Behavioural biases that damage your investments!

If you are a salaried person, getting a loan is faster & easier than booking a train ticket these days. As a result of easier accessibility, people often fall into the debt trap and end up paying more than what they have actually spent.

For instance, interest rate of any personal loan ranges from 12% to 18%, but while borrowing you will be informed 1% to 1.5% per month. This 1-1.5% may seem very small at first but is a lot more when compared to 0.5-0.66% monthly return on any fixed deposit.

Additionally, if you hold a credit card, things may become even worse. A credit card charges interest on the outstanding balances at 3-4% per month. If you think of paying minimum due, think again because, the remaining amount will be liable for interest. If you buy a laptop worth Rs 50,000 via credit card and pay an accrued minimum due of Rs 5000, remaining Rs 45,000 will be liable for interest say 3% so your next bill amount will be Rs. 46350 (45000 + 1350 interest).

So, a 50K laptop now costs you 51350 and may rise even more in case you fail to pay the entire due. Thus the question arises, whether loans are really necessary? Obvious answer is NO. So, what is the solution to avoid this vicious circle?

Affordability
Its an essential concept every individual must embrace in their financial planning. If you ask Google the best smartphone to buy, it may give you numerous options all ranging above 50 thousand. However, if you ask Google whether you can afford it, it may not have an answer. There are things around the world which you can buy, but there are very few of them which you can afford. If you buy things, without acknowledging its affordability, you may end up inviting the unwanted guest called loan. Therefore it is always prudent to buy only those things which you can afford. This way, you will pay only for the cost of product or service and not for interest on amount borrowed to pay it or late fee charges in case of default.

Necessity
If you don’t have a horse, why buy a horseshoe. The most common problem every individual come across is needless shopping. In case you do not have the necessity, you end up paying money unnecessarily and thus sacrificing on either more important spends or an opportunity to save. It is always sensible to know your needs and then act on them, rather than hasty purchases. This will not only save you money, but also keep you inside your budget, without taking the unwanted help of loans.

Save first buy later
Majority population follows buy first, save never philosophy. It eventually ends up with zero savings and multiple loans to cater emergencies or daily chores. Buying the latest smartphone, or laptop or any gadget may cost significant outflow of funds and thus leave you with very little to no money situation before the end of the month. Moreover if you buy these gadgets on EMI, you add up an additional monthly expense to an already packed budget. Now let us say if you earn 30 thousand per month and keep aside 10% of it as savings, within 12 months you will end up with 36000 in your pocket. This 36000 may help you buy your favorite gadget without disturbing your monthly expenses. Buying without saving is like planning honeymoon without money, you may get excited at first but may end up in a bad situation.

Nothing is free
Duh? Not really, people often fell into the trap of marketing, when banks or finance companies come calling. People fall prey to words such as ‘Zero joining free’, ‘Easy EMI option’, ‘No cost EMI’, ‘buy now pay later’ etc. but a fact to be remembered always is nothing is free. Banks, finance companies are always counting on you to make mistake and pay interest or even late fees. Banks or finance companies never do charity, they will always encourage you to avail loan and buy stuff now, rather than wait for years to fulfill your dreams. However, in realty it is their dreams which are getting fulfilled. In addition to that any default causes substantial damage to your credit worthiness, which in future may impact you loan taking capacity. Thus it is wise to ignore these fancy words and stick to your principle of saving first buying later, in order to achieve a better future.

Loan is an unwanted guest and nobody wants to serve it in their home. Yet on account of hasty, unplanned and needless buying, we invite this guest by laying red carpet. Patience builds wealth, hence purchases influenced from your friend, neighbor, office colleague or even you siblings may not help you. Having an ambition is not wrong but having haste to achieve it may lead to uninvited trouble. Therefore by following above steps one can fulfill their ambitions without jeopardizing other responsibilities and keeping the unwanted guests off the guest list. Set your goals, start saving for them, stop being influential and stick to your principles. These four completes list of things required to stop the unwanted guest entering your house and keeping the ghosts of interest and late payment charges at bay.

(The author is founder at Money Mantra. Views expressed are personal)