Principle 6: Never stretch beyond your limits.

Money will come and go; after all, you just have a life to live –why not live it to the fullest? Sounds perfect and positive, isn’t it? Unfortunately, if you are living your life like that, not everything is positive and perfect. You will realize the perils of reckless spending when you face a financial emergency. I have done it in my initial investing life– reckless spending – but soon realized that you cannot discount uncertainties in life. A sudden drop in my monthly cash flows turned my life into a nightmare. So, when i write my sixth principle, I have my own experiences to back it up!

The principle is not very hard to follow – never take money from your savings or borrow temporarily from your friend’s pocket to buy a little more luxury. Be it a slightly bigger house that caught your wife’s imagination or the latest electronic gadgets.

WHERE IS THE PROBLEM?

The lifestyle you want to maintain depends on three factors:

  • The circumstances in which you were born and bought up
  • The kind of friends you have
  • The place or community where you live.

Have you asked your parents about how they started their life? They din’t have a big car or latest electronic gadgets. They probably didn’t live in the big apartment or villa they’re living right now. They built everything brick by brick. It would have taken a lot of time, effort and disciplined life to get to where they are now. That’s exactly the way you should also start off. If you try to achieve all the life’s goodies in very short time, there’s every possibility that you’ll borrow a lot of money assuming that you’ve the ability to re-pay everything in 5 or 10 years and chances are that you’ll get into debt trap should there be an unexpected fall in your monthly income.

Another problem amoung youngsters is that spending habits are greatly influenced by their friends and colleagues. Bank balance doesn’t matter, the car or home doesn’t matter – what matters is the answer ‘yes’ to this question- Are you better off than your neighbor , friend , relative or colleague? If the answer is yes, you are confident, you feel happy. Or else – you stretch beyond your limits to maintain yourself the standard of living that your friend has! You will over borrow, over spend or do something to satisfy your ego. This category of people falls into the trap of personal loan providers. Personal loans are easy to get. There is less documentation and there are no restrictions on how you use the money. Since money comes in quickly with minimum documentation, you won’t mind the higher rate of interest.

Another reason for reckless spending is that these days, a lot of technologically advanced gadgets and appliances are introduced into the market that drives everyone crazy. Financial schemes are introduced by institutions which would seem like a very simple deal. These schemes are advertised in such a way as to lure customers. Such facilities tempt us to spend more. When you buy into such schemes, what you are actually doing is getting into the finance trap. I am sure 99% of people reading this would have done this in some form or other.

That’s principle 6 for you. It’s always wise to stay within your limits.

You may like these posts:

  1. Principle 1.Finding money !
  2. Principle 2.Time value of money
  3. Principle 4. Interest rates.

3 Responses to “Principle 6: Never stretch beyond your limits.”

Anonymous

January 23, 2012 at 4:57 am

Hi, I wanted to say that I like Principle 6: Never stretch beyond your limits. | Basics of Share Market.

shubh

December 12, 2012 at 7:02 pm

I had all the same points in my mind.And now reading the same thing.
Good work nicely explained .Nowadays,many people really need this explanation as a guidance.

Ankur Agrawal

November 19, 2016 at 10:07 pm

I have always a straightforward policy when it comes to debt: It is an extremely dangerous thing. I can’t believe that people buy a depreciating asset such as a car by taking loans!

Taking debt for buying a house is another thing because you would be getting rent from the house and your house value will appreciate over time. This is an appreciating asset. But the moment you take out your car off showroom it loses 30-40% of its value.

I would consider taking a loan if I find some awesome investment opportunity in which I can grow my principal amount at a higher rate than the interest I would pay on loan.

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