Inability to separate wants from needs can land you in a debt trap
Try visiting a white goods counter in a nearby mall. The price tags are replaced by the EMI offers mentioned in bold. If you want to know how much it costs if you pay upfront, you have to search for the ‘price’ mentioned somewhere at the bottom of the EMI offer tag in small fonts. As most shoppers in the malls are millennials who shop on EMI, the retailers prefer to talk their language. However, is it really good for millennials? “Many young individuals prefer to build their expense structures thinking that their income will grow perpetually. Committing yourself to pay EMIs when you are not sure of your future income is a big risk most people overlook,” says Amit Trivedi, founder of Karmayoga Foundation.
Changing mobile phones every year is the new normal. Overseas holidays or performance bikes are a must and the best way to fund them comes through the loans. While the money experts are vocal about responsible use of credit, most of them observe a lot of indiscipline in money matters. “Easy access to credit has made many individuals go overboard with expensive purchases. While peer pressure amplified many times by social media makes one go on a shopping spree, the risk lies in the fact that many are living too much in today, totally ignoring the future,” points out Mukund Seshadri, Founder Partner, MSV Financial Planners.
Personal finance experts are vocal about the undue importance given to ‘wants’, sometimes even ignoring ‘needs’ such as retirement planning. Trouble comes in the form of funding the wants with borrowed money. Many of these expenditures are funded by credit card debts and personal loans which are costly. Even the gadget loans are not cheap. If one ends up spending as high as 70 percent of his monthly income on servicing debt, then there is little left to secure your future.
It is all the more important to curtail your spends on wants with borrowed money given changing times. “Rising healthcare costs and increased longevity are two factors many of us underestimate,” says Mukund Seshadri. As the longevity has gone up and the retirement age has gone down, one must save to take care of himself for a longer period of time as compared to our previous generations. Also there is no comfort of joint families where one may get some support as we have opted for nuclear families. Rising healthcare costs further inflate the number for a comfortable retirement.
With the backdrop, if you are spending a good chunk of your money on repaying your loans incurred to fulfill your wants, you are more likely to run short of your retirement planning target. Just to put into numbers: If Rs 30,000 is your monthly family budget; you will require Rs 1.72 lakh per month when you retire after 30 years, assuming you enjoy the same standard of living and inflation at 6 percent per year. This requires you to keep aside Rs 9,900 per month for next 30 years if you expect to make 12 percent rate of interest on your savings. This will fetch you a corpus of Rs 3.44 crore.
The tall target is achievable for those who are disciplined and willing to put aside money. However, most individuals find it difficult to go for this as they prefer to satisfy their wants first. If you go for an overseas vacation costing Rs 1.5 lakh funded by a personal loan at 16 percent rate of interest, you have to pay an EMI of Rs 5,344 for two years. More such wants you satisfy using EMI route, less likely you will build wealth for yourself as most of your income will go the EMI way.
Here are five tips for millennials on smart spending• Differentiate between needs and wants, satisfy needs not wants.
• Never use borrowed money to fulfill your wants
• Good EMIs (EMI towards home loans, education loans) should not be more than 30 percent of your income.
• Pay yourself first – start mutual fund systematic investment plans (SIP) even before you pay your bills• Save-invest-spend is the way to handle income. Never spend first and invest the rest.