Debt problems?
There is only ONE reason why people get into debt. Living beyond their means. Make no mistake there is just one reason.
However when people get into debt, and when they come to me, they justify on various grounds…I have very little sympathy -Satyam is never Sundaram, but always SHIVAM!!
What are the main reasons why people get into debt? Well my observation is as follows:
1. Living without knowing how to use a credit card: sounds absolutely stupid, but most people who get into debt is because people do not know how to use the credit card. They just flash it for everything – Tee shirt, food, undergarments, entertainment, fuel,….and at the end of the month do not have enough to pay. This forces them to pay in instalments – then it is the duty of the interest rates to kill you!
2. Medical emergencies: suddenly there is a medical emergency for a parent, sibling, friend…and there is Rs. 2.5L bill..and that is on the credit card or as a personal loan. Frankly, if you can afford it, you can. If you can’t , you can’t. So if you do not know how this amount is to be REPAID, please DO NOT BORROW. It hurts your credit rating, your cost of borrowing is too high, …not sure what you can do, but do something other than borrowing without thinking!
3. Too much house: many people justify buying a house saying ‘instead of paying Rs. 12k p.m. rent, Iam better off paying an EMI. Utter nonsense. A house available for 12k rent is available for a Rs. 60k EMI!! At current interest rates and perhaps even the real estate rates you might be better off renting for up to 10 years.
4. Too much car: In Mumbai like cities a car is Rs. 8k driver + 12k petrol + 22k EMI – on a CTC of Rs. 12L (entitled to a 22k emi !!). Or a bigger car – which includes other related costs – this drains out quite a lot of ‘disposable income’.
5. Not understanding personal finance: Well there are a few people who take the trouble to see what is being offerred as loans. They just go see what is available and buy – assets or liabilities!
…..may be there are others…will do a new post later on….
Milind N
Subra
Excellent Article.Many thx for constantly saving Many readers from doing many costly financial mistakes ….A falt taken with an emi of say 60000 pm is a big ticket investment from typical indian lay person.No body educates him ,that well it may be wrong financial decision ….Many thx
pravin
i actually have no problems with how people use/misuse their disposable income provided they just take out a constant fixed amount for investments/savings first before determining what is disposable. if they splurge on a car while not eating out at all or not going to the movies ..it is their choice.
rohit
hi subra I can vouch on rent peice ,i saved myself ( in retrospect -its a pure luck) I was about to take home loan , but later avoided & because of money saved by renting vs emi & compounding in last 3 years I can take same home in cash , but still not doing it
life is fun when you go to sleep without a loan emi to worried about
Vidya
Isn’t a house bought more for capital gains in the long run ? Although I don’t know how that works if one is living in the the same house ! But may be security then ? I agree on the amounts of rent vs EMI.
I can’t argue about the car thing ! 🙂
Jayant
Superb article! Hats off ! “Living beyond their means. Make no mistake there is just one reason.” . Absolutely bang on!