HOW TO BORROW RESPONSIBLY WHEN YOUNG
· A simple fact of life is that it is not possible to get through life without borrowing.
· We may decide to spend only when our savings cover a particular cost adequately.
· But it will make us unhappy as our spending decisions impact our happiness quotient.
· When young, we make 3 types of borrowing and spending decisions:
o Emotional consumption
o Buying of durables
o Acquiring long-term assets
· We need to recognize which one we like to do the most, how it impacts our finances and our happiness quotient, to ensure we have borrowed and spent sensibly.
1. Emotional consumption
· These are expenses with no obvious economic outcome, except a high happiness quotient, as they impact our social lives or its emotional pay-offs.
· Instead of condemning all such spending, a good place to begin is to 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 a percentage of your income.
o Make the most of it 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, take a loan against your own deposits, and repay regularly.
· Be prepared for severe cutbacks in expenses if your debt starts piling up.
2. Buying of durables
· This expenditure is one notch above the purely emotional happiness expense.
· They, at times, 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 will give you an average monthly cost on that product.
· Remember they have limited end value and depreciate as soon as they are bought.
· Ask yourself if you can afford to spend this money, as a percentage of your income.
3. Acquiring long-term assets
· An education loan and a home loan are necessary borrowings and result in a long-term, economically useful asset.
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However, it is best to repay the education loan before taking any other loan, even if it means devoting a large chunk of income to do so.
· Wait for stability in terms of job, location, and other long-term decisions like marriage, parental care, etc. before taking a home 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 for acquiring assets totally.