The crisis in Greece can be a good lesson for borrowers, says Adhil Shetty
Greece, a small country in southern Europe, kept the global economy on tenterhooks for many months, the reason being its audacious decision not to stick to the strict terms and condition laid down by the lenders after the country defaulted on loans amounting to 360 billion euros.
Greece’s inability to pay is an example of how living beyond one’s means can land you in trouble. Worse, Greece failed to act when there were clear signs of debt crossing unsustainable levels.
If Greece was an individual, it would be an ideal case of how indiscretion and short sightedness can leave a person’s finances in a mess. There are many lessons, nonetheless, for individuals to learn from the Greek debt crisis.
• Keep a check on unnecessary expenses: Unlike Greece (a sovereign nation), an individual cannot get a long rope to keep on funding his budget deficit with borrowed money. Therefore, it is key for a person to plan his expenses, keeping in mind his income and repaying capacity.
One of the basic lessons of managing your finances is: “Do not save what is left after spending, but spend what is left after saving.” Even if you follow this principal only in spirit, you will probably do much better in keeping yourself out of debt traps. Avoid unnecessary expenses, keep your credit card bills in check and have a good investment corpus to fall back on in times of crisis.
• Avoid taking loans for frivolous expenses: When Greece was growing at over 4 per cent, it borrowed heavily to fund some of its most “generous” social security schemes and arms purchases. When times are good, banks would keep calling you, showing their eagerness to offer you personal loans and credit cards.
Do not fall prey to these aggressive overtures and take personal loans for unnecessary expenses, such as buying expensive gadgets, throwing a party, etc. Get a loan only if it is for a “productive” purpose, such as buying a house, starting a business, funding education, etc.
• Do not lose sight of debt levels: Greece maintained a relatively “manageable” debt-to-GDP level of 100 per cent between 2000 and 2007. However, after that the debt-to-GDP level kept on growing, touching an unsustainable 177 per cent by March 2014.
Individuals must keep a close watch on the loans they are taking – personal, home or car loans or credit card expenses. If your EMI and credit card bills are accounting for 75-80 per cent of your monthly salary, it is time to act lest you end up in a financial mess.
• Do not substitute loan for income: Since the financial crisis of 2008, there have been a few years when salary hikes were good. However, from 2010 till 2013, retail inflation was constantly in double digits, making life tough for the salaried class. These are the times people tend to look for ways to finance their ever-increasing needs. Taking a loan to finance some of your expenses when your income or savings do not allow you to do so is a big mistake.
You cannot take loans without assessing your repayment capacity. Typically, an EMI up to 50 per cent of the monthly salary is considered safe even by banks. However, every person has a different financial situation and one cannot consider this figure as sacrosanct.
Many individuals may find it tough even if only 25 per cent of their salary is being used to service EMIs. Besides, credit card loans are not usually factored in while considering the 50 per cent EMI limit.
• An elite company has its cost: Greece joined the European Union, thinking it would increase its credibility and status on the global stage. It did initially, but ultimately this became the reason for its fall. Thanks to a uniform euro currency, Greece lost its flexibility to devalue its currency to boost exports and growth when it was in dire straits.
Who wouldn’t want to be in the elite company of friends and colleagues, who wear the best brands, own expensive cars and gadgets, have houses in posh localities and party at the best hotels and restaurants.
However, all these come at a cost and if you are only trying to copy them without having the similar resources to fund your lavish expenses, you are likely to land in trouble.
• Be ready for harsh measures, when deep in debt: One of the reasons for Greece’s failing is its inability to take drastic measures to keep its expenses in check. It continued its generous pension schemes and arms purchases despite clear signs of a debt crisis.
An individual must take necessary and if required “extreme” measures to get out of debt. Cutting down on cost by renouncing the lifestyle that one is so used to is tough but necessary to get out of a financial mess. Giving up a premium but fuel-guzzling car for a cheaper fuel-efficient vehicle, cutting down the number of visits to restaurants and malls or selling the second house to reduce debt are some of the steps that one can take to come out of a financial crisis.
Retire high-cost debts such as credit cards loans, which charge 24-36 per cent interest on the outstanding amount, by taking personal loans at 16-20 per cent interest. This not only checks the credit card outstanding from growing at an unmanageable pace, but gives the borrower an option to pay back the loan in small monthly EMIs over a long period.
For instance, if you have Rs 1 lakh outstanding on your credit card bill and you are unable to pay off for some time, take a personal loan of a similar amount at 16 per cent for three years, and pay off the credit card due. Your EMI would be just over Rs 3,516 on the personal loan.
With so much at stake in terms of the global economy and the future of the European Union, Greece may still manage to survive even after defaulting on a loan of that proportion. However, nobody would give an individual borrower such support.
If you fail to clear your debt on time, your credit history will be ruined, your home or car bought with a loan will be taken over by the bank and all your savings will be eroded. Be proactive and pre-empt damage rather than repairing damage already done.
The author is CEO of BankBazaar.com
