NU who is only 26 years old makes very good money about Rs 40,000 a month. But thereâ€™s just one little problem: he doesnâ€™t get to keep most of it. This young employee of a business process outsourcing (BPO) company is deep in debt: he has a car loan, a personal loan, and a consumer loan. Nearly three fourths of his income goes towards paying the installments on all of these.
Peopleâ€™s attitude towards money has changed over the years:
In earlier days most people didnâ€™t have very much to invest, but still wanted to set something aside either for investment or to save on taxes. Except for a housing loan, it was rare to come across any other kind of debt. The current generation seems quite comfortable with the idea of taking loans. D is for desire and also for debt. Indiaâ€™s middle class no longer considers â€˜debtâ€™ a four-letter word.
More and more people think that financing a coveted gizmo with a loan is acceptable, even smart. Middle aged and younger generation now thinks loan is the best way to buy what one wants when there isnâ€™t enough money in the bank. One could, of course, wait to save enough to make that purchase outright but that appears to be late to enjoy status and comfort. Itâ€™s true that both banking industry and its clients have become more liberal in their attitude towards loans.
Banks are pushing retail loans aggressively to make more profits. And customers are impatient to buy the things they want, without waiting to save enough. If this new trend grows, it could have a long lasting impact on saving and investing patterns in the country.
The earlier generation has been compulsive savers until now, but people younger are shifting towards a consumerist economy.
There is a case of three friends who played in a team for college and still meet once a month. Recently, there was an emergency in one of the friendâ€™s family and he needed some money. He called his two friends and to his disappointment learnt their savings were worse than his.
That is how they all discovered they all shared another addiction besides games that is loans. He found both his friends love high-end gadgets. They wouldnâ€™t think twice before taking a loan to buy something they found cool. He himself has indulged in few things apart from an expensive music system bought recently. Besides consumer loans, the threesome have housing and car loans as well. Not to mention huge credit card bills.
Since most of their salary goes towards repaying these outstanding loans, thereâ€™s little left to save or invest. Unsurprisingly, none of them had a proper investment program in place. Apart from employee provident fund and some insurance, he doesnâ€™t really have any long-term investment. His friends fare no better; despite being married and with kids, they have no insurance cover, let alone planning for their childrenâ€™s future.
The situation made them resolve to repay outstanding loans on a priority basis, and then start on an investment plan. All loans are not equal. But it is not wise to wait until debts are cleared before launching on an investment plan. Itâ€™s important to understand that all loans are not the same. For example, a housing loan helps to create an asset, one that will increase in value over the years.
But a consumer loan taken to buy a cool new cell phone is a bad idea. It will never get a better resale value for such products. One must clear his credit card balance first with the money from a fixed deposit. It made little sense to earn 9% interest in a fixed deposit while paying 36% interest on his credit card balance.
One must get rid of the costliest loan on a priority basis, and get their investment plan off to a modest start. They should first target the credit card dues, then the next costliest loan, and so forth.
These days one can start a systematic investment plan (SIP) in a mutual fund scheme with as little as Rs 500. Many people start off small and realize the potential of a regular investment plan after they get to see the results of their investments.