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MONEY TRAP - 12 : Putting Obligations Over Options


There is a famous saying “Fewer the necessities, better your life will be.” If everything in life becomes a necessity, you just don’t know where to stop. Sure food…clothing…shelter…are all necessities. But for you laptop…car…trip abroad…new shoes every week is a necessity? Your problem….you just can’t separate needs from wants. Money is a finite resource. If you waste it on things you don’t need, you will have nothing to spend on things you need. This is knocking on the doors of poverty. If you do not learn to prioritize needs over wants, your pockets will always be empty. Do you find controlling your spending too difficult? It’s time to seek sound financial advice. Just give us a missed call on 022 6181 6111 to explore our unique Free Advisory Service. IndianMoney.com is not a seller of any financial products. We only provide FREE financial advice / education to ensure that you are not mis-guided while buying any kind of financial products.

Forget about health insurance. I need a car

Your neighbor has bought a brand new car. His garage is close to your gate. Every morning before going to work, you are forced to see his car. You make a promise to yourself….Within a month, you will also buy a car. You don’t really need a car. Your office is just a couple of Kilometers away…you reach there in no time. You hardly travel on weekends. So why do you need a car? Lets understand what happens if you put obligations over options, with a simple example.

Ajay who is 25 years, resides in Hyderabad.  On completing his graduation in computer engineering, he gets a job in an IT Firm. Ajay gets a salary of INR 4 Lakhs a year. Life was good until… Ajay’s friend Rakesh bought a new car. Rakesh used to show off by driving his car…full speed…loaded with friends. Ajay’s office was barely a couple of kilometers away from his home. Buses come right outside his home. Ajay reaches office in a mere 15 minutes. Ajay spends the weekends partying and going out for movies. He stays out late, but the theatre he goes to, is not far from home. The auto fare is reasonable. Simple….Ajay does not need a car.

But Ajay does not know how to place obligations over options. He avails a car loan of INR 5 Lakhs from a reputed bank, paying an interest of 12% a year, with loan tenure of 3 years. His EMIs are around INR 16,000 a month. Ajay gets a monthly salary of INR 32,000. Almost half of what he earns goes in paying the EMI’s on the car loan. Ajay is able to manage expenses, because he stays at home. However he is not able to save and invest anything. Now Ajay makes a second mistake. Ajay does not avail a health insurance plan. He says “Why waste money on health insurance…so what if the premium is just a couple of thousands….money is money. I need to spend every rupee I earn on myself”. This was a serious mistake as Ajay’s employer did not offer him group health insurance. One day Ajay was feeling weak and just could not go to office. Worried, his mother takes him to hospital, where he is diagnosed with Jaundice. Ajay spent a week in hospital and then more than a month at home. Ajay had to pay a hospital bill of INR 35,000. As Ajay was not covered with a health insurance plan, he had to bear this bill himself. Ajay made a full recovery and went back to work. However Ajay’s problems were far from over. Struggling to pay his car loan EMI’s, Ajay fell behind in payments. His cibil score came down. Ajay went into depression.

What do you learn from Ajay’s mistake? Ajay put obligations over options. He did not need a car, but still purchased it availing a car loan. He fell into the loan trap, buying a car he really didn’t need. He then compromised on an obligation, health insurance, which proved very costly. He had to pay the hospital bill from his own pocket, instead of the insurer paying it for him.

 SEE ALSO: How To get Personal Loan Without Bank Statement?

Swipe your credit card for things you don’t need?

A famous saying by Warren Buffett “If you buy things you do not need, soon you will have to sell things you need”. You might not have to sell things, but you would definitely have to compromise on your obligations. Let us understand this with a simple example. Narendra who is 35 years of age, works as a manager in a reputed call center. He earns INR 50,000 a month. Narendra is an impulsive shopper with a dangerous weapon in his pocket….the credit card….

One day Narendra’s friend Ramesh visits him. Ramesh shows him his brand new smart phone, costing INR 50,000. Narendra had just purchased a smart phone a few months ago. He definitely did not need a new smart phone. But Narendra could not control himself…His friend Ramesh had a smart phone of INR 50,000…Narendra must have one. He swiped his credit card and bought a smart phone of INR 60,000. This was in addition to a laptop, he had purchased a few days ago for INR 70,000. Narendra needed a new laptop but definitely not one of INR 70,000. A laptop costing INR 30,000 would have sufficed. Worse…Most of Narendra’s purchases were made using his credit card. He had to pay an interest of 30% a year, on his outstanding balance. This meant Narendra soon fell behind in his credit card payments.

Narendra used to spend most of his money on frivolous purchases. He definitely could not avail a home loan to purchase his own home. He was forced to stay in a rented house. This is when he made his second mistake. Narendra did not bother to avail home content insurance. You cannot avail a home insurance plan to insure the structure of a rented house. You can only insure the contents which belong to you such as jewelry, electronic equipment and furniture with a home content insurance plan. One day after a late night party, Narendra returned to find the lock of his house broken and his washing machine, laptop, smart phone, TV and fridge all stolen. Most of these electronic items were brand new. His loss was in lakhs. Narendra had not only fallen behind in his credit card payments, he was also paying for things he was not using. He had bought the washing machine, laptop, smart phone, TV and fridge all by swiping his credit card. Narendra had fallen in the loan trap.

What do you learn from Narendra’s mistake? If Narendra had availed home content insurance, the insurer would have compensated him for at least part of his loss. If Narendra had put obligations over options, he would have availed home content insurance, instead of wasting money buying things he did not need.

Mr. C.S. Sudheer

Mr. C S Sudheer is the founder and CEO of IndianMoney.com – India’s largest Financial Education Company. He started his career with ICICI Prudential Life Insurance and later on worked with Howden India. After his brief stint in Howden India, he moved on and incorporated Suvision Holdings Pvt Ltd which is the sole promoter of IndianMoney.com. He aims to build a nation that is financially literate with investment savvy citizens.

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