In this consumption based digital economy, the ability to borrow seamlessly through credit card culture and EMI’s are very dangerous as it leads to impulsive spending and over borrowing. Spending the money you have is one aspect, but spending the money which you will earn in future is other.
These are the most expensive borrowings and come with 18-20% cost, and if it is on your credit card it will be 24-30%. No investment can generate that kind of return.
EMIs work through decompounding effect. It breaks the total amount into a small denomination of Rs. 1,000 – 2,000 per month. This conversion factor is the main culprit, as this small denomination seems like paltry sums, and one doesn’t calculate the costs involved. All one thinks is whether that sum sounds payable and if it does, the deal is done and huge interest burden in committed to.
All these borrowing are short term borrowings, i.e. for 6-18 months only. So if you can delay or defer these spending till that time and in return start saving the same amount, you will end up creating a spending account, which in other words can be called the Reverse EMI Fund or the Good EMI. Visit our lawyer site to learn more.
All these funds should be accumulated in the short term debt fund. The idea here is not to generate substantial return but some return which has a stability of a fixed income. So instead of spending in EMI you are doing a SIP.
Whenever you feel like buying something, see if there is enough money in your spending account. If there is, just withdraw and buy what you want, else wait. Do remember not to treat this as savings, as this is an Expenditure Fund. Instead of interest expense of 18-20%, you end up with 6-7% extra earnings, thus making a huge saving of 25%.
It all sums up to that if you post-pone your casual expenses you create money and if you pre-pone them, you destroy it.
