The availability of easy credit and equated monthly installment (EMI) options has made buying high-value products easy and also entices people, especially young generation, to go beyond their earning capacity to buy and showcase such products.
There is no harm to acquire an appreciating asset like a piece of land or house property or buy an income generating asset like computer or machinery to build assets and enhance your future income through EMI options, which otherwise you won’t be able to buy with available cash. But buying depreciating assets like high-end smartphone or other gadgets, that are not necessities and get outdated quickly, may ruin you financially by putting you into a debt trap. As said by world famous investment guru Warren Buffet, “If you buy things you do not need, soon you will have to sell things you need.”
While investment is a process of postponing current spending to create future wealth, buying things through EMIs is spending your future earnings today, which is also known as negative investment, unless it is done to enhance your earning capacity or to create wealth or to reduce current expenditure.
Earning capacity may be enhanced by buying machinery on EMI to generate business income or to buy an equipment or investing on study to enhance future employability. While an appreciating asset like plot to build house may be purchased through EMI to create future wealth, a small flat may also be bought through EMI to reduce current expenditure on paying rent.
However, you should keep in mind that whenever you buy a thing on EMI, you are spending your future earnings in advance as you have to pay it back monthly from the income you would generate in that month. So, you will become committed to spend the income even before you earn it.
Such situation would call for maintaining a large liquid contingency fund to ensure uninterrupted EMI payments in case of any unfortunate interruption in your source of income at any point of time. If you overlook such backup and continue to buy things on EMI, it may overshoot your capacity to pay back and in case of any loss of income, you may become bankrupt.
It’s better not to buy unnecessary things especially through EMIs and invest the money that you save, so that you may get into a position where you may fulfill your dreams without going for EMIs and eliminating the chance of falling into a debt trap. So, prefer to invest monthly through SIP and avoid compulsory monthly expenditure through EMIs.
