*Akshay and his family have just come back from a holiday in Europe. It was an expensive vacation. They spent over Rs 13 lakh and he had to use his credit card quite liberally.
Akshay took the entire holiday package on EMI, which means starting next month, he has to pay Rs 37,300. As Akshay pulls in over Rs 4 lakh a month after tax, this should not have been a problem. But when one is earning this much, why should they take a loan for a holiday?
While he has been earning quite well, Akshay and his family have been steadily living it up. The home, car, his son's school, travel, lifestyle, etc, and EMIs take away most of what Akshay earns. He has no investments except Rs 11 lakhs in fixed deposits and some stocks.
Akshay's story is playing out with millions across the country. Income is not the problem in most cases. Expenses, poor understanding of finances, poorer money management, wrong priorities, peer-induced steep lifestyle scale-up, etc, are the problems.
Goal priority and sequencing
Every goal cannot be high priority. We need to assign priorities to the various goals we have. Out of them, some may be high priority (eg college fees) for which resources need to be allocated.
For medium priority goals (changing the car), we need to check if resources are available or need to be pushed back so that resources become available. For low priority goals (world tour), it can be pushed back, dropped, or made contingent on the availability of surplus funds (eg. getting a bonus).
Many people have problems as they do not prioritise the goals nor do they sequence and stagger them over time.
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Signalling the arrival
As people progress, they want to flag off their arrival at every stage. That happens through a home/ car upgrade, education in “better” schools/ colleges, lifestyle step-up in terms of entertainment, vacations, grooming, clothing, accessories, etc.
This does not look like much until we understand that each one of these can soak up a lot of money. This "announcement" of the arrival is a costly and draining exercise financially.
Peer pressure
People want to conform and belong. They are influenced by friends and colleagues. Many upgrade their lifestyle to be in line with their peers. If friends or colleagues own a luxury car, for instance, there is unstated pressure to upgrade to such a vehicle. This again applies to all other areas too.
The problem is that the goals, personal situation, profession, earnings, etc. are not similar among a group of people. That is why emulating what others are doing could greatly weaken or even bankrupt some people.
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Borrowings
People go to great lengths to align with peers. Credit cards come in handy and are seen as a great leveller. But they are not.
Those who do not have the means to fund a lifestyle resort to all manner of borrowed spending. Today, everything is available on loan.
For that matter, the loan itself is available easily. It is common to find people having multiple loans and struggling with EMIs.
They do not realise that the loan they are spending IS the income they have not earned. They are discounting their future income.
Family in the dark
To keep up the charade of teflon-coated infallibility to appear super successful. The worst part is hiding the truth from the family.
When the family does not know the truth, they go about their lives believing they are affluent. That compounds the problem. This results in an increasing incidence of debt and a descent into a loan spiral.
Atleast the family should know if there is a problem. While they may be very disappointed when they come to know, they would rally around when they learn the true position. And when friends get to know about one’s situation, one will come to know who is a true friend and who is not!
It happens more often than is good and the reason why it should serve as a caitionary tale.
*Names used are for illustrative purposes only
The author is the MD & Principal Officer at Ladder7 Wealth Planners and the author of the book “If God Was Your Financial Planner”.
Disclaimer: The views expressed by experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.
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