Thriving middle-class need to revisit their financial behaviours and tools

With the Bangladesh economy journeying from a "basket-case" to an "achievements not foretold" over the years, a large portion of the population has entered the middle-class and affluent consumers (MAC) socioeconomic category.

The group of people, having a monthly income starting with $401, already making more than 7% of the population, is growing at a double digit rate each year to help Bangladesh outpace its peers to catch them up in terms of getting many more people with increasing disposable income, according to a 2015 report by the Boston Consulting Group (BCG).

The research firm projects that by 2025 nearly 3.5 crore Bangladeshis would become MACs – to more than double in a decade.

With a significant surge in income, the MACs, especially those in urban areas, have already come through a massive shift in their lifestyle.

Their consumption priorities today – affinity for brand-buying, personal car, frequent dining out, foreign vacations etc – were beyond imaginations of their past generations, said Dr Zahid Hussain, former lead economist of the World Bank.

At the same time, their life-goals have taken a paradigm shift that commonly include affording expensive consumer durables, luxury apartments, child's education abroad, a world-tour, and even plan for early retirement or start their own ventures.

While manifold higher income over their past generations may justify such rise in consumption as well as aspirations of the middle-income people, most of them seem not much aware of the rising costs of their aspirations.

The biggest catch, experts such as Dr Zahid Hussain observe, is the gap between MACs' aspirations and current actions to afford their aspirations.

They say it is critical to define one's aspirations by time and in numbers (the actual future costs) to back-calculate the current required investible surplus and required rate of growth of that surplus. Only this may enable people to materialise their aspirations timely.

Such objective preparation will help one maintain the right financial disciplines to continue generating the right surplus; and, at the same time, will motivate to pick the right financial tools that will deliver the required rate of growth.

Bangladeshi people generally save after consumption. Usually, they have the propensity to go for completely safety-bound avenues like DPS, FDR, National Savings Certificates (NSCs), and each of the tools are generating lesser returns nowadays.

As a result of these two facts, the basics of financial planning may get compromised – neither the right amount of surplus is generated nor does whatever is generated give the required risk-adjusted return to timely meet the new kinds of aspirations.

On top of these, inflation has a critical bearing given the current savings rate in the market.

Net result of these are – peoples' financial assets are perhaps de-growing in reality, if one's savings rate is lower than inflation, and they actually are slowly digressing from their life-goals.

The middle-income people nowadays are concerned about it, especially since they have started to face a drop in returns from the popular vehicles they historically prefer to park their surplus income into – bank deposits or NSCs, said Dr M Masrur Reaz, chairman of a private sector think-tank, Policy Exchange of Bangladesh.

Following an unprecedented drop in interest against bank deposits in 2020-21, the central bank only pushed that up for term deposits at par with the official inflation rate a few months back.

The government also has put a limit on buying NSCs (Sanchaypatra) – Tk 50 lakh by an individual and a similar additional in joint name, which is not enough for many people to meet their aspirations, which is not enough for the affluent people, Dr Reaz said.

The trend of low return from banks and national savings certificates is likely to prevail and it should, he added while talking about the need for a low interest environment as a business enabler.

Coupled with this drop in savings' returns, the middle-income people are also going to face some constrictions in the income tax space. As the government is reforming tax rules to improve the tax-GDP ratios, middle-income people will be needing financial products that offer maximum tax benefits or rebates, which people in other economies care much about.

Bangladeshi MACs now have got their wake up call to revisit their way of parking money for a much better financial life one, two or three decades later, said Economist Ahsan H Mansur, executive director of Policy Research Institute.

Merely beating inflation does not help savers improve their lives and all over the world the idea to save in banks for the financial wellbeing and growing family wealth is almost dead, said Dr Mansur.

"Our peoples' financial behaviours as well as choices of financial products must evolve in line with their new kind of aspirations. If people are really serious about meeting their aspiring life-goals on time, they have to look for products that beat inflation by far while giving them maximum tax-rebate."

In a nutshell, it's time for middle-income people to revisit their financial behaviours and tools, experts said.