HOW TO BORROW RESPONSIBLY
· A simple fact of life is that it is not possible to get through life without borrowing.
· We may decide to live within our means, and spend only when our savings cover a particular cost adequately.
· But it will make us unhappy as our routine spending decisions impact our happiness quotient.
· Most youngsters make 3 types of borrowing and spending decisions:
o Emotional consumption
o Buying of durables
o Acquiring long-term assets
· We need to know how it impacts our finances and happiness to ensure we have borrowed and spent sensibly.
1. Emotional consumption
· These are expenses with no obvious economic outcome, except a high happiness quotient.
· Instead of condemning all such spending, one should nurture the habit of doing so responsibly by doing 3 things:
o Take the time to think through and prioritize by being realistic.
o Allocate a mental budget in terms of your income, instead of the amount.
o Make the most of your money by planning its spending well.
· Impulsive decisions are the enemy of happiness expenses.
· If you are borrowing to fund your happiness expenses, do it with a clear repayment plan.
· Use a debit card, plan ahead and get a cheaper personal loan, borrow against your deposits and repay regularly.
· Restructure and be prepared for severe cutbacks if you have piled up a big debt.
2. Buying of durables
· This expenditure is one notch above the purely emotional happiness expense.
· In several cases, these expenses have indirect savings, enhance our productivity and enable us to lead better quality lives.
· Most first loans are for buying these goods.
· Make an estimate of the duration for which you will use the product.
· Divide the cost of the product by the number of months for which you will use it.
· This is the approximation of your monthly cost on that product.
· Most of these products have limited end value and depreciate as soon as they are bought.
· Ask yourself if you can afford to spend / allocate this money, as a percentage of your income, towards that product.
3. Acquiring long-term assets
· Most youngsters take an educational loan and this is best repaid before acquiring any other loan, even if it means devoting a large chunk of income to do so.
· Most youngsters cannot buy a home without resorting to a loan.
· These are necessary borrowings and result in a long-term, economically useful asset.
· Wait for stability in terms of job, location, and other long-term decisions like marriage, parental care, etc. before taking a housing loan.
· Servicing home loans over a long period is fine as long as it does not take away too large a portion of your income.
· The thumb rule is to not have long-term loans that take more than 25% of the post-tax disposable income of the household.
· Avoid taking loans for indulging in speculative activities.