Curious about the effects of personal debt on your financial security? You’re not alone. Join us in this article as we discuss the rise of household debt in India and its influence on our daily lives, including a look into the concept of “Emotional Borrowing.”
The Context
If you believe that focusing on investing alone is the key to financial security, it’s time to reconsider.
Let’s look at some interesting data from CEIC Data that sheds light on India’s household debt. Back in 1999, household debt made up only 2.2% of the country’s Nominal GDP, the lowest it has ever been. However, fast forward to 2022, and that number has climbed to 14.3% of the Nominal GDP, which is quite a substantial increase over the past two decades.
You know, our borrowing habits are going strong because the government keeps pushing us to spend more, thinking it’ll boost the economy. But this focus on consumption can make us borrow and spend more than we should, which leads to more household debt pile-up.
But here’s some good news—we’re not as heavily in debt as the US! Their household debt is around 65.7% of their GDP (as of March 2023), but ours is way lower. Thankfully, our financial system has some strong aspects that make it harder (for now) to get easy credit, which may actually help us stay more stable during unforeseen economic downturns.
Personal debt has become a common aspect of modern life, impacting people from all walks of society. While borrowing to achieve life goals can be reasonable, it’s crucial to understand the psychological factors that may drive us towards borrowing more compulsively.
To make this unique guide more relatable and interesting, we’ll share some stories of real people just like the ones you meet every day. By using simple examples that you can easily relate to, we hope to keep you engaged and help you better understand the concept.
1. The Instant Gratification Trap
Allow us to introduce you to Rahul, a young professional who has a steady job. Rahul tends to use credit cards on impulse, especially during sales and festive times like Diwali.
The excitement of getting things right away can lead to overspending, and as a result, he finds himself stuck with a growing personal and credit card debt. We are sure that many of us can understand Rahul’s situation, where our feelings and the urge for instant pleasure affect our financial choices.
Let’s help—Rahul!
To help Rahul change this habit, he needs to realize the long-term consequences of impulsive spending. He needs to make a budget, use his credit cards more wisely, and find healthier ways to satisfy his emotional needs and materialistic cravings.
By doing so, he can break free from the trap of immediate gratification and gain better control over his finances.
2. Keeping up with the Neighbors
Let’s meet Priya, a young woman who just moved to a new neighborhood. Since her new neighbors seem quite well-off, Priya feels the pressure to live up to their lifestyle.
To fit in, she ends up taking personal debt and spending more than she can afford just to keep appearances. Sadly, this desire to impress others leads to her borrowing more and more, trapping her in a cycle of debt.
Let’s help—Priya!
To help Priya out of this situation, she needs to understand that true happiness doesn’t come from having fancy things or seeking approval from others. Instead of focusing on material possessions, she can work on building meaningful connections with people and finding joy in life experiences, which are far more valuable than just stuff.
By shifting her focus, Priya can break free from the burden of excessive borrowing and find contentment in the things that truly matter.
3. Coping with Emergency
Ajay is a responsible family man who always saves money diligently. However, he recently faced some tough times when unexpected medical expenses came up.
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To handle these emergencies, he had to take personal debt with high interest rates, which put a lot of financial strain on him. It’s not easy to deal with sudden expenses, and it can lead to significant debt, especially when you don’t have a strong emergency fund in place.
But here’s the good news: Ajay can turn things around!
Let’s help—Ajay!
To avoid such situations in the future, he can start building a solid emergency fund. This fund should be enough to cover at least six months’ worth of living expenses.
By having this safety net in place, Ajay will be better prepared to handle any unexpected situations that come his way, without having to rely on high-interest loans.
4. Lifestyle Inflation
Sneha and Raj, a newly married young couple we recently got to know. They are thrilled with their rising income, but there’s a small problem– as their earnings increase, so do their expenses.
This has led them to accumulate more and more personal debt over time. This common situation is called lifestyle inflation, where people tend to spend more as their income goes up.
Let’s help—Sneha & Raj!
To prevent Sneha and Raj from getting caught in this cycle, they can explore a concept known as mindful spending. Instead of impulsively spending on non-essential items, they can make deliberate choices about how they use their money. By setting aside or investing their surplus funds, they can avoid the pitfall of emotional borrowing and work towards a financially stable future.
Conclusion
It’s really important to understand why we end up in debt so that we can change our financial habits for the better. Whether it’s the lack of deferred gratification gene with the temptation to buy things right away, the pressure to keep up with others, sudden emergencies, or spending more as our income increases— being aware of these factors is the first step towards making a positive change.
In the world of aspiring investors, individuals like Rahul, Priya, Ajay, Sneha, and Raj are looking for practical strategies to make smarter financial decisions and transform their approach to emotional borrowing and spending money.
The goal is to lead a debt-free life.
If you found any of the case studies relatable, don’t worry— it’s never too late to take charge of your finances and develop a healthier relationship with money.
Let’s start this journey toward financial well-being right now!
Manage your money wisely!
