Alternative to EMI schemes

EMI schemes and personal loans are the best justification for planning your personal finance. Hence planning your finance is an alternative to them - and a very profitable alternative. This post is for those people who dont seem to every have money with them when they want to buy something and as a result keep resorting to EMIs.

Cost of debt

Let us look at what the implications of EMI are. Consider purchasing a phone worth 8,000 Rs at a 6 month EMI of Rs 1400. This is fairly representative scheme and you may image that it is not very costly. But in fact, it costs you Rs 400 and the interest rate is just around 17%. Similarly, the interest rate on personal loans comes to anywhere between 14% and 16%. Credit card debt is even worse at 24%-36%.

If an EMI is taken as a one off case then it may not seem costly but the reality is that taking things on EMI is usually a sign of bad habits that cause recurring problems.

Planning

The first benefit of planning is that it avoids impulse buying. You may be tempted to buy stuff that you do not need on EMI since the gratification - the reward of buying is instant but the costs come over the next few months. However, if you pay in cash (or by debit card), you will need to plan before making large purchases - and in the process you will have to ask yourself whether it is really worth the money or not. In the cool and comfort of your home, away from the glitz of the shop, as you weigh the options, the unnecessary purchases will be avoided and things that matter most to you will remain.

The second major advantage of planning is that you save a LOT of money. 400 Rs may not seem like much, but if you make a purchase every month, it quickly will. Worse, when you use EMIs for small things like a washing machine, you will also use it for larger things like a car. THAT can easily put you back by a whopping 25,000 Rs. Don't believe me - do the maths yourself.

How to plan

Systematic planning involves a lot of steps but for now we will just begin with a quick a dirty plan - but one that is better than no plan at all. First of all, you need to have a budget for shopping and capital purchases. This will include almost every item sold in the glitzy stores in a mall for instance clothes, shoes, accessories, electronics, furniture, furnishings and so on. Note that as a rule of thumb, the budget should be between 10% and 20% of your take home salary; begin with 10% and try to keep it there unless and until you have to increase the budget.

Now keep atleast half of you budget in a "fund" - a piggy bank is the best idea. Whenever you have the impulse to buy anything, just add it to you wishlist. Put money into your fund every month immediately after getting your salary. At this time you can also check you fund value and decide if there is anything you would rather buy from you wishlist or wait till your fund increases.

Of the remaining money, add a fourth to your wallet every Monday and feel free to use that amount - and only that amount to "splurge".

So for a person who earns 20,000 Rs per month, the monthly budget is Rs 2,000. Of this 1,000 will go into the fund and every week he will add Rs 250 to the wallet for spending.

As you go about this you will initially spend the the money in the first 2-3 day itself and will feel miserable the rest of the week, especially on weekends. Over time, if you keep at it, you will learn to keep waiting for all of the weekdays so that you can have a good weekend. If you really want to become a pro, you can try saving something from the 250 Rs (say 50 Rs) so that once a month you can have a better party.

If the budget of seems too low - even after taking it all the way upto 20% of your take home, you need to take a hard look at your overall planning which we will do in the next post.