There are times when you make the mistake of seeing a financial decision in isolation and miss the big picture. At other times, you miss the details in pursuit of the big goal. Both are equally capable of harming and hindering the desired end result. We need to be aware of the common errors so that we can avoid them, or take steps to rectify them in case they have inadvertently crept into the way our money is managed.
Where big picture can get lost in the details
When you ignore the idea of opportunity cost and time value of money while making a financial decision to spend or save or borrow or invest, you are leaving an essential element out of the decision-making process. The decision to buy that much-coveted car is not only about negotiating the best price and a loan at the lowest interest cost. It is equally about the opportunity cost of how the money committed to paying the equated monthly instalments (EMIs) could instead have been employed to earn returns. An EMI of around Rs40,000 on a Rs20 lakh 5-year loan, if invested at 8% per annum, will grow to a corpus of Rs30 lakh. Consider what this corpus can do for your other goals before deciding on the new car. Similarly, think twice before you tell yourself that you have scored a good deal because you chose a zero-interest instalment offer instead of a discounted lump-sum current payout. If you did not take into consideration the impact of time value of money, your decision could be to your disadvantage. Paying less money immediately could prove to be a better option than paying a larger sum in instalments even if it is without interest.
When you postpone retirement savings, you are focusing on the immediate go