Why Saving Is Better Than Taking Loans to Buy Assets?

In today's consumer-driven world, loans are easily accessible and often marketed as a smart way to achieve financial goals. But is it always wise to borrow money to acquire assets? Let’s explore this through the story of Sameer and understand why saving before buying is often the smarter route.

Meet Sameer: A Cautionary Tale

Sameer, a 35-year-old professional with a promising career. He has a young family—a homemaker wife and a child—and is currently juggling multiple loans, including a home loan, car loan, and a personal loan.

Sameer believes he's making smart financial decisions by using loans to acquire assets. He also considers EMIs (equated monthly installments) as a form of compulsory saving, assuming he wouldn’t have saved otherwise.

But is this strategy really sustainable or wealth-enhancing in the long run? Let’s explore why saving might be a more prudent path than borrowing to build assets.

1. High EMIs Can Risk Financial Stability

If more than 50% of your income is going toward EMIs, you're treading dangerous ground. Sameer needs to consider that:

• A significant part of any household income goes toward essential expenses—groceries, utilities, education, and healthcare.

• With a growing child, mandatory expenses will only increase over time. Think rising school fees, extracurricular activities, and family travel.

• In case of job loss, illness, or emergencies, high EMIs can become a financial burden that’s hard to manage.

Takeaway: A high EMI outgo limits your ability to save and leaves little room for unexpected life events. A safer approach is to build a healthy monthly surplus through disciplined saving.

2. Loans Usually Cost More Than the Assets Earn

Most consumer loans carry interest rates higher than the returns generated by the asset being purchased. For example:

• Cars depreciate in value the moment you drive them off the lot.

• Personal loans used for vacations or gadgets create zero financial returns.

• Even a home, while it may appreciate, doesn’t generate income if it’s self-occupied.

While real estate might look like a valuable asset, the cost of the loan (interest) often outweighs the actual return unless the property is rented or sold at a substantial gain.

Takeaway: Relying on loans to accumulate depreciating or non-earning assets reduces long-term net worth and limits financial flexibility.

3. Over-Reliance on Property Skews the Portfolio

Many middle-class investors, like Sameer, end up putting most of their wealth into property. But this comes with downsides:

• Real estate is illiquid—you can’t easily convert it to cash when needed.

• A high EMI for a home loan eats into cash flow, leaving little for investments in more flexible instruments.

• Overexposure to one asset class increases financial risk.

Ideal Tip: Sameer should aim to allocate at least 30% of his investments to liquid and diversified assets, such as mutual funds, fixed deposits, or even emergency savings.

4. Saving Builds Discipline Without the Pressure

Unlike EMIs, savings don’t come with the fear of default. Setting up automated savings plans, such as SIPs (Systematic Investment Plans), can mimic the regularity of EMIs but without the downside risk.

Benefits of saving before spending include:

• Better financial control

• Lower stress

• More options in the future, including the ability to invest in opportunities without taking on debt

Final Thoughts

While taking a loan may seem like a shortcut to asset-building, it often comes at a high cost. Saving, though slower, is more sustainable, flexible, and rewarding in the long run.

Sameer—and others in similar situations—should consider rebalancing their financial strategy to prioritize savings, reduce loan dependency, and diversify investments.

📌 Key Takeaways:

• Keep EMIs below 50% of your income.

• Understand the real cost of loans versus asset returns.

• Maintain a diverse investment portfolio, with at least 30% in liquid assets.

• Automate and prioritize savings to reduce financial stress and build wealth over time.