The You Live Only Once or YOLO phenomenon is making a lot of millennialsbite off more than they can chew. More and more young people are now borrowing to meet their needs. A recent research report shows that there is a 55 % surge in personal loans for travel purposes with 85% of the borrowers being millennials. It will be interesting to find out the driving force for this trend.
Being an unsecured mode of finance, these short-term loans carry a high-interest rate running into double digits. Availing too many of them within a short notice creates liabilities which becomes difficult to manage in the long run.
Let us take the example of 25-year-old Rajat, who is works with an IT major. A short-term personal loan for travel to swiping his credit card on the go to buy the latest gadget frequently, his credit report reflects it all. He belongs to the growing breed of millennials who don’t shy away from borrowing money to fulfil their lifestyle needs.
This rising tendency among millennials can be attributed to the easy availability of credit. Gone are the days, when banks were the primary go-getters for finances. The rise of non-banking financial companies (NBFCs), peer-to-peer lending platforms, and digital lending firms have changed the dynamics of personal finance radically over the past few years.
Instead of physically visiting the lender’s office and filling out several forms for availing loans and funds, nowadays it can be procured within minutes, with a few clicks. This is making millennials borrow more, for every need – irrespective of how big or small it is. This behaviour is slowly pushing them towards a debt trap.
Instant gratification often leads to making bad choices. Lenders cash on this tendency among millennials and offer them easy credit, which becomes a cause of a major heartburn later. Be it finance or anything else, there is no free lunch. Before falling for such offers, it is important to go through the fine print to make an informed choice. Often such offers are laden with high processing charges and interest rates, along with bundling of products which don’t align to one’s needs.
Thus, to overcome one debt, another one is taken to repay the previous one and the trap becomes vicious with each passing day. Not only does this wreaks havoc on your personal finances for the present, it also becomes a roadblock in building wealth for various life goals in the future.
How does one reduce lifestyle borrowings?
Chalking out a monthly budget plan and deciding to make prudent investments can be a daunting task for a millennial. Prioritszing your budget can allow you to effectively save, pay off debt and also to reach a goal. It is important to remember that a payment that can be eradicated with minor inconveniences, or does not impact your life monumentally, is a “want.” A payment that would overwhelmingly affect your quality of life, such as your electricity or paying off a debt, is a “need”.
But if you are struggling to save money and pay off your debt, the 50-20-30 rule can help you align your budget with your financial goals.
A well-planned budget goes a long way in keeping away unnecessary loans at bay. As per the rule, 50 percent of the income should be spent on needs, 20 percent should be allocated towards savings and investment, and 30 percent on wants.
So, if someone is earning Rs 50,000 per month, Rs 25, 000 should be directed towards needs, Rs 15,000 should be allocated towards wants, and Rs 10,000 should be for savings and investments.
Do keep in mind that this rule isn’t the one ultimatum to follow, but if you are able to follow it through, it can help you to create tailor made budgets for every situation in your life. The execution will depend on individual financial liabilities.
If someone has lot of liabilities with loans and expenses then the 50-20-30 budgeting rule might not work. In this case, the rule can be tweaked to say, 50-40-10, to increase the allotment towards debt payments. Here, 50 percent should be allotted towards your needs, 40 percent should be used to repay your debt and 10% towards your wants. Once you reduce your debt, it will automatically help you to grow your savings corpus.
To sum up
All borrowings aren’t necessarily bad. However, what is essential is to gauge its importance in terms of financial well-being. For instance, while borrowing to learn a new skill or course can give you a leg-up in your career, the same for buying a new smartphone or going on a vacation doesn’t add any real value in terms of asset building.
A well-planned budget through the 50-20-30 rule coupled with creating a buffer for various needs goes a long way in keeping unnecessary borrowings, particularly related to lifestyle, off the hook. It helps one be wiser with money and create a nest for addressing various life goals with proper asset allocation. Most importantly, it prevents individuals from sliding into a debt trap.