EMI or SIP: Which is the better way to realise your dreams?
You are eligible for a pre-approved loan.
This message from a loan service company left Anusha in a dilemma. Her friends had planned for an impromptu overseas trip that they wanted her to join. The plan sounded fun, but she did not have the money to fund the trip. “Swipe your credit card for the tickets and maybe take one of these easy loans, that you can repay with EMIs,” Anusha’s friend had suggested.
What would you do? Are hefty credit card bills and personal loans the way you fulfil your aspirations? Indians are taking more loans than ever before to fund their life goals such as travel and wedding expenses. This increase in loan taking indicates that we are likely spending more than we earn. India’s saving’s rate has hit a low and that is worrying, experts feel.
What then is the option to lead a fulfilling life without breaking the bank? Here are reasons why investing for your goals is better than opting for a loan.
You are in charge of your money
When you plan and invest your savings to build a fund for your goals, you can make all the decisions. They include, how much money you can save every month, the amount you want to achieve your goal and the vehicle of investment. But when you opt for debt or loans, you have to follow the rules set by the lender. Some of these rules are; the rate of interest, the amount of credit you are eligible for, the penalty you may have to pay if you plan to repay the loan earlier than the given term.
Helps build a financial discipline
It does not sound glamorous, but making a budget and adhering to the plan consistently in time is the fundamental way of building long term wealth. Investing means thinking of the goal, evaluating your needs, budgeting your income and tracking your expenses. All this to make sure you save enough to invest. This mindfulness approach with money management can hopefully turn into a habit, one of making sound financial decisions.
Your income isn’t burdened
When you take a loan for an expense, the repayment adds burden on your income. It may also leave you with little or no money to save for your other life goals such as retirement or emergency funds. Using a credit card and not repaying the entire bill, lands you in debt with a high-interest rate. This pressure may also factor in when you may have to consider job changes.
But is all credit bad? Should it be avoided at all costs? A loan is considered good debt if it is used to purchase things that will be of high value for the long term and carry a reasonable rate of interest. An example of a good loan can be a home loan. The prudent way, even for a home loan, is to build a good corpus for the downpayment so that your loan amount is as low as possible.
Goal-based investing allows you to define your long term and short term goals and build towards the target amount at a pace that is suitable for you. At Basis, our goal-based investment advisory offers recommendations for mutual fund investments towards goals such as travel and education. You can even build a customised goal!