This Independence Day, you should aim to liberate yourself from the clutches of debt. Borrowing money, in itself, is not unreasonable but going ahead with financing plans indiscriminately is not recommended.
Here we try to explore whether dipping into your savings is a better idea rather than taking a loan every time you have a large expenditure lined up.
For long-term assets such as a car and a house, borrowing money is still acceptable but one should refrain from going overboard on this, say advisors.
Sridharan S., a Sebi-registered investment advisor, says that loans should be seen as a last resort. It is common for investors to spend money via credit card and then continue to pay minimum payment.
This way, it would take 72 months to completely return the payment. This practice must be kept at bay, advises Mr Sridharan.
The better alternative is to prepare a financial budget for whatever you want to buy — say an iPhone. And instead of buying it on a loan, one can defer the purchase and save money in the next 12 months, he explains.
He also explains that this is not uncommon for young parents to pay the school fee amounting to ₹one lakh of their children via credit card and then returning the same in EMIs. Instead, one can start saving ₹8,000 a month a year before the fee is due. That way, you stand to lead a happy life.
One should cut down on impulsive purchases so that one can be happier in the long run. After all, the job market is unpredictable and you never know what the future holds for you.
So, rather than suffering at a later stage, one should pursue financial freedom, adds Sridharan.
How much is too much?
Experts point out that the amount of loan should stay within reasonable limits so that it does not become a drain on your finances.
The loan amount should be moderate, says Jayesh Faria, Director of Motilal Oswal Private Wealth.
“Ideally, it should not be more than one third of your monthly income. If you don’t pay for one month, it increases the next month. It can lead to a vicious cycle,” says Mr Faria.
Avoid going overboard
Some, however, say that these questions (whether debt prevents you from achieving financial freedom) are far too complicated and one should know where exactly to draw the line, indicating that borrowing is necessary for meeting big expenses.
“Some expenses such as buying a car or a house are big. And, it takes a lot of time to save that kind of money. By not incurring those expenses, you stand to forego the experience that you stand to get from these assets. And to make sure that these EMIs don’t disrupt your plan of becoming financially independent -- you must do a proper calculation to find out how much you would need to save every month to accumulate the corpus. For instance, someone needs to save ₹50,000 every month to accumulate ₹2 crore for financial freedom. And after that has been done, one should be okay with other expenses and even EMIs with the remainder of the income,” says Deepesh Raghaw, a Sebi-registered investment advisor.
Also, if you create long-term assets such as a house with the borrowed money, it would help you become financially independent.
But it doesn't mean that one should continue to borrow money. “At some point of time, one has to draw a line, and where exactly do you draw it is subjective,” he says.