In recent times, we have been spending like there’s no tomorrow. There are enough reasons these days to convince yourself that “I can afford it”. Now we have started spending like never before.
Most people do not save anything at the end of the month. They feel as if their life takes away all the money from their pocket by the month end. However, this is psychological effect. They could not adjust their needs and desires in life to what they earn. If their salaries are increased by 50% in 2 years, a bike gets upgraded to a car; a small car gets upgraded to a bigger one and a normal TV is replaced by plasma. “Supply creates its own demand” is a law of economics and it applies to personal spending too.
Note that saving money does not mean depriving yourself of all the good things in life. The only thing that we have slowly started going the American Way, i.e. spending more than what we can earn. We are a nation which saves but we do not invest properly. As per my understanding, two major convenient modes of payment (diseases) are responsible for careless spending i.e. credit card and EMI disease.
Forcing a Credit Card
For the last couple of year, we have been using too many credit cards and in the wrong way. Imagine you are paying cash every time you buy something you really do you need. When we are using credit card we buy unwanted clothes and unnecessary gadgets. Research shows that we feel less guilty when we pay with our credit cards than we do while paying in cash. When we use cards, we don’t see money going out; there‘s just a consolidated bill once a month. Nothing can be done (or undone) then. You just pay up the amount on the bottom line.
Why have we all suddenly shifted to plasma TVs instead of the old TVs we have used in our childhood? Of course, technological changes should happen and we should always move forward, but buying a plasma TV just because it looks cool does not make sense at all, especially, if you haven’t planned for your retirement or taken care of all the important goals in life. If it’s really your need, then go ahead. I would encourage it. But most of the time, people buy it just to keep up with friends and relatives. Once your other priorities have been met, you can go in for it. But it should not be at the cost of something more important. The credit card company never knows how much your expenses amount to or what your future goals are or your risk appetite is or what future plans you have.
Affordability of EMI
Similarly, the EMI system has changed our “wants into needs”. EMIs are available on everything from international vacation to a pair of jeans! All is that it cut a big piece of debt into smaller chunks, to make us believe that we can afford it. If the EMI amount is more than you can afford it, just increase the tenure by 3 times and voila… the product just got affordable! You have to pay only Rs 2,000 per month instead of Rs 6,000 per month. If it still looks unaffordable, increase the tenure a little more. It’s human nature. The problem is not the EMI concept in itself. The problem lies in the numbers. The lower the number; the more affordable it becomes! However, this is not true! Actually the more you reduce the EMI figure, the longer the tenure, and accordingly the higher will the total cost due to all that interest you have to pay and extending our affordability horizon to such great lengths, that we have everything in our life; but most of it is under debt.
I’ve heard horror stories of people who have bought homes and are crying today. They have moved into more fancy homes, but the quality of their life has drastically decreased. They suffer from stress because now even small things in life which gave them happiness look unaffordable… all because that 3 BHK flat’s EMI have to go through next month.
This leverage available today has created a new mind set- “buy now, pay later”. Unlike our parents and grandparents, we are spending money which we haven’t even earned. We buy house, cars, bike, jazzy mobile, vacations etc., and then pay the cost for the rest of our working lives. In some cases, it might make sense, but a large section of society just lives beyond their means.
Conclusion
There is nothing wrong in buying things on EMI or through credit card, as long as you know what you are doing, and then only if you really need it. Don’t run after everything you can get on EMI and credit card, and don’t drown you in so much debt, that it gets tough to come out. Save a good amount for down payment and take debt only when buying something becomes inevitable. An early Start in saving today will make you wealthy overtime. Spending is important but don’t make it hobby. It’s like a cancer. It will not hurt you immediately, but kill you some day.
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Suresh Kumar Narula is founder and Principal Financial Planner at Prudent Financial Planners. He has earned the professional CERITIFIED FINANCIAL PLANNER and got registered with SEBI as Investment Advisor. He writes on personal and financial planning articles and got published in Dainik Bhaskar, Business Bhaskar and The Financial Planner’s Guild, India. He is also a member of Financial Planner’s Guild India ( An association of practicing SEBI registered Investment advisers) to create awareness about Financial Planning in general public, promote professional excellence and ensure high quality practice standards. Suresh received his an M.com from Himachal Pardesh University and an MFC from Punjab University, Chandigarh. He can be reached at info@prudentfp.in