My grandfather never borrowed for anything. His guiding lines for me were – Using borrowed money is like fuelling the fire using hay, it burns fast and gets consumed quickly but when we want to repay we will be paying in firewood for the same volume of hay which could have served us much more. Another mentor quoted a text when I wanted to buy a flashy car much in my early career – We buy things we don’t need, with money we don’t have, to impress people we don’t like.
Both those texts are my guiding lines for debt management now, but adopted it much later when I learnt it the hard way. Two of the biggest purchases in one’s life, a house and a car, often don’t stop at needs but end up as a status symbol. People love to show that they have arrived and achieved. In reality no house or car is big or luxurious enough over time. So people go all out and buy things that are not affordable. Loans were initially meant to lent out to people seeking business capital. Those were risky so banks turned to milk the retail borrowers – ‘us’. Affordable loans are oxymorons, if you are going for a loan to buy something then you cannot afford it.
Negotiating for big purchases with cash in hand vs taking loans has a big difference. We are hard on our future selves but care for who we are today so the cash in hand looks heavier and hard earned while the loan repayments broken down over the months in the future looks small and affordable; inflating the overall demand and reducing the willingness to negotiate.
When we buy larger than our needs, we commit to a monthly outflow which we cannot afford to skip because it will bite back with more penalties. This is the single biggest factor which contributes to workplace stress; people put up with toxic work cultures, long working hours and bad bosses in the fear of losing the lifestyle they signed into.
On the contrary, if we save up for paying the big purchases we will negotiate hard with the money in hand, we will not be a victim to the need of hefty monthly payments, which gives the clarity of thoughts to take crucial career decisions. You can buy a dream house by SIP route within 7-8 years of saving the same money that we will be paying for 20 years for a home loan. Once I was in a car showroom where I observed a guy talking to the salesman for the model he wanted.
Salesman: Please let me know what is your monthly salary, I will let you know which car you will be sanctioned?
Buyer: I wanted the top end model, in that specific color and rims.
Salesman: In order to proceed I need to know your ability to pay month on month, I can work out the interest rates and tenure:
Buyer: Gives a cheque and says – Fill it with the price that you are offering that will make me sign and drive the car out.
The salesman was stumped and the buyer negotiated almost 10% off the vehicle.
Debts are for businesses to quickly turnaround profits and not for building assets over 20 year loans. Try the no debt strategy, this means you will have money in your account you don’t know what to do with. This is the first step in being financially resilient, there is no pressure to pay huge bills month on month. The next thing is to resist the urge to spend and build up moveable assets. More on subsequent posts.