Home / Opinion / Enjoy today, but not at the cost of your tomorrow

In this world of instant gratification—fast food, power yoga, lose-weight-quick regimes, get-rich-quick products, retail therapy to dispel blues—our motto is why delay till tomorrow what we can possess today. It’s good to be aspirational, and even greedy, about one’s goals. But some things take time.

Most of us prefer to live for today than plan for tomorrow. And with easy financing options available, our wishes have been granted wings. During all these unnecessary buying transactions, the only one laughing its way to the bank is actually the bank itself, or shall I say the tribe of lenders. In the process, our future needs lose. Charlie Munger, the right hand man of Warren Buffett (ranked the world’s third richest in 2013 by Forbes magazine), outlines this dangerous trend: “A banker who is allowed to borrow money at X and to lend it at X plus Y will just go crazy and do too much of it if the civilization does not have rules which prevent it."

This is unfolding in front of our eyes. We get many calls on a weekly basis asking us to take another credit card, or we are congratulated about our enhanced personal loan limit, or we are encouraged to use easy payment options on our outstanding credit card bills. One road trip around Mumbai and you get to view innumerable hoardings advertising simple documentation and instant approvals of personal loans.

Day in and day out I meet people from various walks of life who have bought houses far bigger than they can afford, done up their homes in a far fancier way than they can manage, have sent kids for expensive courses abroad without doing sufficient due diligence on the quality of education and the economics involved, or have gone overboard on their vacation budget.

So often, these over-the-top activities get funded by an easily available personal loan. And to compound problems, we all are under-invested in asset class like equities, one of the most appropriate options to beat inflation in the long term. We label stocks as being high on volatility, and conveniently ignore the fact that they can deliver promising returns in the long run. We, in fact, stay away from such choices without realizing that at times avoiding these growth options is the biggest risk we are exposed to—the risk of sub-optimal growth of our investments.

Moreover, this irrational spending behaviour seeds misunderstanding about money’s acquisition, accumulation and use in the minds of our children. They are nudged towards believing that money comes easy and can, therefore, be spent easily. Since many of our expenses revolve around children, it’s critical that they understand the dynamics of money early in life.

Personal loans are one of the most expensive forms of loans available in the market today. Not without reason though. Since these are offered without taking collateral from the client, they are deemed as higher risk. The rates of interest charged can vary from 13% to 17%, depending upon the lender, the income dynamics of the borrower, the credit score of the borrower, the tenor of the loan and the amount sought. Credit score of the borrower in derived after taking into account factors such as types of loan taken, amount of loan sanctioned and disbursed, their dates, defaults if any, repayment history, and others. Such loans can be taken for amounts as low as 10,000 and right up to 10 lakh. These also offer the flexibility of being used for any end-purpose.

It’s important that we understand how to tame these loans. Let’s examine two scenarios to find out what different tenors mean in terms of monthly burden and the total amount paid as interest.

In both cases, the outstanding amount is 5 lakh, the rate of interest is 15%. In case one, the tenor is 36 months, and the equated monthly instalment (EMI) is 17,333. Overall, 25% (1.24 lakh) of outstanding amount is paid as interest. In case two, the tenor is longer, 60 months, but the EMI is lower, 11,895. But overall, 43% (2.14 lakh) is paid as interest.

The moral of the story being that wherever possible, try and go for a higher EMI, which will reduce the loan’s tenor.

This article is not an attempt to encourage stinginess. The principle aim is to create awareness around spending sensibly. By all means, spend money if you have to and can afford to. However, be watchful that it doesn’t hinder your future day-to-day living.

The following Swedish proverb beautifully states the ills of going overboard on expenses, “He who buys what he does not need, steals from his tomorrow." Money which is nurtured well today will not seize control of our tomorrows.

Deepali Sen is a certified financial planner and founder, Srujan Financial Advisers LLP.

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