From Savings or Future Earnings?

The fundamental difference between our parent's generation and our generation lies in how we finance our purchase of assets.


Our parents funded the purchase from earnings already made. I remember my father closing all his bank Fixed deposits and then taking a loan from his Provident Fund (which was in fact his savings) to finance our first car - a princely sum of Rs 17,000 in 1972. He constructed his house also from his post retirement settlement. All the consumer durables were bought whenever he got his annual bonus. In short, he was living within his means and buying assets for the future generation from what he had set apart for them.


Our generation buys everything, whether it be house, car, consumer durables, gold, on loans or using credit cards with a promise to make the payment in the future through EMI's. In effect, we are buying against 'future earnings'. This is fine as long as future earnings are assured. But in the volatile open market economy, where job security and earnings are at a premium, this is fraught with risk. Any disruption in earnings lead to non payment of debts, leading to considerable stress and loss of assets. There is a strong possibility of people getting into a debt trap. Also, many of our generation purchase assets beyond our capability to earn on the hope of funding the deficit through additional income. This leads to a situation where people resort to unethical practices like taking bribes to meet their financial obligations or alternatively stretch themselves in the workplace to have some additional income. The former is despicable while the latter is acceptable as long as one maintains a modicum of work life balance, the absence of which can lead to a broken family.


I am not sure whether our governments, which thrive on fiscal deficit and indiscriminate spending beyond its means, are a reflection of the people of our times or whether people mirror the government's financial policies. They would do well to follow what is happending in Greece and what is likely to happen in Portugal, Spain, Italy and England in the next few months. India is also spending much beyond its means and we are approaching a 1991 scenario when the fiscal deficit was unmanageable. The only difference between 1991 and 2010 is the healthy state of Foreign Exchange Reserves. The sky rocketing inflation, soaring deficit, falling asset prices, indiscriminate social sector spending, unethical benefits for the industry and high interest rates, and a government totally clueless is a recipe for disaster.