It’s the festive season. But what stood out the most this time were all the billion-day sales, the great Indian sales, and the explosion of lending startups. There were full-page advertisements imploring people to buy gadgets and clothings at great deals—not that people really needed that push.
The trend now among the younger generation is ‘comparathon’, where each one needs to outdo the other in terms of material possessions.
To add to this, there is a new breed of lending companies that is fueling this consumption at prohibitive interest rates. There is an equated monthly instalment (EMI) for everything. What makes it appealing for the consumer to opt for these loans on EMIs is the quick and collateral-free processing.
Apart from personal loans, which people may take to go on vacations, now purchase loans and pay-day loans targeted at millennials and students are in vogue.
Purchase lending allows an individual to buy specific items on certain e-commerce sites on EMI, and pay-day loans give short-term loans to individuals against their future salary.
In many of my sessions, the participants have expressed a common grouse of not earning enough to meet their expenses and the fact that their salary lasts only 20 days. Such people are happy to take on pay-day loans, which extend their spending capacity for another 10 days, till their next salary comes in.
Once this amount is deducted from their following month’s salary, they find themselves in need of a loan all over again.
What they don’t realise is that this is all it takes to get stuck in this vicious cycle to maintain their lifestyles.
Fired up by quick loans, the comparathon only increases and most of the GenY is oblivious to the huge interest rates that they end up paying on these loans.
They end up buying products that they don’t really need, and the ease of processing the loan sometimes results in people not taking the time to understand what they are getting into or overlooking the loan conditions and documents. In addition to this, the high number of unsecured loans would certainly have a negative impact on their credit scores.
Slowly but surely, these loans and services are taking control of our finances and the advertisements of attractive deals are clouding our judgement. Whatever happened to saving for a rainy day or planning for the bigger things in life?
This month there was Daan Utsav, which is for giving time, money and resources to the needy; Dussehra, which celebrates the victory of good over evil; and Diwali, when homes are cleaned for the goddess of wealth to visit.
However, the significance of our festivals seems to have got lost. The demon of consumption has taken over and Lakshmi is going out of our houses and into the lending companies. While Diwali is celebrated by cleaning the house and buying new things, it would be a good idea to do the same with our financial lives too.
It’s important to think about the future and plan for the same. There are too many uncertainties in the work environment and hence it’s a better idea to let money work for you rather than you having to work extra hard just to pay off loans.
So what are the steps forward?
First, get rid of all unsecured loans like personal loans, purchase loans and pay-day loans. Take stock of your finances and start devoting at least an hour a month to manage your money.
There are certain basic principles to be kept in mind.
1. Try to save at least 30% of your take-home salary. Save first, then spend. This does not mean that one lives a frugal life. Buy the things you need and of course indulge yourself but keep a budget for the same. Don’t go overboard while shopping and if you don’t have the money for it, don’t buy it. You wouldn’t want the things that you own to end up owing you.
2. Set up an emergency fund that has money equivalent to 6 months of expenses kept aside for contingencies.
3. Look at the bigger picture. Start saving for future possibilities like setting up a venture or buying a dream home. For this, remember that an early start means your money will have longer to compound and would be worth more, as opposed to investing a higher amount at a later stage. It’s not just about how much you invest but how long you invest it for. There will be times when you could be in a demanding financial situation and investing early would help you tide over the situation.
4. It is important to choose the right instruments to invest in. For long-term goals, a combination of systematic investment plans in equity mutual funds and Public Provident Fund would be the best options to invest on a regular basis. These instruments give inflation-adjusted positive returns and also compound.
5. Finally, the quality of life is directly dependent on the financial decisions that we take, and hence, financial prudence is imperative.
Focus on keeping Lakshmi at home, or the time may not be far when instead of income, consumption will be taxed.
Mrin Agarwal is a financial educator; founder director, Finsafe India Pvt. Ltd; and co-founder, Womantra.