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Can you buy a helicopter for Rs 6,667? Understand the EMI trap!

Can you buy a helicopter for Rs 6,667? Understand the EMI trap!

Can you buy a helicopter for Rs 6,667? Understand the EMI trap!
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By Rishabh Parakh  Aug 9, 2019 2:01:58 PM IST (Updated)

Do you keep saving more with every rise in your income? Probably not! Do you often say that you are not able to save in spite of earning enough? Do you know the reason behind this? Well, the answer is simple, with every rise in income, there is a rise in your expenses leading to higher loans and ultimately more EMIs with nothing left to save. So why is there an increase in consumption with every rise in income?

Do you keep saving more with every rise in your income? Probably not! Do you often say that you are not able to save in spite of earning enough? Do you know the reason behind this? Well, the answer is simple, with every rise in income, there is a rise in your expenses leading to higher loans and ultimately more EMIs with nothing left to save. So why is there an increase in consumption with every rise in income?

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Well, the typical answer is 'to maintain the standard of living'. So, with every rise in income you tend to buy more material things and spend more to keep pace with your standard of living. Besides, buying material things like gadgets gives you a certain ‘high’.
But is buying material things the real culprit?
No, the main culprit is not buying more to upgrade your lifestyle and maintaining a good standard of living. In fact, you should always strive to achieve that.
Then what is the problem?
The main problem is not buying things, but purchasing things beyond your budget. Whenever you buy something, you want nothing but the best. So, the problem is chasing that ‘best’ in everything you buy. Whenever we buy something, we want only the best. The problem is chasing that best in everything we buy.
Let’s understand this by analysing the way we buy a product.
Anyone wanting to buy a mobile will first start with a ‘budget’. And let’s say his or her budget is Rs 30,000-40,000. The next step would be to do a lot of research and zero down on the mobile you want to buy. The last step is to make the purchase.
What happens when a person visit the store?
Now, after visiting the store, the salesman shows that person the desired mobile phone and before that person makes the payment, another salesman comes and presents a newly launched upgraded version costing Rs 60,000. The icing on the cake is that the person doesn’t need to make that payment in one go. If you use a credit card, you can take this upgraded version home by paying Rs 3,000 EMIs only! So the same mobile beyond budget, which the person would not have thought of buying, is now suddenly affordable.
Now which mobile will that person end up buying? 
A lot of people will end up buying the upgraded version, right? What exactly goes on in their mind that induces us to buy a product beyond our budget?
The answer is the same as explained earlier, the mindset of wanting to buy nothing but the best. We are going to buy it only once so why settle for less when we are not going to buy it again and again? That is the trap! You need to ask yourself honestly as to how many times you have made purchases like this which are beyond your budget, and this thinking is supported big time by the availability of easy credit through credit card EMIs.
That’s precisely the reason for not saving money in spite of earning enough.
Yes, with the power of credit cards and the EMI culture, you can even buy a helicopter! Sounds funny, right? I keep saying that each one of us can buy a helicopter by paying Rs 6,667 per month only, for the next 200 years! Now while these numbers might not work out exactly like this but I am just using this as an example to highlight the fact about  EMIs which makes us believe that not only we can buy anything available on this earth but we can actually afford it, isn't it? You need to know the difference between 'buying' and 'affordability' which is very important while making any purchases.
There is nothing wrong in using cards which are usually more convenient to use than cash. If used sensibly, credit cards can be an important financial instrument. But, there are several psychological reasons which prove that the use of credit cards can be hazardous to your financial health and can be one of the biggest issues in ‘overspending’.
Rishabh Parakh is Chief Gardener at Money Plant Consultancy.
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