Loans: Your enemy in the war for financial freedom

If you are fighting a war for financial freedom, loans are your greatest enemy! And while I realise the futility of saying this at a time when lenders are flush with funds and consumers are borrowing at a record pace, you need to avoid taking unnecessary loans. Debt can be the biggest obstacle between you and financial freedom.

I will keep using this space to reiterate the importance of being responsible with debt. For this week's newsletter, I wanted to reproduce an article, "LIVE DEBT-FREE NOW TO LIVE STRESS-FREE IN THE FUTURE", that I recently wrote for the Times of India on the perils of debt. You can read the original article on the TOI site here:

LIVE DEBT-FREE NOW TO LIVE STRESS-FREE IN THE FUTURE

Some of the biggest and most common sources of stress worldwide are work pressure, relationships, health concerns, and of course, money. Financial stress can, in fact, be one of the most debilitating long-term concerns for individuals, couples, and families. And as per a recent PwC Global Consumer Insights Pulse survey, money concerns are much higher in India than in other regions–74% of respondents in India expressed worry about their personal financial situation as compared to a global average of 50%.

Loans are one of the most significant financial stressors.

Diving deeper when it comes to money, the most significant stressor is debt. Irresponsible levels of debt can single-handedly destroy the finances and stability of any household, and it doesn’t take long to get swept into a debt trap of unwieldy EMIs, usurious interest rates, out-of-control late fees, and other charges. And once you are in the web, it is extremely tough to get out–you live from month to month, paying whatever instalments you can and piling up further charges on the remaining balances.

Furthermore, financial organisations make it so easy and tempting to take even more loans that it requires some serious willpower not to dig yourself an even deeper hole. Loan approvals in minutes, low-interest introductory rates, waiver of processing fees–every marketing trick in the book is thrown at you to suck you into the system. And that’s precisely what happens to most people, especially the youth.

The desire to gain goods and experiences often comes at a high cost–years of servitude to financial institutions to pay back the loans taken on, in many cases, on an impulse.

You need to be responsible with debt.

If your ultimate goal is financial freedom, that utopian state where you have enough money so that you don’t need to work if you don’t want to, then you have to be highly responsible with debt. Try and save for whatever you want, and do not make purchases on a whim. Pay with your money in the bank, not through tempting loans or schemes.

Understand that a loan will rarely make sense financially–it takes a lot of effort to invest and consistently earn 10% to 15% yearly. So how would it ever be justifiable to pay 20% to 40% p.a. interest on a personal loan or credit card? It won’t.

Some types of loans are understandable.

That is not to say that debt is always bad. I encourage you to take home loans if you plan to buy a primary property which saves you from the whims of the rental market. If you want to take an education loan for studies, that will hopefully lead to better professional prospects, more power to you! If there is a dire emergency and there is no option other than to take a loan, do not think twice. But if you are taking personal loans to fulfil some non-critical desires, or charging shopping on your credit card and then not paying for it in full, or taking on a Buy Now Pay Later scheme just because it is convenient and then getting stuck with thousands in interest and fees, then that is foolhardy. You are simply delaying financial freedom by years, if not decades. And borrowing money does not mean that you are eliminating financial stress; you are merely delaying it. And when it eventually catches up, it will be even more powerful.

If you must YOLO, then YOLOLA!

So to the best extent possible, be responsible with debt. Take loans if absolutely necessary but pay them back as soon as possible. And do not take loans to fund any impulsive desires and wants. Instead, save, invest, and purchase when you have the cash to fund them.

I do appreciate the concept of YOLO, but you might as well YOLOLA: You only live once. Live awesomely. And that can only happen if you are debt-free and carefree!

Rishi Piparaiya?has held senior leadership positions in wealth management, strategy, sales and marketing with leading financial services organizations, including Citi, Aviva and Banco Santander. He left his corporate job at the helm of his career to pursue his passions. He is now a?bestselling author,?world traveller?and?angel investor. His latest book,?Three Pigs to Financial Freedom, demystifies financial planning and offers an incredibly easy system to manage your money for a comfortable, worry-free life.