Why these strategies work better than EMIs
Premium- With the EMI option, we end up buying goods that are not at all necessary
- More importantly, we pay much more than the actual price of the consumables
With bumper sales and lucrative discounts offered all through the year, we make several purchases resorting to EMIs. “Now, this has two negative effects, first with such tools in hand, we presume our purchasing capacity to be more than it actually is. Secondly, we end up buying goods that are not at all necessary," said Jeetendar Peswani, Financial Educator and Consultant.
More importantly, we pay much more than the actual price of the consumables, pointed out Tarun Birani, Founder & MD - TBNG, SEBI Registered Investment Advisor, Speaker, and a simple mathematical calculation proves it.
- For example, if you buy a gadget worth ₹1 lakh at 6% interest rate for a tenure of 1 year, then the EMI amount for the same would be ₹8,607 and the total amount you pay over the period is ₹1.03 lakh.
- Meanwhile, if you plan ahead, then a corpus of ₹1 lakh can be created in 1 year by investing only ₹8,100 every month (at 6% interest rate), and you only invest ₹97,000 in total.
- A straight saving of ₹6,000.
Also, it should be noted that EMIs for consumable purchases are usually offered at a much higher rate. Birani said, “Such actions bring in a lot of indulgence and can significantly hamper our financial health."
Validating the other side of the argument, Deepak Krishnan, financial planner at Mangrove Wealth, said, consumerism has changed vastly today. For example, youngsters on getting their first job today plan to buy a bike or car, this was unthinkable even 20 years ago."
“Obviously, any change should be accepted with an open mind," Krishnan said, adding, but a line has to be drawn somewhere.
Here are the best practices to follow while purchasing consumable:
- You can start an SIP investing towards the goal. Buy the consumable once you have saved the money.
- You can partially save for it and partially pay on EMI (if such options are available).
- If you have to make two or three purchases, then plan ahead and save for one (or two - in case there are 3 purchases) and buy one on EMI.
“Nobody expects you to live like a monk. But, it is critical to know how much is enough," says Krishnan.
What is the Buy Now Pay Later option offered for consumable purchases? Should we opt for it?
BNPL helps consumers buy goods with the option of paying for it within an ‘interest-free’ period in installments (usually 3 installments). Many e-commerce players have already tied with fintech companies to offer this facility to their customers.
“It should be noted that if you are unable to pay the installment in time, you have to pay a much higher interest rate and also a penalty charge," Peswani said, adding, “Plus, with offers like these, we often buy more than we need."
What about home and car loans?
Though Birani advocates against taking loans for consumables, he said, “Taking a loan is completely fine in cases of asset building - like buying a house, property." However, adding to his view, Peswani cautioned, residential real estate for the investment purpose should be avoided since the rental yields are very low compared to other Investment options.
A loan can be opted even while buying a car, as this is a day-to-day necessity today, Birani added. However, one should aim to make a down payment of 30 to 40%. Further, buy in within a budget, for which the loan can be repaid within 3 to 5 years.
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