September 27, 2019

Which one is smarter - Saving or Borrowing?

Budgeting & SavingFinancial well-beingLoans

If you’re an avid Instagrammer, your feed is likely a collection of everyone else’s fancy vacation photos, Michelin star dinners, and the latest new technology. Ever wondered how people fund themselves?

In a modern-day utopia, everyone would have enough to buy everything they have ever wanted but in reality, it can be hard to meet escalating monthly expenses, much less invest in your favorite new product.

The Gen Y city dweller is ever aspiring to newer and better things. With globalization, the world is your oyster, but how best to make the most of the world? The answer can lie with your spending power - often the more we spend, the more successful we feel. But pause, and ask yourself - are you spending money you don’t have?

Myth: Borrowing is easier than saving

There are a lot of arguments in favor of borrowing money rather than spending your own. It goes without saying that in order to spend your own money, you will have to save some first, which can often affect your lifestyle and daily budget adversely. Naturally, many of us prefer to take loans or opt for EMIs when we purchase something.

For banks and lending agencies, this is a massive opportunity to make money, with promises of easy loans and low rates being made to potential customers through a gazillion channels such as emails, SMS, phone calls, every day!

Sure, borrowing may seem like a piece of cake, but consider how it affects your overall income. Bad loans are a hallmark of every struggling economy, which means there are millions of people around the world who are unable to repay their loans, and you certainly don’t want to be one of them! With additional charges over and above the actual amount you have borrowed, high-interest rates between 11- 15% on personal loans, and taxes levied on the amount you have borrowed, in the long run, you pay far more than the price of the item you want to purchase.

Saving, on the other hand, is a fulfilling exercise. You can set yourself a goal, work to achieve this saving goal and buy everything you want with your own savings! In case you don’t want to save a chunk of your income every month, worry not, there are plenty of ways to save small and spend big with your savings.

What do you want to spend on?

Perhaps the most important thing you need to think about before making a decision on savings versus loans is you are going to spend on. Educational courses, buying a house or a car are big loans that need a large amount of investment over a longer period of time. If you are not comfortable with a big chunk of your monthly income being invested in such a venture, it is probably a good idea to invest in a loan that comes with EMI options. These are readily available in the financial market. In fact, you have probably had some amount of experience with banks emailing, SMSing or even calling you up to offer a loan!

However, it’s always the small things that we struggle with. Should you opt for EMI when you are buying a new refrigerator?; Is it worth opting for a flight ticket for which you can pay at a later date (it’s possible!)? Given that most EMI schemes and loans come with high finance charges and interest rates, it is certainly a better idea to start saving for short term goals such as investing in new gadgets or future holidays. This way, you don’t pay anything more than your actual cost.

Consider this: Additional taxes

For most of us un-tax savvy folks, the taxation system can be a bit of a mystery! How much can you actually invest in a year? What non-taxables does this cover? Is your PF included? Are there additional amounts you can save? What are RBI bongs? The list of questions and the corresponding answers can be confusing for most!

When you take on a large loan, you don’t always consider the additional taxes that are levied over and above your actual income. In some cases, loans are considered as actual income, so it is a good idea to consider what percentage of taxes you will be paying additionally on your loan or EMI.

The easiest answer to this is to opt for savings. Since your savings come out of your income directly, you will have already paid taxes on these. This automatically means that you pay no additional taxes on sourcing the money for your purchase and the only amount you pay in excess of the actual price is whatever sales charges or taxes that are involved. Simple!

Planning for short term goals

While it may have been your great grandfather’s ultimate goal to own a house of his own, you may be far more keen on planning a trip to Monaco for the Grand Prix. Today, it is far easier to save small amounts without getting into the cycle of fixed deposits and credit cards, and a personal financial assistant that is customized to your needs and preferences is just one click away.

When money is regularly deposited in a savings account, it accrues interest. Even in cases of non-banking financial planners, there is always a scheme or an incentive that helps you make more money than your savings will help you accumulate. This way, not only do you save the excess amount you would spend if you borrowed, but you also make money on your savings. The best part? You don’t have to worry about securities when you borrow and you certainly don’t have to worry about repaying that loan! It’s a win-win.

The bottom line

You have seen enough cars with bank stickers to know that until you pay off your loan or EMI, you don’t really own it. Save for your dream and it will be yours right away, with no hidden charges and no excess payments involved.

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