Is your lifestyle becoming a liability for you?

Ramesh and Smita worked for same bank. They had joined as management trainee about 6 years ago. Over the years they grew in career. Their background and likings were same and hence interaction beyond work increased. Finally the friendship got converted into matrimony.

Since they were working in a bank they had easy access to loans. They both were progressing well in their career. Soon after marriage they borrowed to purchase home. Initially it was decided that they would do interiors of house 2 or 3 years later but since easy loan was available they decided to go ahead with the interiors. Both had decided that after these expenses they will live frugally and ensure loans are paid back.

For the next 18 months they lived simple life but then one day Ramesh got a major job opportunity in a competing bank. Pay was good and designation was also good. Ramesh now was vice-president in that bank. He had his own cabin and had several individuals reporting to him. One day while returning home his car broke down. He took a ride from one of his junior colleague. Colleague had latest car. Next day another colleague offered to pick him up from home and ride him to office. She also had a better car than Ramesh. That night Ramesh spoke to Smita. They both felt Ramesh should have car to suit his designation. While they were servicing loan for house and interiors, they decided to take car loan. They were slightly over stretching themselves. However they were sure over the years their income is bound to go up.

That's exactly what happened in another six month's time. Smita got a job in a world renowned financial institution which had head quarters in New York. Job entailed traveling around world and interacting with individuals across globe. She thought she needed a wardrobe makeover. On her next trip to New York she spent lavishly on Fashion Avenue of Manhattan. Most of the purchases were on credit card. 

The bill was fairly large. Ramesh and Smita now started making only minimum payment on credit card and revolved balance amount. Every now and then they would decide to cut down on expenses.  They would also make some spending plans but then within few days if there was a new gizmo or latest handbag, they would pick it up.

They were confident that their income will keep rising and hence they will be able to pay back loan. However borrowing means spending our future unearned, uncertain income today. After borrowing the money, we spend and repay from future earnings. Future is uncertain. Same thing happened to Ramesh. In the next slow down, he got a major pay-cut. His earning dropped by about 30%. After about 9 month, Smita lost her job. Now they were with less than half their total annual income and more debt.

As human beings our mind likes to ignore and/or delay pain. Cutting down expenses means restricting ourselves. Any kind of restriction is painful. Therefore cutting down expenses in most instances is painful. 

On the other hand living in glory, whether past or assumed future gives us pleasure. Human mind inevitably seeks pleasures, even if it is illusionary.

Therefore invariably we like to imagine of higher earnings in future. This gives us happiness. Also that allows us to splurge. Splurging in materialistic world gives happiness. 

Families that got wiped out in the USA and many other parts of world kept imagining higher earning of future and spent lavishly until they came face to face with reality. In most cases it was very late by then.

-Gaurav Mashruwala

The author is a Certified Financial Planner. He may be reached at gmashruwala@gmail.com