My Dad's Financial Theory

I always relied on my dad for any major financial decisions. In early days I used to inform even about paltry 2k loan given to my best friend as well to my dad. Even though my dad has not made best investment decisions in his own life, somehow I sensed accuracy of his judgement when it comes to my financial calls. Right from the day when to start my first LIC policy to when to plan for my car. Best of all came ofcourse during my house purchase. If he was not there to assist, I would not have purchased by house. The decision, when I look back now, has almost saved me from any probable financial crisis today. The timing was so right that it continues to be the best investment I made in my life.

There is how ever a peculiar way my dad manages his own finances. Given the fact that I became familiarized with finance through my job in a leading bank's IT department, some of my dad's decisions don't make whole lot of sense to me from investment/return stand point. His major strategy on investment is acquiring an asset through loan even though he has adequate cash at hand in form of debt instruments. For a person who is near retirement age, not much argument goes against his investments in debt instruments. But what amazes me is he finances his asset payment(assuming the asset is not having any tax benefit like a homeloan) via a bank loan and thus his net interest margin(NIM) is at least -6to -8 %. In layman's terms when his debt instruments pay him around 8-10% return where his bank loan eats up to 12-14% as interest payable. Only positive side of it is if the asset appreciates in its value then the negative NIM might get offset in time. If he employed his cash instead of loan, his appreciated asset would fetch him more profit.

His argument is simple. We lack financial discipline unless there is a liability enforced upon. We can easily pay back loan with out defaulting any installment but we do lack financial discipline to accumulate a lumpsum. For example he needs 5 lakhs to purchase an asset and he takes a bank loan by paying 12% interest for 3 years(despite having a 5laks cash in debt security) . He claims at the end of 3 years he would be in possession of asset and his 5 lakhs cash remains the same. But if he uses up his 5laks cash for asset purchase, he would mere have asset at his disposal at end of 3 years as he lacks financial discipline to accumulate the lumpsum of 5 lakhs back.

Practically what he says seems right to me even though from financial stand point it does not appeal to me. I made a very recent amend to this. When I had to fiance my car I did not rely on his theory. I instead emptied my pockets first by pulling out every penny in every bank account/FD. When I still fell short that's when I went to bank for loan. In this context my decision seemed right to me as car is all the more depreciating asset. Only thing I came to understand is financial indiscipline is catalyst that drives my dad's financial theory. So decided to be little more disciplined so that I can try and accumulate the lump sum I had before purchase of car. If I manage to do it I can say I had improved version of financial theory.