“Not having the burden of EMI is a big relief,” a banker who had retired from a foreign lender at a senior level had told me once.

His comment surprised me a little. As a banker all his life, he was supportive of loans. In fact, he had even resisted my recommendation to pay back his home loan at an early date. However, he said, he had realised the stress it had caused on the family and after retirement, even he was not comfortable with it.

This is not a stray experience for me. A CEO of an MNC was relieved when his loan was paid back.

He was not happy in his job, it was turning out to be stressful and he was missing spending time with family and pursuing hobbies which he wanted to do all his life.

Once the loan was paid back, he immediately switched over to a job which demanded less of his time. It, of course, paid less but gave him more time. According to him, “Now that the loan is behind me, I am feeling like a free bird.”

In the current times, when we are facing turbulence in income, erosion in wealth and experiencing issues concerning health, those who do not have liabilities, will be more at ease.

As a professional, I have been witness to the other extreme also. “If there is an EMI, it helps me control and stay focussed on the expenses. If there is no EMI burden, I tend to splurge.” This was told to me by a youngster. I find it weird. It is like saying, ‘I have cough and cold, I am fairly indisciplined about taking medicines, so, I have hired nursing staff at home to give me medicines.’ If we don’t do that, then why do we continue with a loan?

As an individual, if there is a fixed monthly commitment to be honoured, what will be the preference? Paying the monthly instalment of a loan, i.e. EMI or investing every month in a mutual fund scheme i.e. SIP. In fact, even regularly setting aside an amount in a bank in the form of a recurring deposit will give more happiness and, of course, lead to long-term wealth creation.

Taking on a loan is not bad; of course it should not be for splurging. But, continuing with the loan will dent long-term wealth creation.

A taboo in the past

About 2-3 decades ago, borrowing was taboo in this country. In 1997, I was promoting credit cards for a foreign bank.

In those years, ‘loan’ was a bad word. Many youngsters would want to apply for a card but were reluctant. According to them, if elders in their family came to know about it, it would have been a big issue. As a society, we have come a long way from there.

Loans or borrowing are no more bad words but still, a majority would prefer coming out of it. Currently, I don’t have the data but my gut feeling is when it comes to a home loan, irrespective of tenure for which individuals borrow, most of them get rid of the loan much before the end of the actual tenure.

There are instances of individuals continuing with a loan for tax benefit, using the funds available for repayment of loan to invest. All these sound great.

However, they are more like joy rides, something which gives a high for some time. The latent feeling is of following some kind of a brilliant strategy to build more wealth. Honestly, it is nothing but a kick, a feeling of a high. This is short lived.

From a long-term wealth creation perspective, stick to the basics. Basics are always beautiful. Pay off the loan and invest the money saved from paying monthly loan instalments. To pay off the loan, a certain amount of capital will be used. But upon repayment of the loan, that entire asset will be a clean investment of ours. This will add to the net worth of our balance sheet.

Having paid back the loan, use the amount saved every month to invest. This will also add to wealth creation. Over a period, both the fully paid asset and regular investments will add to our net worth.

Net worth means the clean assets we have in our balance sheet after paying back all the loans. Therefore, always focus on ‘My EMI.’ ‘My EMI’ is not ‘My Equated Monthly Instalment’ but ‘My Equal Monthly Investment’ for building long-term wealth.

(The writer is a financial planner and author of ‘Yogic Wealth’)

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