Towards a debt-free life

By Rajesh Choudhury

Rajib’s family was excited about getting new furniture, curtains and even a beautiful showpiece for their living room, just before Diwali. However, their excitement soon turned into anxiety when they realised that the probable price of all this would be around Rs 1,00,000. They knew they could charge the entire amount to their credit card. But after a little discussion among themselves they came up with another possible way to fund this home improvement — taking a Personal Loan.
In both the cases the way to achieve their dream was only by borrowing, either by credit card or a Personal Loan. Because Rajib and his family had fixed monthly expenses, they could not afford to pay more than Rs 3,000 additionally, after meeting their monthly obligations. So opting for a loan was the only choice they had — the EMI (equated monthly instalment) option.
EMI has become a household word across the country and its promotions are tagged to every product and even services today. Advertisements act as a strong reminder of this financial panacea to realise materialist dreams, just like for Rajib and his family.
EMI is nothing but a loan or debt designed in such a way so as to woo consumers during decision-making about purchases. The concept of EMI holds good not only for Rajib and his family but also for more and more people in our society. The number of those who have accepted this practice as an ultimate way to satisfy their wants and desires is engulfing our population at an exponential rate.
Is this really the way to satisfy our material desires, by taking loans, or is it becoming just debt addiction?
Herbert A Simon, the American economist and a Nobel Prize winner, remarked, “A decision maker did not always make the best financial decision because of limited resources and personal inclinations.”
Lending has existed for thousands of years and has taken on many forms. Traditional loan can be traced back to the beginning of civilisation. Basically grain loans were given to farmers and traders who carried goods between cities. This began around 2000 BC in Assyria in northern Mesopotamia.
Mortgages were developed for the real estate or property buyers just 100 years back. This kind of a loan is called ‘good debts’ as they create value in the long run.
But the generic purpose of loans has drastically changed down the line since ancient times, primarily because of its easy availability with upgraded technology. The mindset of buying every product by borrowing is gaining popularity by leaps and bounds.
Even in India, till 30 years ago, society at large never thought of taking multiple loans to fund their household goods like washing machines, television sets, two-wheelers, smart phones or even clothing. This trend is not a healthy sign as the financial stability of most households is in question today.
Even big decisions of once in a lifetime buying, like homes, have some interesting statistics. HDFC was the first organised player in the Home Loan market. The average loan amount was Rs 30,000 to build a project of Rs 70,000 in Mumbai’s Malad area way back in 1978, meaning that around 43 per cent was self-funded by the borrower. Borrowers never thought to fund their house by 80 per cent through a loan as they do today.
Today, surprisingly, one can take a loan even for a dinner at a five star hotel and make the payments by EMI. This is becoming a serious issue that our society needs to address as the continuing practice of such activity will not only hamper our financial life but also affect our children’s behaviour towards money.
The mindset has changed over a period of just a few years in financial decision making, especially during the making of purchases. We are satisfying not just our needs here but our desire to possess all the goods out there, being advertised day and night, luring us to buy them, posing themselves as things which will make us happy, and paying for them all through EMI. It is an illusion that we can enjoy all the luxury of life at this cost when, in fact, we are paying a price significantly higher than the published MRP.
The following points may open up our minds to understand how loans and debts are actually bad financial practices and deteriorate our financial health.
If we are in debt for the next 20 years, we land up paying principle plus interest nearly three times of our loan on the principal amount borrowed.
Credit Card the “any time loan dispenser” is a magic wand, which increases the impulse to buy now and pay later and pushes us further into debt traps
If we buy on loan goods which are actually depreciating then, in fact, we are creating liabilities. Good debts like for a home or land will generally appreciate in time, increasing their value.
Borrowing can make us fall into a trap from which escape could take decades or more.
Once people make it a habit to purchase things by EMI payments, they feel at ease and unknowingly a false sense develops, making them feel as if they are paying less while in reality they are in a trap, the “Debt Trap”.
But habits can be changed. Budgeting is the first and fundamental tool to put one’s spending and saving under control. Accumulation of wealth and staying debt free does not require someone to earn a very high income. All they need is to be prudent in managing their expenses.
Impulse buying is a weakness that many succumb to unknowingly and the household budget is the best tool to control this too. Budgeting helps us to review our entire financial health regularly. As they say, if someone practises anything for a minimum of 21 days they can change a habit. So the EMI habit too can be changed and by household budgeting one can save and plan the future purchase in advance and can easily avoid falling into the debt trap.
Let not debts control our lives.

(The author is a finance expert)

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