The financial position of many young couples leads to a common disturbing factor among them. They spend a very high portion of their current income and in some cases very close to 100% on current consumption. Most of them cannot afford to buy cars, LCD TVs and other high end products from their savings. But they want to own it fast.
Saving first and then buying these items of luxury is not their concept in life. They think these are necessities in life and thus buy them by availing consumer loans from financial institutions at very high rates of interest. Most of the buyers know only about their equated monthly installments (EMIs) payable on their car or LCD TV loan. They have no idea about the rate of interest.
Consumerism is not bad and it is not wrong to enjoy one’s life to the full. But definitely there is a better way to doing it. Let’s take a look how one can enjoy the luxuries of life.
Indians are essentially very good savers. As a nation, our gross domestic savings are more than 30% of our Gross Domestic Product (GDP). The younger generation should realize the virtue of savings and also understand the basics of investing. The best way for a salaried couple is to buy durables that will ensure a better standard of living and also by buying them from their secondary source of income.
For most people the primary source of income is their salary. Young couples should pay EMIs from their secondary income and not their salary income. It’s proper to buy a house and pay the EMIs from the salary income if you are going to stay in it. This helps in having your own shelter, tax benefit and scope for appreciation over a long term. Otherwise, the house should be purchased from secondary income.
The concept of secondary income is that the earning family or member does not spend the whole of his primary income but save a portion of it postponing some consumption. This involves some amount of sacrifice to secure family’s future. It’s vital that this saving is invested carefully and systematically
Investment means buying assets out of our savings. Assets generate income. The income earned from such assets is called secondary sources of income. Salary is the primary source of income far salaried people and income from business or profession for businessmen and professionals.
It is possible to have a very high level of secondary income through well planned and intelligent investments. It’s also possible to ensure that the secondary income exceeds the primary income over a period of sustained investments. This level could be achieved even in 10 to 15 years. We work for money which is our primary income. But we can make money work for us — by investing systematically and earn secondary income.
Incidentally the salary income is tax inefficient and two irritants. First the tax is deducted at source and the balance is paid to the employee. Second the tax rate now is as high as 33.9%.
The investment income: If it’s from long term capital gains on stocks or equity oriented mutual funds, is free from income tax. Fixed income plans too have tax efficient options like Fixed Maturity plans of more than one year where the tax rate is 11.33% or even less. It’s important to focus on the tax adjusted rate of returns on our investments and make sure that we get very good rate of net of tax returns on our investments Many people who planned their investments carefully manage to have a net-of-tax secondary income which is much higher than their net-of-tax primary income.
Young couples who love their debit and credit cards and buy most of their durables on EMIs must look at other options very carefully as these can change their lives dramatically. All they need is a little patience and belief in their investments nobody is against spending and a higher standard of living. It’s very important to spend money and consume things.
People should buy bigger cars, branded watches, branded apparels among other things and live happily and comfortably. But this should be done from their secondary income. The EMIs should ideally be paid from the secondary income. It may be wiser to borrow and pay the EMIs if you manage to earn more on your investments than the interest you pay on loans.
Let’s learn from the developed economies where most couples work till the age of 65 or 70 to pay their home loans. The question is whether their dream house is an asset or liability?
When the economy is booming and salaries rise, one may not feel the pinch. But when the interest rates start rising and the economy starts to slow the push will turn into a shove – EMIs will rise, cost of living will go up, salaries won’t rise and people will be forced to sell their assets cheap to meet liquidity demands.
Economic cycles must not dictate a family life. Plan your lifestyles and chase your dreams with the secondary incomes.