Plan Your Purchases To Avoid Debt Trap

It’s that time of the year when you are flooded with numerous offers and discounts right from the apparel and electronic shops to the car dealers. As the festival season draws near, most of us have it in our mind to go out and buy something lest we might miss out on the years best deals. Our modern shopping system is created in such a way that we invariably get drawn to the so called malls and ultimately end up buying something most of the time. But the festival season is an exception as during this period, a lot of people throw aside the budgeting rules and shop as if such offers won’t come back. Some justify this shopping binge by saying that they deserve to spend the way they want to as they are working very hard and shopping provides them a level of satisfaction. Others are influenced by their peers and colleagues and there is constant effort to match them, a fact which is not expressed publicly. 

Incomes have grown tremendously over the years and with that even expenses have gone up due to improvement in lifestyle. A bulk of the expenses today are related to lifestyle which has become such an essential part of our life that curbing the spend on it makes us highly uncomfortable. Most of the purchases today are on credit. For some, the very reason of having a credit card is to ensure that they keep buying things on credit as they cannot afford to pay cash upfront or do not earn enough income to sustain the purchases. Then the credit and interest grows to such a level that to pay the credit card outstanding, they take a personal loan and in the process add additional liabilities. 

What can one do to prevent such credit traps?

  1. List down your financial goals in order of priority: All of us have various goals in mind but seldom on paper. Due to that we don’t even know how much money one needs to save every month for those goals. Only when the goal or responsibility approaches near does one start thinking about it, by which time you don’t have much choices but to compromise on those goals. For example if your goal is to buy a house, then unless you decide a time frame and the amount required to buy that dream house, you won’t know how much to save and therefore your expenditure pattern would continue the way it was earlier. Setting a timeframe and target amount enables us to examine our expenditure pattern and changes can then be done to reduce spending (wherever required) and increase savings in order that the goal may be realised. Not having a goal diverts us and therefore most of us abandon discipline and use such festival shopping offers to splurge on things which are not on the priority list. By the time we realise it’s too late. What could have been achieved earlier now gets postponed by a few years, exposing that goal to further inflation which demands higher investments now in order to achieve it. 

  2. Live within your means: There are so many things which we all desire and want to possess but evaluate out of those things which are the ones you really need. The younger generation is more obsessed with electronic gadgets which keep changing by the day. We cannot purchase everything that we want but can plan the purchases of things that we need over a period of time. Planning the purchases in a gradual manner enables the use of cash over credit and also does not put pressure on your finances or liquidity. Make a list of all the things that you would like to evaluate before you visit the store and also the amount that you can comfortably pay rather than going directly to the store and falling for the discounts and wondering later how to purchase all of them. Taking joint decisions along with your spouse can also help in avoiding mistakes. 

  3. Don’t compromise on your contingency fund: Ensure that you maintain adequate amount of money in a separate bank account which has to be used for emergency purpose only. If you are planning to replace your old washing machine or television, then too that amount can be kept in this account. If you do not have the savings for the purchase of those things, then start putting aside some amount every month from your regular account to this contingency account. Alternatively you can also start a recurring deposit from your salary account and on maturity, move this amount into the contingency fund. 

The shopping temptations are very high but unless one exhibits control and shops in a responsible manner, things can go out of hand. Unless you have the financial backing to bear the consequences it helps to be responsible. 

Steven Fernandes, 

Chief Planner, Proficient Financial Planners.

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