How saving money can drain your savings

Yes, you have read it correctly! Saving money can also end up draining your savings.

Today, all the electronic gadgets, vacations, white goods, almost anything under the sun can bought on debt. And many us have bought things/ experiences using debt.

But this debt is not a regular low-cost debt that you get for housing mortgage or car loan. Its interest rates are much higher, almost double the regular debt interest rate.

When you are carrying such a high-cost debt, the best approach is to first use all your spare money after essential expenses to pay off the debt.

Let’s try to understand this using an example –

Problem: Suppose you take a personal loan of Rs 200,000 at 15% interest rate for an overseas vacation. You have an option to pay the loan over 1-2 years. You realise you can save only 22,000 monthly.

Scenario 1 – The thought of giving it all towards loan repayment feels scary so you decide to divide it equally between loan EMI and savings.

Scenario 2 – But then a friend comes over a suggests you should first pay-off all your loan as soon as you can using all your monthly savings. You ask them, ‘won’t I have saved less money if I save only after paying off the loan?’ 

Please look at the Scenario tables in pictures.

Therefore, at the end of 2 years –

Scenario 1 savings – Rs. 2,85,805

Scenario 2 savings – Rs. 3,10,283

Scenario 2, paying-off the high-cost debt as soon as possible gives you almost Rs. 25,000 more than Scenario 1.

What would you choose now Scenario 1 or Scenario 2?

This example clarifies the fact the trying to save while carrying a high-cost debt would rather end up reducing your savings.

This is one of the several strategies that I have used to help my clients grow their money faster. If you are also carrying high-cost debt and would like to discuss what strategies can help you get rid of the debt quickly, I welcome you to book a 30-minute discovery session with me at https://lnkd.in/ddvYDzpM