Today's young generation is completely hypnotized by the latest gadgets, new clothes and accessories to maintain their fancy lifestyle amongst their group. Thanks to the improving Indian economy which is helping the youth to fetch decent salaries which they usually spend for their status war with peers. Well, this could be the reason, the majority of today's generation is paying more EMI's as compared to their monthly savings.
In addition to the above, personal loans, home loans, car loans and consumer durable loans are adding a burden to their pockets.
When you take any loan, you sign documents of paying equated monthly installments on a long-term or short-term basis at a certain interest rate which lender/bank charges from you. With this, you make certain psychological adjustments to your finances -
You may compromise any other expenses, but you will be bound to pay monthly EMI's.
Your every new spending will lead to the mental calculation to check whether you can manage the burden with your existing EMI outgo.
On the other hand, Systematic Investment Plan (SIP) in mutual fund schemes is quite a popular investment option because of its consistent performance and ease of monthly contribution which is as low as Rs 500. One can fulfill many quantified financial goals by linking one's mutual funds SIPs and contributing the amount based on the calculation.
Which one is good?
In the case of EMI, if you are paying an EMI towards the creation of an asset than it is termed good as your asset will be appreciated although you pay interest on EMI's. Therefore, any EMI paid for home loan repayment is good. EMI paid to repay a car loan, credit card or personal loan is considered to be bad as you end paying huge interest on your principal amount and at the same time value of the goods which you have bought also gets depreciated.
On the other hand, when you invest in mutual funds through SIP's you gradually create an asset for yourself that will help you achieve your financial goals in life with the help of the power of compounding.
What to choose?
Let's suppose, next Diwali you plan to buy a new sofa set for your home costing Rs 85,000 approx. One option you have is to only plan it at the time when Diwali arrives by buying the same by swiping your credit card and converting the repayment into 12 monthly installments. With this, you will end up paying almost Rs 90,626 approx (Rs 7552 EMI) at an assumed interest rate of 12%, which could go higher up to 15% depending upon offers from banks which vary from bank to bank. But if you plan it and start saving for it in advance, let's say 1 year before you decide to invest, you only need a SIP of approx Rs 6800 per month to accumulate approx Rs 85000 in 1 year at an assumed and expected rate of return of 10%.
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The above example clearly, explains that if you plan your buying in advance you can actually save a good amount and at the same time it gives you and your family, a sense of security.
Even if you get a bit late on buying the things you need, it is always better to avoid the debt trap which slowly pulls you to a stage when you end up taking one more loan to pay your previous loan. Systematic Investment Plan (SIP) provides you a disciplined approach to investment and that too at a very nominal amount to start with. All you need to do is quantify the amount for whatever you are planning to buy, based on which you can plan your SIP amount.
The author, Vishwajeet Parashar is Senior VP & Group Head - Marketing at Bajaj Capital.