Among the many defining traits of a millennial, living in the now is the most dominant. But doing it without the financial foresight to save means spending most of what one earns and more.
According to a recent survey by IndiaLends, an online lending platform, 19% of India’s youth is borrowing to meet their travel goals and 20% of them are borrowing to get married. Another report by CASHe, a digital lending company, showed that in 2018, 23% salaried millennials took short-term personal loans to refinance individual EMIs and 14% borrowed to pay off their loans. The average frequency of repeat loans was 60 days. Clearly, the focus seems to be on spending in the ‘now’ rather than investing for the future.
How debt piles up
With increased digital penetration, easy access to credit cards and online shopping avenues, the concept of zero-cost EMIs seems to have become popular. According to news reports, during the festive season last year, two in four EMIs taken by consumers on e-commerce websites Flipkart and Amazon were no-cost EMIs. The pressure to keep abreast with latest trends and increased number of lending companies offering unsecured loans is making millennials borrow to meet the smallest of wants. But borrowing to sustain a lifestyle can be fatal for your financial life.
A 36-year old, who didn’t want his identity to be revealed, learnt this the hard way when his successful startup business went bust in 2015. Forced to borrow to sustain his lifestyle, he realised first-hand the havoc debt wreaked in his life and the more he gave in, the deeper he got sucked into the debt vortex. He lived off loans and credit cards till he maxed them all out and had no option but to shut shop and move back to his native place.
“I was sailing in rough waters," he said. Of course in his case, it was not so much of a choice but compulsion. However, the lessons learnt are for everyone. Not having an emergency fund in place was his biggest mistake. “I should’ve planned a reserve fund to be able to sustain the business," he said. The other cardinal mistake according to him was not apportioning a part of his income towards investment. And this meant he ended up using credit cards to sustain himself and eventually dipped into his provident fund to pay his employees’ pending salaries.
While the youth years are meant to be enjoyed, remember that being young also means that you have many more years left to live. So, even if you put away sums in small amounts, the power of compounding will reap huge rewards.
The first step is to make a small lifestyle change and that is to save first and spend later. Start a systematic investment plan in mutual funds where a certain portion of your income is invested right away. Once this is taken care of, you can focus on your spends. While it may be easy to make this tweak in your lifestyle, it is difficult to change the way you look at debt—from seeing debt as normal to seeing it as the last resort. For this to happen, you have to first learn to cave in to peer pressure and believe in the principle of delayed gratification.
“Spend only what you have. Save for things and then buy them instead of taking loans. This might delay that trip or that gadget a little but you won’t end up paying more than what it costs," said Shweta Jain, certified financial planner, chief executive officer and founder, Investography Pvt. Ltd.“Credit cards and personal loans are the most expensive loans. Ideally, stay away from these products. I know people also withdraw cash from credit cards and say it’s only ₹50,000 and so on. But soon this becomes a habit and you end up paying huge amount of interest," Jain added.
If you have already crossed over and are reeling under debt, be ready to make some significant lifestyle changes. To cater to the rising debt, the person quoted above completely downgraded his lifestyle and stopped buying branded clothes or eating out at fancy places as he couldn’t afford it anymore.
The spending capacity of millennials has increased with the easy availability of credit. However, remember that it’s going to be you who will have to repay it and that too with added interest. Just because something is available on the click of a button doesn’t mean you leverage it to build a false sense of a grand lifestyle. Financing your lifestyle with loans should never be an option at any point in your life.