On a TV show an anchor was interviewing devil
Anchor: What is the cruellest thing you have ever done?
Devil: I only do cruel things. That is my job.
Anchor: Is there any act of yours which you are proud of as a devil?
Devil: I am proud of everything that I do. I create epidemics, orphans, wars, holocausts, catastrophe etc. I am the malicious being.
Anchor: If you were to name one thing which is feather in your cap, what would it be?
Devil (Thinks): I created credit cards.
Every morning when we pick up a newspaper it is filled with advertisements of variety of products and services that are available on EMI. Several of the life style related products and services viz. Mobile handset, white goods, vacations etc. are also being offered on zero percent interest rate.
Recently I did a TV show on the subject. My co-panellists were from retail chain store and consumer durable manufacturer. Both of them agreed to two things (i) Their sales had enhanced after the launch of these schemes (ii) Even if it is zero percent game, consumers/borrowers should be careful before plunging into it, as borrowing can hurt.
First and foremost, there are never genuine zero percent schemes. Invariably zero percent schemes would also have some kind of processing fee, service charges, administration charge etc. That charge is your interest cost. This charge is collected upfront. If zero percent interest schemes is for a period of 3 months and if upfront service charge is 3 percent, effective cost is fairly substantial.
Secondly when product is offered on zero percentage, it is usually sold to us at M.R.P. (Maximum Retail Price.) Under normal circumstances, if we were to make upfront cash payment, retailer would give us discount. The price difference between M.R.P. and cash discount is also our cost.
We need to remember cardinal rule – “There are no free lunches.”
Let us look at what goes in our mind, when we fall for zero percent loan schemes and what could be sensible alternative.
In first place our conscious mind tells us to refrain from purchasing life style related products & services and more so on loan, however it is our sub-conscious mind that plays spoil sport.
Words like ‘use latest technology,’ ‘in-thing,’ ‘be the first one to own’ et al will boost our ego. It is human nature to own things that are latest, new, something that others don’t have as yet etc. Once the advertisement has nudged the ego, it has done its job. After that, our sub-conscious mind will start justifying the purchase. Term zero percent acts as stimulant to the process of justification. Our philosophy of delayed gratification then goes for a toss.
However, there is a way to get prolonged pleasure by delaying gratification and even making money out of it. It is like eat one’s cake and have it too.
Start a Systematic Investment Plan (SIP). Give name to that SIP e.g. if you want to purchase a handset which is costing Rs 50,000.00. Start a SIP for six months and call it ‘HANDSET SIP.’ If you want to own it in 3 months time and if no mutual fund company is offer SIP for 3 months, keep aside fix amount of money every month in FD. Ensure FD/s mature around the time of purchase. If your financial goals are near term, say less than 3 years, choose debt as an asset class. In debt you can opt for
debt mutual fund, recurring deposit, FD etc. If financial goal is greater than 7/9 years go for
SIP in equity. For an interim period financial goals make combination of debt and equity.
Here two things are important (i) Set aside funds every month (ii) Give it a name.
Under normal circumstances, once we purchase/consume life style product/services after some weeks we stop getting pleasure out of it. However if you opt to differ purchase to ‘pre-determined’ future fixed date, till the time purchase is made, you will keep thinking about it. Those thoughts will give you pleasure – sans cost. Also, since the funding of it is linked to SIP/FD, you know your deferment is not infinite
Imagine starting a SIP to go to Switzerland next summer with family. Every month when you will invest through SIP you would think of Switzerland - Free enjoyment. Eventually when you will redeem the amount for spending for the trip, there will be no guilt – It is like “We have earned it.” There will also not be any direct/indirect interest cost.
In consumerism delayed gratification is unheard off. Everyone wants those goods/services as of yesterday. However is we start SIP and give it a name, delayed gratification changes to prolonged gratification.
- Gaurav Mashruwala
The author is a Certified Financial Planner practitioner. He can be reached at gmashruwala@gmail.com 
