Top bad habit: EMI more than 25% of monthly cash flow

March 3rd, 2022 Financial Planning

If you have borrowed funds or plan to take a personal loan, I suggest you ask the following simple questions to yourself.

  1. Why are you borrowing funds? 
  2. What are the short-term and long term benefits? 
  3. How do you plan to borrow and pay back?
  4. When will you finish paying up?
  5. What will you do to payback?

If you have clear answers to all the above questions, you have no reason to worry. Simply borrow. But if not, then the amount that you have borrowed or plan to borrow may not prove to be a good debt.

In such situations, put your desire to borrow on hold. It is very important to postpone your decision to borrow funds till you are able to satisfactorily answer the above questions.

This is my simple formula and I am sure will help you stay away from bad debts besides encouraging you to borrow good debt. The questions may look very simple. But they are very powerful when it comes to helping you differentiate between good and bad debts and also in differentiating good and best debts.

Here's a real life story:

This story is about a woman who was around 32 years of age. Her mother was a housewife while her father was a busy 'corporate world' man. After having completed her graduation in commerce from Mumbai University, she went on to work with top fashion designers and also did a couple of fashion designing courses. Being adventurous in nature, she always wanted to be on her own. Her family background did not support her entrepreneurship initiative. But then her desire to excel in her field was strong. 

She was always quick to understand her clients' needs and helped them put the same on paper. She always believed in the philosophy 'clients needs first' and soon was adept at striking good business deals for her employer. However, her greatest struggle was understanding finance.

Having no one to support her financially and left with no other option, she decided to start her garment business by borrowing funds on ten credit cards.

She had sleepless nights with all this but was self-assured on the path she had chosen due to her experience, talent and skills. Today she successfully manages her extensive garment business in four countries and lives a balanced life.

I am not sharing this story to encourage haphazard debt such as credit card  which is the most expensive and the worst choice one could make when it comes to borrowing funds. But this is a story, which teaches that if you know what you are doing then it is a good starting point.

This entrepreneur had a knack of building strategy, which was supported by her talent. No doubt she had a high-risk taking ability but her capability of setting and pursuing high goals, her unique talent in garment designing and understanding client needs proved that what seemed to be bad debt by all turned out to be a good debt for her. 


What supported her throughout was the wealth of knowledge she possessed of the garment business, her experience and her ability to manage risk. So instead of always going by the number formula, ask yourself questions that can clearly tell you what that money will do for you.

Unlike the above case where a personal loan was borrowed to set up a business, borrowing funds with an aim to enhance your lifestyle is a bad debt.

Borrowing funds to pay for your lavish lifestyle means borrowing funds for something that you cannot afford right now. Whenever a thought of borrowing  funds for lifestyle needs like buying expensive cars, electronic items, and travel occurs in your mind, postpone it and remember to answer those four simple questions.

Borrowing funds for life style needs? It could be fatal: You will realize that borrowing funds for the said reasons can give you a temporary high. But then these shortcuts can prove to be fatal in the long run. Most of them end up with frustration, family fights, bad relations, and bad health.

So, choose wisely before you make a move towards borrowing funds. Also here are a few gems of wisdom that can guide you in choosing debt wisely:

  1. Never borrow what you cannot afford to pay.
  2. Never borrow more than 30-35% of your net worth.
  3. Never borrow funds for which you need to pay more than 25% of the net cash flow.  
  4. Take time to think about your decision to borrow.  

And finally the most important thing is to have a clear intention behind borrowing. If it is good for today and does not seem good for tomorrow (that which does not help you in achieving your long term goal), do not take that road. Learn to differentiate between good debt and bad debt else you may have to pay a very high price for your ignorance.

The author, Zankhana Shah is a Certified Financial Planner (CFP) and Chartered Accountant (CA). She is the founder of Money Care Financial Planning. She can be reached at

Disclaimer: The contents in the article are the intellectual property of the author Zankhana N Shah. The article is purely informative and you are advised to consult an expert in the related field before taking any significant decision.

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