We see it too often these days that many people choose to use EMIs while buying expensive products. This trend is particularly common among millennials, who want the latest releases – be it a car, phone or laptop – but don’t have sufficient funds when they make the purchase. Opting for EMI has become the go to strategy since credit cards have become more widely available, but more often than not this strategy can get out of hand. Many people often struggle to make their payments on time, end up paying more in interest and sometimes even resort to selling their products at a loss just to meet their dues. Given these issues, why do people find EMI so alluring?

The myth of no cost EMI

The term ‘No Cost EMI’ is often used to market the idea of purchasing an expensive item, and not having to pay any extra amount in the form of interest. It is particularly common in online shopping websites. But can this really be true? Does ‘No Cost EMI’ actually come with no additional costs? The answer is no, and it’s just a marketing gimmick that takes advantage of unaware customers; this was made apparent by the RBI as far back as 2013. In such plans, the cost paid by interest is either made up using a processing fee, by forgoing any discounts that may have been applicable on the product or by simply adding it to the price of the product. In some cases, this amount can be compared to an equivalent interest of around 16-24%. 

Strategies you can use to replace spending through EMI

You should not depend on using EMI to satisfy your momentary wants since this might not be as cost effective as it advertises, and could really affect the way you plan your finances. In that case, here are some strategies you can use, when it comes to bigger expenses, instead of relying on EMI.

1. Save and invest for your wants: One of the golden rules of finance is to save before you spend. By setting aside 10-20% of your income as soon at the beginning of each month, you will be able to accumulate a sufficient corpus over time. This can be used towards some of your more immediate purchases – like a new phone, TV and so on. For some expenses, which might not be spur of the moment purchases, and will involve some forethought – like a new car – you can take this strategy one step further and invest towards these goals. By consulting a financial advisor, you will be able to identify the right instruments for you to use, in order to be able to achieve these goals in the timeframe that you have set. 
2. Allocate expenditures in your budget: Another extremely useful strategy that you can harness is efficient budgeting. Once you are aware of your spending patterns, then you can think about bucketing your budget towards your expenses. For example, you can allocate 50% towards meeting your needs like rent or utilities and groceries; keep 30% aside every month towards satisfying your wants over time like a new phone or laptop; and finally, 20% can be saved or invested for the future. Remember that these are just rough estimates, and the way you allocate your expenses will depend on the organisation of your finances.

So while EMI can seem extremely alluring, it isn’t really the best option in all cases. Especially when it comes to bigger purchases, don’t make decisions in the spur of the moment and think about how you can save towards them. Consider developing a financial plan that can pave the way for you to achieve your goals, if you don’t have one already. In this regard, always work with a certified and experienced financial planner or wealth management firm, who will have the expertise to guide you in an appropriate manner.