Dissecting loans, EMI and Life

If you belong to the salaried class and you are trying to save money for your future then you get,

1. At least, one call a week asking for a Home loan/Pre-approved loan/Car Loan
2. At least one mail a week from an online seller with discounts or products listed under Easy EMI options
3. At least, one mail from your bank on the offers available for your credit/debit card
4. At least, one mail from the shops you've previously visited
5. At least, one SMS from food chains you've previously visited

Yes! there is an option to unsubscribe to these alerts. But, if we slip into any one of these without adequate financial knowledge of what we are doing, trouble awaits us. The reason I'm writing this now is not because I'm against loans, EMI or other complex financial products. The knowledge about financial planning is scarce among young people and they easily fall into financial quicksand. The more they want to come out of it, the faster it swallows them into it's trap. Let me write about this in the form of a story.

Prem is a college topper and landed on a job which pays him a handsome sum of Rs.50,000/- per month. Kumar is also out from the same college and has landed in a job which pays him a decent sum of Rs.30,000/- per month. Both of them are students of Computer Science and they both work for IT industry. Lets assume both of them work hard and are aware that the road ahead is hard. If you are about to rate both of them rationally, you would place Prem higher than Kumar as the probability of him being successful financially is high. After 10 years, lets look at both of them.

Prem is still in the same company he first joined with three levels higher in the hierarchy. Now, his monthly earnings have tripled and he is extremely content with Rs.1,50,000/- that his company provides. He also has a 'own' House (bought on Home Loan, still paying EMI), a Car (also bought on loan but now settled) and is still paying EMI for personal loan which he availed for his sister's marriage. Besides these, he pays premium for two medical insurance schemes, one accident insurance scheme and one car insurance. He holds three credit cards, pays for car maintenance and also has annual maintenance for his washing machine, air conditioner and many other misc expenses.

Kumar stayed in the first company which hired him for about 18 months and then had to make a choice of either studying further or moving to another company as he no longer felt professionally challenged. During these 18 months, he did not have any major increments apart from 10% increase in salary after one year. He lived frugally ensuring he restricted his expenses to a maximum of 40% of his earnings per month, i.e Rs. 12,000/- per month if he earns 30,000/-. After 18 months, he joined another IT company which gave him a 30% pay rise and felt very happy to join this company as there were lot of challenges around. He was in this company for 6 years and his salary had quadrupled now. Kumar was very comfortable in this company and again he wanted to have more professional challenges. He left this company and got an offer to head a start-up. He took that role and now he is the CEO of the start-up he joined two years ago which is planning for an IPO next year. Kumar is now earns Rs.4,00,000/- per month and also holds a major stake in the start-up.

This is where Prem and Kumar stand at the end of 10 years.

So, what is the difference between Prem and Kumar?

#1 Always be a master of your money, not a slave to it

Prem earned more initially but lacked planning. He bought a home near his office on loan and was proud of it thinking it was a smart decision. He had rented a fully- furnished and was paying Rs.15,000/- as rent. Now instead of that, he thought that buying a home and paying the same as EMI for my 'own' house is smart. On paper, it's a smart investment decision but the thought of having to pay EMI each month made him stay in the same job. Not just home, he also bought a car on loan. So, when the month begins home and car sucks a major chunk from his earnings. He had become a slave to the money instead of being a master of it.

Kumar on the other hand, never bought a home instead lived in a PG and followed the rule of 40% for expenses though his earnings increased. He divided his savings into fixed deposits, systematic investment plans and a token amount for emergency. He did have an insurance but the coverage was less. So, at the end of 18 months he had made money out of savings and was not tied up by any EMI's or loans. He was the master of his money. So, switching over to another job was easy for him as his monthly bills were not haunting him. 

#2 Everything has a cost

Offers, discounts, promotions, freebies also have a cost. The only thing is that this cost takes time and energy from you and not money. Every offer is an indirect way to bring you into the market and buy more. Prem availed almost every offer that came on his cards. He bought more credit cards to get more offers. On getting credit card bills, he only paid the 'minimum amount due' and not the entire outstanding amount on his card. This carelessness in managing his finances was like slow poison which made him pay close to 36% as interests later for a product he had bought months ago. Kumar also used credit cards but again had a track of he is spending on. He promptly paid all his bills as everything he did was calculated and risk-free.

#3 Never work for the money

It's a golden rule. When you work 'just' for the money in a corporate, growth will be slow. Money is very important but it's the only thing that's important. Prem was intelligent technically but he never worked with passion. He wanted to lead a life for which he thought he needed money. To have money, he needed a safe job and so he worked. Kumar on the other hand earned less initially but he wanted to be challenged in some way. No matter what work he did, he carried that out with passion. He knew that the money which stays in your bank account after it had come is more important that amount of money you earn. Kumar never worked for the money but instead was well aware of how to use his money. He was financially literate.

#4 Take risks, move on; for all these have your finances planned

Prem had to stick to the same company as he had to pay these EMI's, Loans, Credit Card bills which shielded him from moving out and search for a more challenging role outside. He needed the money and with time he had become part of the 'system'. If Prem had planned his finances properly and had a buffer amount, he could have searched for another job. The fact that he was financially trapped made him do a job which was less interesting. Every time Kumar went on job search he was confident that though he might face rough months, he can get through it. He has the liberty to take risks because he had his finances planned. It was a costly gamble but it paid off for Kumar which made him rise through the ranks in the IT industry. Hard work, technical expertise, managerial skills all skills which helps you rise higher in corporate ladder and but good financial knowledge is an essential skill or rather a mandatory skill.

So, whom do you want to be like is purely your choice. There are many Prem's and Kumar's in the real world. Many Prem's are happy with what they have and live a very content life. You can also live like Kumar and make money dance to your tunes. 

Whomsoever you are, always ask these questions before your money goes out of your pocket; What I spend does it add some value to my life? Can this purchase be made on a later date? What are indirect expenditures I would incur by buying this? Once you are able to provide reasonable answers to these questions, buy what you want to. It can be from a notebook to an apartment, but these fundamental questions always apply.

Love,
Ram Thilak

Image Courtesy: Internet

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