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Vacation on EMI? Why not SIP instead?

Should you indulge in something you cannot afford or perhaps make an effort to ensure that you can afford it? The former can take you from not worrying about affordability to complete financial distress if EMIs become a habit.

Holiday today and pay tomorrow! This is the standard advertisement for going on that much needed break without having to worry about whether or not you have the funds to pay for it. 

The idea that is promoted is that you shouldn’t have to forgo your travel desires simply because you can’t afford it. From instalment schemes to loan EMI (monthly instalments) cards, there are all kinds of solutions for your travel woes. But should you indulge in something you cannot afford or perhaps make an effort to ensure that you can afford it? The former can take you from not worrying about affordability to complete financial distress if EMIs become a habit.

Travelling on a loan can be addictive but it is detrimental to your financial health. If you over dose on this addiction, you stand to lose not only the indulgence in this annual pleasure, but also your peace of mind and financial stability.

Why not EMI?

Let’s say you go on a summer break on an EMI. It means you can’t really afford to pay for the holiday but have decided that you can afford to convert the spending into a loan for which you pay a finance company (through the travel company) a monthly repayment instalment. Many such arrangements come with a ‘no cost’ EMI tag. No cost means no upfront interest on the EMI, however, you will have to deal with processing charges and any many cases the price or value itself is elevated to compensate for the interest charge.

What happens if you lose your job half through the year and haven’t managed to repay all the instalments or have to delay the payment on these instalments? Rest assured there will be additional charges for delayed payment, which also you may not be able to afford. 

You may finish repaying and realise its already time for the next summer vacation. Another loan?

Travelling on a loan can be addictive but it is detrimental to your financial health. If you over dose on this addiction, you stand to lose not only the indulgence in this annual pleasure, but also your peace of mind and financial stability.

SIP instead

If annual breaks are a must, why not plan in advance? Start a year ahead, estimate an amount you will need and work backwards to see what you must invest each month to arrive at the amount you need. Let’s say your budget is Rs 2 lakh; this translates to a systematic investment of Rs 8,000 every month for two years, in a good quality, stable return liquid fund with the assumption of 7% annual return.

This is money you have saved and if it is not utilised for the vacation, you can always use it for any other purpose. Secondly, it’s what you can afford, there is no insecurity about future financial stability. Lastly, rather than paying additional charges in the form of processing fees, interest or elevated costs, you are earning a return.

Be it an EMI or an SIP, the action is the same, you pay a monthly instalment. Be wise and choose to pay that instalment towards making a return rather than taking a loan, paying additional charges and interest.

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