Money 101: The lowdown on monthly installments

Are you borrowing money from your maid because you're upto your ears paying installments? Well then, save and invest!

You know you have money managing issues when you resort to borrowing Rs500 from your maid at the end of the month. Living the urban upwardly-mobile middle class lifestyle is a dream for many and the source of income for businesses ranging from fast food to electronic dealers.  And what I am going to harp on about today are the dreaded monthly installments.

Picture this: Ayaz and Aziza are a newly married couple living in one of Karachi’s many high rise apartment buildings. Both are working in the corporate sector and together bring in about Rs150,000 (which is possibly the correct upward middle class monthly salary range if you apply the global purchasing parity basket model). In their late 20s, they are already paying monthly payments for their air-conditioner, car, the holiday they took to Sri Lanka last year. All in all, these payments easily account for 40 per cent of their monthly income.

The installment attack

Equal monthly installments (EMIs) are a monthly attack whose due date arrives every first day of the month, and before you know it they leave - taking most of your salary with them. Factors such as social pressure are instrumental in leading you up that path.

Here’s a classic example of a pre-EMI conversation as overheard at the Forum:

“Even Ami was saying that we should buy a bigger fridge,”

“Really? All our friends have DVD players, maybe we can get a package deal on them…”

“We will buy now and think about payments later…Rs3,200 are really not all that much”

Money is earned to be spent, but the idea is that you – the buyer - should get a good deal and extract the maximum out of your money’s worth. The most common form of EMIs are mortgages and car loans. A quick calculation has just pointed out to me that one ends up paying 40 - 60 per cent more by going the initial deposit and 60/ 120 monthly installments route. And these are understandable to an extent. I almost agree with the frequent argument that I hear from home buyers that even if they are paying that much extra at least the money is going towards ‘something that is their own’. You need to keep a prudent property value projection, the development of your residential area and whether you are likely to be based in that area for the next five years at least before signing on the dotted line.

I have a car, but no money for petrol

The economic progress in the last decade has made thousands of our countrymen proud car owners which have added not just to pollution but also a source of stress for all those who are paying out the five figure installments. And while we understand the perils of public transportation, the convenience of owning your own set of wheels – you need to understand that if a Suzuki is what you can best afford it is a bad idea to pay for a Honda City – the end result will be that you will have a car but petrol money would have run out by the 20^th of the month!

Spend what you have

It is frustrating to hear friends wax poetic about how plastic money works abroad and people are used to getting first and second mortgages on their homes. Evidently they have not learnt from the global economic collapse of 2007 onwards! The mantra for 2011 has to be ‘spend what you have’ – do not aim to create expenses dreaming of a 50 per cent salary hike – it is very unlikely given our current economic situation. So if you cannot afford Koh Samui, make do with Bhurban; that too has its charm.

Being a self-confessed excel addict, I would recommend making a monthly budget and trying very hard to channel set percentages towards specific expenses. Rent, for example, should not go over 30 per cent – food should cost maximum 20 per cent and so on. Having done this, you can then decide or negotiate with your better half whether you should buy a home gym on hire purchase or stick to the neighbourhood park as your fitness area!

Save and invest is my mantra but I would love to know if you are pro-EMIs and why you believe they make your life better.