcast.

AB: Oh, fabulous. And I’m sure you’ll encourage lots of people to do that. So Luis, my first question to you is, you know, from the time where you had a salary when you started your career to now heading major financial institutions, can you describe to us the evolution of your personal relationship with money?

LM: I’ve never been driven by the need to make money. And even when we built those institutions like HDFC Bank, which today is the fourth most valuable bank in the world, or when we started IDFC Private Equity, investing in infrastructure, it was never about the money. It was always about building a good business. And that’s something which has been driven, whatever I’ve done. It’s not that I grew up with a lot of money as kids, et cetera, but we had enough. And that’s really what drove us, the fact that money is just a mechanism to be able to survive and go on. But after some stage, what do you do with that extra money? So a few years ago, one of my friends, Amit Chandra, called me up and said “ You know Luis, we’ve started this movement called ‘Living My Promise’, and would Fiona, and you consider pledging half of what you have for charity either in your life or in your wills?” And we said, sure, but we need to talk to our kids because when we are dead, we’re gone. But our kids are the ones who are giving it up, actually. And both our kids said, “Dad and Mom, this is your money and we don’t need it, and you do what you want with it.” We’re glad we sort of continued that sort of thought even with our kids. Because once you’ve had the basics, what do you do with the rest of it? We don’t spend extravagantly. So money is just a means to get to where you want to be. And interestingly enough, whenever I was working, wherever I was, and if I realised that the only reason to stay on was for the money, that’s when I knew I had to leave.

AB: Very well said, actually. And funnily enough, you said, money is just a mechanism. This is my book of affirmations, and I’d opened it today to this, which says money is just an energy, and I can attract this energy.

LM: Absolutely.

AB: So I want to ask you, when you look back to when you were growing up, in your younger days, when you were building your career, do you feel like you should have done things differently? Should your approach to money, to spending, have been different?

LM: If I look back at what I could have done differently, I think I would have started investing earlier. And that’s what we even tell our kids: start investing. And even to the people I mentor, [I say] “Put aside a small sum of money every month because the power of compounding is a huge lesson.” Well, I studied that in school, but I never appreciated it from a financial perspective. And even now, the other day, we were sitting and redoing our wills, and I was surprised at what we had. And I was telling this to our trustee, and he said, “You know Luis, I’m not surprised,” but I said I was surprised because you forget sometimes that’s the power of compounding. And so my only advice, really, to the people would be: to start early and not sort of wait till you sort of feel that you have enough. Start that habit of putting things early. The second thing is never forget that there’s a huge amount of luck involved. I strongly believe that I’ve been lucky. I’ve been lucky to get to where we are financially or professionally or emotionally. And once people believe that they are masters of their destiny, I think that’s when they have a challenge, there is a certain amount of randomness also in life that we have got to keep in mind, 

AB: And, you know, as India is modernising. And with all this digitisation happening and fintech happening, have you noticed any unexpected trends in the way people approach their finances and their spending decisions? 

LM: I think the availability of credit has actually made people spend more than they could have. Now, I’m not saying credit is bad, credit is good. Economies have grown on credit. But reckless credit is dangerous, especially when you have easy money and you suddenly realise that I could have, and then you spend on stuff which is not creating assets. So where do we spend our money? My wife and I, Fiona and I, just spend our money mainly on education and travel, because we believe that travel is also education. We don’t spend it on fancy food. We don’t spend it on fancy cars, et cetera. And that’s really where it’s about creating investments in the future. But if you spend a lot on stuff that is not what we think is necessary, you tend to wonder: ‘Is that sort of right?’ So the access to credit can be very powerful if used properly, but can be very destructive if used badly. And unfortunately, you’re seeing so many people today at all levels who are borrowing and living off credit without any way to repay that year. So that’s something important.

And a book that I find very useful is a book written by Morgan Housel, the Psychology of Money. And that’s a fascinating book, which I think everyone should read here. It’s a simple book. There’s no maths in it, but it really talks about the fact that everyone’s personal experience determines how they relate to money. And that’s important. And he talks, for example, about how President Kennedy, when he went through the Great Depression, (they) actually grew in wealth during the Great Depression. So he never knew how much people suffered until he went to college, and then he saw other people suffered. So your personal experience determines your relationship with money. Morgan talks also about the role of luck in the things that we do and about the need to look at broad patterns as opposed to anecdotal sort of situations over there. So I think that’s a fascinating book which people should read.

AB: Okay, and tell me something. So if you take, say, the developing economies, right, once people reach a place of comfort with their lives, then what is it that influences their spending going forward? Is it culture? Because you said one of them is growing up. Is it collectivism? Is it just following trends? Like, X has this car, so I want this car. Because I grew up in Delhi and I’m seeing a huge consumerism culture there. 

LM: So, first of all, let me say, there’s nothing right or wrong in the way and what people do with their money. It’s your money. There’s no judgement over there. What’s dangerous is that if you spend more than you can afford, and then you get into trouble because you suddenly don’t realise you’re going to live longer than you did, and therefore you don’t have enough saved over there. So it’s important to save first, and then look at what else can I spend with my discretionary income? It’s about that freedom to spend when you have enough tucked away because you started investing earlier, which is important. People do spend because they’re comparing themselves to others. And I think that’s a dangerous thing to do because you have no idea what’s the other person’s driver. And just because your neighbour has a big car, it doesn’t mean that you also need to have a big car. You’ve got to ask yourself that question. And it’s different for different people. 

For us, we just believe we’ve been lucky and blessed. So we’ve been giving away things. And I’m a strong believer that when people ask, why do you give money? And I wrote this article for Forbes where we basically said, ‘People give because it makes you feel good.’ And this was based on research done by one of our professors at the University of Chicago, John List. And he knows, people give because it makes you feel good. And whatever you do with your money, do it because it makes you feel good. Because otherwise it shouldn’t be something that makes your life sort of miserable. So Morgan Housel actually talks about something interesting over there in his book. He says, ‘It’s easier to make money, it’s tougher to remain wealthy,’ and we tend to then spend too much. So that’s something to keep in mind, that you have got to hold on to what you’ve done or make sure that you’ve not blown it away or lost it in recklessness. Today you see a lot of entrepreneurship coming up and a lot of people being encouraged to be entrepreneurs, and I think it’s great. But also they’ve got to realise that there is also that risk involved. And it’s not (like) everyone’s going to become a unicorn, but as you said, in certain places there’s more conspicuous consumption than in others. That’s part of the growth. And I also learned that as economies get wealthier, as countries become richer, people then start spending on stuff which they didn’t do earlier. They’ll spend on lifestyle, things like theatre or fancy cars. Going out to restaurants. When we grew up, I don’t know whether you’re the same vintage as I am, but we never went out, and there weren’t many restaurants to go out to when we were young.

AB: Yes, you’re right.

LM: But now people eat at home as an exception versus the norm because of its availability. And again, it’s nothing right or wrong because those eating out creates jobs, it creates opportunities for other people also. So that’s really the way I see it. There will be more consumption. People will upgrade what they eat. Even the poor have a right to have a bigger house, or a better mode of transport. All that will happen. Consumption will go up. 

AB: So also, Luis, I know you’ve been involved with philanthropic organisations, right? So can you share an instance where one of those has used their limited resources in a really special way, that the resource allocation has been exceptionally good, so that we can all learn from that?

LM: Well, I think that is the biggest lesson that I’ve learned. One of the biggest lessons I’ve learned from being in the social space is really how to spend carefully. And I’ve tried a lot, to get people in the corporate world to engage more with the social sector, only to be able to learn how to work and operate in an area of scarce resources. Because then you can realise what waste is here. And we work with schools in Ladakh [which are] at a 17,000ft foundation and there’s not much money over there to go around. But we’ve been able to build out, through philanthropy, et cetera, improve the quality of lives in over 200 government schools across the state, across the Union territory. But the other thing we also learn is by hanging out with people who work in the social sector. You understand, again, how careful they are about their money because they don’t have a lot of money. And what we could spend on a meal one evening could be what they earn in a month. That makes you think, Is it really necessary? I’m not saying it’s wrong. I’m not saying it’s evil, but is it necessary? And so there’s a huge amount of lessons. I work with another organisation called CORO, where we work on grassroot leadership. And during the COVID times, I learned so much about the struggles people had. I’m sitting in this house of ours. We can arrange for food to be bought. We can arrange… I can go to the market next door and get [what I need]. Okay, I’d have to stand in line, but we’d have enough. We’d be adequately covered for them. It was a struggle about- how do I get rice? How do I get some dal, et cetera, and pulses, et cetera. So that’s when I knew— you get to experience the challenges people have. And also, I keep coming back to the fact we also appreciate how lucky we are.

AB: No, absolutely.

LM: And another set of people that I’ve learned how to be cautious about spending— is our kids. I’m not extravagant, but through our son and daughter, when they were studying in Chicago, working in Chicago, they introduced me to travelling by the bus and by the metro, et cetera. And actually, it’s so much easier to get around and quicker.

AB: Yeah, absolutely.

LM: It’s learning from your kids also, if you give them the right sort of environment, to go and experiment with that. 

AB: Yeah. So my older daughter is a typical millennial, and she will wear her clothes till they tear because she’s like, why put pressure on the Earth’s resources? So I’ve learned so much from my kids. 

LM: My wife is still after our kids that I don’t get rid of clothes until they’ve really fallen apart. She’s not happy with that yet. 

AB: Also, at the Indian School of Public Policy, how is the subject of economic behaviours typically addressed in relation to their impact on policy?

LM: Oh, we focus a lot on economics. In fact, one of the criticisms is that a lot of our courses are spending too much emphasis on economics. But that’s because we believe that it’s an important part of public policy. We teach politics. We teach the structure of the government. We talk about voting. We talk about all those issues. But we also teach economics. We teach understanding behaviour through the patterns of how people behave in economic situations. We talk about markets for development, the role of the markets over there. We talk about law and economics. So a lot of the focus is over there because it’s very important from a policy perspective. Thanks for asking that. 

So there are a lot of different tools you’ve got to understand. You’ve got to understand critical thinking, design thinking, and then basically get some of the tools to work on this; things like statistics, for example. And I even run something called the Antarang Leadership Lab over there and it’s about teaching people the skills of leadership. But we do have that underlying thread of economics over here and the ability to understand the financial implications and costs of public policy that’s important. It’s extremely important because we don’t operate in a land of plenty or in a land where there are limited resources. That’s what we operate. 

AB: And tell me, you were talking about mentoring earlier in our conversation. So when you’re mentoring young entrepreneurs or startups, how do you explain to them the concept of spending personally for their startups, for their target markets? How do you explain that to them and what do you tell them to do in different scenarios?

LM: So Anshu, I’m old school, I’m used to the fact now that you build up businesses by creating cash flows which go to the business. And I realised some years ago that I’m too old for today’s world where it’s all about other metrics, which sort of create value over here for people. And I struggle with this. So when we were building our HDFC bank, it was about building up a bank that we could all be proud about, which could show the world that you could have an alternative in terms of efficiency to foreign banks, and also the agility compared to the state owned banks at that time. We never in our wildest dreams expected HDFC Bank to be where it is today. And similarly with IDFC private equity, everyone told me, “Luis, you can’t make money investing in infrastructure.” And people who know me know that when I’m told I cannot do it, I have to do it. And we’ve proved it. We sort of created new models for, sort of, building out infrastructure and developing it. But at the end of the day, it was really about how do you keep on generating a steady source of income? Which means you’ve got to be careful about cost. So we had this great story where Aditya Puri one day said, “We will no longer give coffee mugs in the office. Bring your own coffee mug.” Now, it’s something which is tiny, it doesn’t cost anything, but it sends a signal. It sent a signal about being careful about money. Similarly, in the Indian School of Public Policy, we believe that we’re building up a school in a frugal way. We’ve spent a fraction of the money that other people spend, not because we want to be tight fisted, but we believe that this is a model that is scalable. So being able to control cost. That’s why today, when I see offices with fancy campuses, et cetera, it’s alien to me because that’s not the world that I grew up in and that’s it, I’m old fashioned. But it’s really about that. How can you sort of grow a business by being careful about cost is the way that I’ve grown up thinking about it. 

AB: Okay. Also, from our whole conversation, it seems that you’re hugely driven by purpose. So what advice can you give to people who are maybe driven by trends? I mean, I’ll give you an example. You’re talking about these fancy campuses at the moment. The startup trend is to give people fancier campuses, to give them all kinds of things in the campus. So they don’t need to leave it. The argument of the companies is then they don’t need to go home. They get their breakfast, lunch, dinner here, they get their recreation here, they get their haircuts here, they get their dry cleaning here. They don’t need to go home, if at all, they’ll go home to sleep, or they can sleep in the pods at work. So what is your view on that? And also, how would you advise people to move from a trend-driven society to a more purpose-driven society?

LM: You forgot to say they give massages also at work.

AB: Yes, I mean, there’s lots of things. There’s train tracks and there’s all kinds of things.

LM: Again, I come back to the fact that I don’t create a value judgement for it. If that’s what young people want, if that’s what your employees want, go do it. But you ask yourself, is it really necessary to build out the business in the long term? But I want to come back to the other thing which you talked about— trends and what do you sort of do? I made a career of doing stuff which was not conventional. And I was told I’m always crazy. I came back to India in 89 when it was not normal to come back to India. After studying there, I quit a forum bank job with a few to set up this strange animal called HDFC Bank, a private sector bank, which again was crazy at that time to do. Today, it looks like a no-brainer. We started investing in infrastructure when people said we can’t. And then now looking at public policy, which I think really is going to be the next wave of a field to study, like what the MBA was in the past, because it’s about the ability to deal with the government. We’re going to see a stronger government in our lives. Whether we like it or not is irrelevant. It’s going to happen. And how do you deal with the government? How does the government get more better policies? So I’ve done all these things which are, in my view, away from the trend we didn’t set up. For example, another business school we didn’t set up. Today, when I see people trying to create the next similar thing, I find that to be boring. It may make financial sense, but I find it boring. So, for example, when you look at ISPP, we have no model which we can say we’re trying to copy because there is nothing like what we’re trying to make over here. So it’s really creating that path over there, which is what makes it interesting. And that’s what I tell entrepreneurs, can you do something which is— if you want to make money, you can do a lot of vetos, et cetera, and be careful, but if you really want to hit the ball out of the park, you go with stuff which hasn’t been done before and at the same time, don’t do it for the money. Do it for the purpose.

AB: Purpose.

LM: And people have said, you know, fine. It’s fine to talk about purpose when you have money. But I didn’t have money when I started. I had the distinction of being the lowest paid guy in my graduating class for many years. After business school, all my friends would go on fancy holidays. I couldn’t. I didn’t have the money when Fiona was defending her PhD. I couldn’t go to the US to sort of be there when she defended it and got her graduation certificate because we didn’t have the money. Today we can afford to do that. But at that time, we didn’t. So I understand what the purpose is. And today, when I see a young entrepreneur telling me, ‘Luis, this business is going to be worth $500 million in this period of time,’ that person’s already lost me. Because my questions are more- how will you make this a better world? How will you impact the lives of people? And that’s what we’ve done, the various places we’ve been at. It’s not about the money. It’s about creating businesses that will be sustainable and enduring for a long time. And money will come. And that’s important, this thing of purpose. I have this lovely saying which I picked up, it’s a quote at the University of Chicago at the Booth School of Business. It’s a neon sign which says— ‘why are you here and not somewhere else?’ And I tell everybody, keep asking yourself that question because it helps you understand, why am I here? I came for a particular reason. Is that reason still valid? I’m frustrated, but I knew this was going to happen to me, so maybe I should just focus on some of the earlier things. And I have so many stories over the years about people who’ve looked at that quote and then said, ‘actually, I’m happy where I am.’ I’d just been disturbed by either my boss being a jerk or something else, but I actually love the work I do. And sometimes by asking yourself the question, ‘why are you here and not somewhere else,’ you maybe realise it’s time to move on.

AB: In fact, Luis, taking your quote to an extreme, I would even say, why are we here on this planet?

LM: I’m sure we can do another podcast on that one. That’ll take a long time!

AB: I know, I know. So Luis, we always do a rapid fire round to summarise our chat. So one way in which you’ve changed your own spending habits recently and how it helped? 

LM: I think we give away a lot more today. It makes us feel good. The ability to give away money, when you do it, it’s a fabulous feeling.

AB: Exactly. What should people think about when they’re driven to make purchase decisions and how can they be reminded to do this?

LM: I guess just ask yourself a question: Is it necessary?

Just a simple question. ‘Is it necessary?’ It sounds like romantic consumerism, but no, just ask yourself the question: ‘Is it really necessary to do so?’

AB: Okay. And a common spending myth you wish more people would challenge.

LM: Buying things makes you happy.

AB: Okay, wonderful. Thank you so much Luis for your time and for your wonderful, powerful insights.

LM: Thank you, Anshu. Lovely catching up with you online. Have a good day.

AB: Thank you for listening today. I hope you’ve learned something new and I hope we brought you a little closer to leading a healthier, happier, more hopeful life. Please do subscribe to my channel on YouTube and on the podcasting channels like Apple, Spotify, Amazon and Google and all the other podcasting channels. Also, I would love to hear from you, so please send me any questions that you might have or any topic suggestions to Anshu@wellnesscurated.life. See you next week. Thank you.