I got screwed every time I got a pay hike

by Manshu on July 27, 2012

in Opinion

A friend said this to me today, and I burst out laughing because I thought he was joking, but it turns out he was quite serious. He told me his story, and I think a lot of people will be able to relate to it, and perhaps recognize the same behavior in their own self and avoid making the mistake.

My friend did his school and engineering from a small town in India, and joined an IT company in the late 90s. He started off with a small pay and his hard work and middle class ethos helped him make the most of it and live a happy life.

After a few years, he got stock options, and that changed everything. He had this notional wealth against his name, and that made him spend more freely than before and as a result, he had to borrow small amounts from his friends every now and then to keep up with the spending, and what seemed like small innocuous sums ate into all the money he got from his stocks when they vested.

This was a bitter lesson because his classmates who joined the same company were buying tangible things like a car or a bike with the money whereas he had nothing to show for it.

Life went on, and he got back to his regular ways but then after two or three years he job hopped twice and got an almost 80% pay hike within a period of 6 months.

He started seeing more money flow in every month, and unfortunately for him, he got a credit card with a limit of close to Rs. 5 lakhs at the time. He got into the habit of spending freely again and before he realized, he had run quite a huge credit card debt and along with his home loan EMI, it was hard to pay off anything but the interest on the credit card.

So for about 10 months or so he paid just the interest on the credit card, but he got really fed up of that and decided that he needs to do something.

So, he took a personal loan and paid off the credit card, and in about one and a half years or so he reduced his personal loan to half as well.

But then, his company decided to send him abroad for a year, and in the three months he had when the decision was taken, and when he did fly out, he ran a big credit card bill again!

Just before leaving, he finally cut up his credit card, and vowed not to get another one ever (a promise he broke shortly thereafter; for the convenience, not the credit) but he is still saddled with a home loan EMI, a personal loan EMI and a credit card EMI.

This is really crazy, but I don’t think it’s all that uncommon, shows that personal finance is as much about behavior as it is about numbers.

{ 15 comments… read them below or add one }

Amit M July 27, 2012 at 9:24 am

It’s a hard but basic rule to follow: “Never take a loan for a luxury”.

Can’t afford a bigger bike or car? Buy a smaller one and wait till you can save up enough for that big one. The trouble is we never can wait. The moment we get that offer letter, we assume that all that money is already in the bank.

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Manshu July 29, 2012 at 1:53 am

I agree but then it’s true that this is easier said than done, and I’ve fallen to the temptation many times to know this to be true. Delayed gratification is a great concept.

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Manoj August 1, 2012 at 4:00 pm

I think, 2 important rules are:
1) Delayed gratification
2) Provision for your expense well before you spend !!

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DJSays! July 27, 2012 at 10:21 am

Hi!

This quite true. It depends on how strong your mind is. It has happened to my cousin who was trapped in Credit Card Debt and was paying interest like hell. He ultimately came out but, he has learnt a lesson.

This is a common issue with many. The mindset is we have to pay the amount after 30-45 days and not now. But, the reality is ultimately you have to pay the same from your pocket (either today or tomorrow).

CCs should be used for convenience only and never for credit (atleast as per me).

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Manshu July 29, 2012 at 1:51 am

So how did your cousin get out of it? I’d imagine it’s very hard if you chalk up a big bill every month.

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DJSays! July 30, 2012 at 1:34 pm

That’s what had happened. He was young, spending out and even letting his friends use his card for their stuff. For one reason or the other they couldn’t pay their dues to him in time nor could pay for his dues in time. Was locked in such a situation for around an year.

Now, he seldom uses his CC. Burnt his fingers once. πŸ˜›

But, yes you tend to spend a bit more when you are using a CC.

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Manshu July 31, 2012 at 5:46 am

Oddly, even this guy told me that he lent out some money to friends despite knowing there is very little chance of ever seeing it back.

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Karan Batra July 27, 2012 at 1:43 pm

Spending through Credit Card may be a convinient way fo spending but at the end of the day you end of the day, you end up spending more than what your pocket allows as a result of which your savings go down

The Culture which is prevalent in the US of spending everything which a person spends seems to be spenidng in the Indian Youth as well.

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Sahil July 27, 2012 at 3:31 pm

simple, use debit card.
πŸ™‚

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Manshu July 29, 2012 at 1:26 am

That’s one way to deal with the problem.

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DJSays! July 30, 2012 at 1:37 pm

I keep amount separate for purchases made via CC by generally opening FDs of 15 – 30 days or so maturing near the Due Date.

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Abhishek July 29, 2012 at 1:02 pm

We r all sailing in the same boat.Ours is a emi serving interest paying generation.Why blame just credit cards though they r ofcourse most deadly.Home loan car loan personal loan we get it all easily .The notion of saving for a financial goal is totally absent in our generation.We want it all now and we will take it on interest and then keep paying.i wish we could print currency notes to finance our deficits πŸ™‚

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Manshu July 29, 2012 at 8:36 pm

If you find a way to finance your deficit, you know where to find me πŸ˜‰

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Sudarshan August 7, 2012 at 6:14 pm

I recently read an enthralling article about how the booming(once upon a time maybe) US economy can be attributed to the fact that the US people spend money that they have not yet earned. I.e. they are always in debt, and this in a way actually helps the economy.

Is there actually any truth to this? If so, I can’t see how this problem wouldn’t affect them!

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Shabbir August 7, 2012 at 7:53 pm

I think he just tried to get a magic wand to clear his debt and prepaying even as low as 100 to 500 Rs is very effective in clearing off credit card debts. He actually planned it wrongly and the only solution left for him is to pay off debts in decreasing order of interest rates.

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