My quote in an article:
http://business.bhaskar.com/article/when-loans-are-dead-date-doctor-advice-3135489.html
http://business.bhaskar.com/article/when-loans-are-dead-date-doctor-advice-3135489.html
Monday, April 23, 2012
Thursday, April 19, 2012
Road to buy your dream house!
Following are the various aspects which should be looked into before taking a decision
1. Personal Aspects
a. Life stage: Your life stage will define your requirements. A bachelor’s needs are different than a married couple or different than a retired couple. Older people might prefer a low maintenance house. Whereas families with growing kids may prefer greater floor space. Giving detailed thoughts about your needs and then translating them into written requirements can be a very helpful approach. A very important point to consider is futuristic requirements to be kept in mind and not to confine your analysis only to immediate needs. For example, if you are planning to increase your family in near future, then you should consider buying a slightly bigger house than what you may need currently.
b. Single income vs. double income: If you plan to include your spouse income also then it needs a lot more deliberation than it appears. Availing loan based on double income may increase the total loan amount eligibility, and therefore a better house, but your loan repayment becomes critically dependent on both of your income. Consider situations where, due to a variety of reasons, one stream of income gets stalled then it will be very difficult to continue repayments. For example, your spouse wants to take a sabbatical for 2-3 years.
2. Professional Aspects
a. Stage of career: Your stage of career can also have a deep impact on your decision as it is directly responsible for your financials. If you happen to foresee any changes in future which can result in increased income then you can consider it in your calculations. However, you should be cautioned not to get too optimistic unless there is a 100% certainty about it.
b. Salaried vs. self-employed: A salaried person may prefer equally distributed monthly payments to one time payment. Where as a self-employed person may prefer otherwise. The point which is highlighted here is that you should be clear of your income distribution. Regular stream can take care of monthly repayments and one time bonuses or equivalent can be used to prepay some principal amount. General guideline is to ensure EMI stays less than 40% of your monthly take home salary.
3. Financial Aspects
a. Budget for down payment: There may be a large amount, usually 15-20% of house cost, required to be paid by you initially. If you have budgeted any of your investments in equities/ NSC/ ULIP/ mutual funds/ real estate, then you should liquidate that well in advance. Depending on the nature of the investment, your liquidation planning should be done 6-8 months prior to your house search. Careful liquidation planning can result in higher ROI on your investments.
b. Analyze cash flows: Cash flows can be a very useful tool to analyze your financial situation. Detailing out even minor aspects of monthly expenditure and income and identifying areas of expenditure cut-down can vastly improve the cash flows. It helps you prepare better to absorb changes in EMIs as and when that happens.
c. Save for emergency fund: You should not be tempted to utilize all of your savings and income streams into buying a house. You should save and keep aside certain amount of savings as emergency fund. The understanding should be to use this amount strictly under any adverse situation only, and not to fulfill any other purchase. Buying a house or a buying a car or going on a vacation should be viewed outside this.
d. Take adequate insurance: Buying a house by availing a loan increases overall financial liability by a significant amount in most cases. Increasing your insurance cover by a similar amount is a very good idea. A term insurance is generally an advisable solution. Also, you should plan and budget for insurance premium which can also be a good amount in a year. You should always have adequate insurance all the time. Absolutely don’t use your existing insurance to add to your kitty i.e. do not surrender any existing life insurance policies to get some quick money.
e. Be vary of multiple loans: Too many loans, in general, is not a healthy situation to be in. Moreover it reduces your borrowing capacity for a new loan. You must analyze your existing loans and look for opportunities if you can close one before going ahead with the current house buying decision. This might mean postponing the house purchase but that is perfectly advisable. Keep in mind the point above i.e. total EMI should not exceed 40-45% of your monthly income.
f. Plan for house doing up & registration: Planning for down payment and loan is necessary for house purchase but not sufficient. There is a need for registration & stamp duty on possession, amount of which may vary under different situations. Added to this is significant house doing-up amount which you may want to incur. The general advice here is to budget 10-12% of house cost for doing-up your house taking into account several aspects like wood work, electrical, alterations, kitchen etc.
It is better to be safe than sorry. Let house purchase be a completely confident decision on your part and not an impulsive one. A comprehensive analysis of your situation and planning your finances in detail can help you gain that confidence.
Tuesday, April 17, 2012
Is your Family involved in Financial matters?
Since a lot of people still believe in the older version of the adage families are hardly involved in the financial decision making. Following could be the few reasons for non involvement:
1. Safeguarding my Family from money worries:
Karishma, 35 got a call from a bank’s credit card division on her landline number. She was shocked to hear why her husband Shekhar was avoiding calls on his mobile. In fact their impulsive purchases have landed them into a huge credit card debt, which has been rolling over from one card to another. Shekhar could not muster courage to tell her about having insufficient funds to pay it off.
He was protecting her from money worries!
2. My spouse doesn’t take interest:
Geeta concerned herself only to her work and her family. From paying a bill to operating a bank account, from taking a house loan to investments all were done by Gaurav and ‘papaji’, her father-in-law. While Gaurav was out of country for work and papaji went on a pilgrimage, Geeta did not know where to pay the bills and how to pay the EMI.
Gaurav was frustrated because Geeta thought it was a ‘man’s’ domain!
3. Kids are too young:When Shubham, 19 joined college and started living in the hostel, his new found freedom led him into reckless spending. He was enjoying his popularity as a friend who can always lend and was ever ready to pay the canteen bills. His parents got alarmed when he could not pay the college fees and demanded more money. As an apple of their eye he had never heard a NO for anything he wanted to buy.
His parents considered him to be too young to have money lessons!
4. I can handle it alone:
After their marriage Raj and Nikita share same house, same surname and same set of relatives but refuse to share their salary details, spending habits and bank accounts. They feel that it may lead to identity crisis!
Raj pays the bills (as the man of the house) so even being an intelligent investor never has enough money to invest. They compromised on a small house because Raj didn’t want to borrow money from Nikita.
Nikita, with a poor understanding of personal finance has bought several insurance policies to save tax. She never discussed it with Raj who knew about various other tax saving instruments available in the market!
Both of them wanted to handle it alone!
5. Lot of time left to share:
Sudhakar, 45 was hospitalized. His family was paying endless medical bills from their savings because Sudhakar never discussed the benefits he can get from his company and his medical insurance policy. Though he had taken some sound financial decisions but he never communicated them to his family.
He was either too busy or thought that a lot of time was left to share!
Finally:
Above situations and many more can be seen and heard in daily life.
They may not be acute at the moment but what if Shekhar loses his job or Gaurav goes out for a long term assignment and papaji falls critically ill?
What if Shubham starts ignoring his studies as he doesn’t fear about making a living in future? What if Nikita and Raj develop a communication gap between them and their married life suffers?
What if Sudhkar passes away suddenly and his family is unable to handle the loss both mentally and financially?
Talking about money matters at home will save a lot of what if situations.
It will help you discover the spenders, savers, investors and financial disasters in the family. Talking money matters to your family can be your best investment! After all its joint happiness that matters so it is a joint responsibility as well!
You may like to read more posts on family issues and role of finances in it. The issues could be unwillingness of women to participate in home finance, how your hard earned money can go into wrong hands if do not make your wishes clear during your life time or how your family can suffer in your physical absence from home.
and role of finances. Here are the link:
http://shilpijohri.blogspot.com/2012/05/why-women-are-unwilling-to-participate.html
http://shilpijohri.blogspot.com/2012/07/who-should-get-your-moneyneedy-or-greedy.html
http://shilpijohri.blogspot.com/2012/09/traveling-for-work-help-your-family.html
Karishma, 35 got a call from a bank’s credit card division on her landline number. She was shocked to hear why her husband Shekhar was avoiding calls on his mobile. In fact their impulsive purchases have landed them into a huge credit card debt, which has been rolling over from one card to another. Shekhar could not muster courage to tell her about having insufficient funds to pay it off.
He was protecting her from money worries!
2. My spouse doesn’t take interest:
Geeta concerned herself only to her work and her family. From paying a bill to operating a bank account, from taking a house loan to investments all were done by Gaurav and ‘papaji’, her father-in-law. While Gaurav was out of country for work and papaji went on a pilgrimage, Geeta did not know where to pay the bills and how to pay the EMI.
Gaurav was frustrated because Geeta thought it was a ‘man’s’ domain!
3. Kids are too young:When Shubham, 19 joined college and started living in the hostel, his new found freedom led him into reckless spending. He was enjoying his popularity as a friend who can always lend and was ever ready to pay the canteen bills. His parents got alarmed when he could not pay the college fees and demanded more money. As an apple of their eye he had never heard a NO for anything he wanted to buy.
His parents considered him to be too young to have money lessons!
4. I can handle it alone:
After their marriage Raj and Nikita share same house, same surname and same set of relatives but refuse to share their salary details, spending habits and bank accounts. They feel that it may lead to identity crisis!
Raj pays the bills (as the man of the house) so even being an intelligent investor never has enough money to invest. They compromised on a small house because Raj didn’t want to borrow money from Nikita.
Nikita, with a poor understanding of personal finance has bought several insurance policies to save tax. She never discussed it with Raj who knew about various other tax saving instruments available in the market!
Both of them wanted to handle it alone!
5. Lot of time left to share:
Sudhakar, 45 was hospitalized. His family was paying endless medical bills from their savings because Sudhakar never discussed the benefits he can get from his company and his medical insurance policy. Though he had taken some sound financial decisions but he never communicated them to his family.
He was either too busy or thought that a lot of time was left to share!
Finally:
Above situations and many more can be seen and heard in daily life.
They may not be acute at the moment but what if Shekhar loses his job or Gaurav goes out for a long term assignment and papaji falls critically ill?
What if Shubham starts ignoring his studies as he doesn’t fear about making a living in future? What if Nikita and Raj develop a communication gap between them and their married life suffers?
What if Sudhkar passes away suddenly and his family is unable to handle the loss both mentally and financially?
Talking about money matters at home will save a lot of what if situations.
It will help you discover the spenders, savers, investors and financial disasters in the family. Talking money matters to your family can be your best investment! After all its joint happiness that matters so it is a joint responsibility as well!
You may like to read more posts on family issues and role of finances in it. The issues could be unwillingness of women to participate in home finance, how your hard earned money can go into wrong hands if do not make your wishes clear during your life time or how your family can suffer in your physical absence from home.
and role of finances. Here are the link:
http://shilpijohri.blogspot.com/2012/05/why-women-are-unwilling-to-participate.html
http://shilpijohri.blogspot.com/2012/07/who-should-get-your-moneyneedy-or-greedy.html
http://shilpijohri.blogspot.com/2012/09/traveling-for-work-help-your-family.html
What’s your Financial resolution this year!
Every ‘New Year’ brings in a lot of joy, excitement, freshness and hope. Past is forgotten and fresh start is made. New Year resolutions are self commitments in the hope of living a better life. The resolutions like living healthy, reducing stress or spending more time with the family show the importance of various aspects of life for us. Personal finance is also one such aspect which needs determination, patience and constant efforts in order to help you live a happier life.So why not take a financial resolution this year and be more confident? Let’s take a look at some of them.
1. Define your goals:Will you try to go on a vacation without deciding the destination? Probably never! The thought of having a miserable experience intrigues you, but you may be saving and investing without defining your requirement.
If you wish to get the best higher education for your child, consider it as a goal. Try to qualify and quantify it further by listing down the colleges you wish your child to take admission. Then, detail out all kinds of related expenses like admission fees, tuition fees, boarding and lodging fees, and cost of travel. Also find out at what time and for what duration you would need the amount. You are ready to plan your investments with the goal.
A resolution to define the goals will help you avoid haphazard buying of financial products. It will save you from some very miserable experiences financially.
If you wish to get the best higher education for your child, consider it as a goal. Try to qualify and quantify it further by listing down the colleges you wish your child to take admission. Then, detail out all kinds of related expenses like admission fees, tuition fees, boarding and lodging fees, and cost of travel. Also find out at what time and for what duration you would need the amount. You are ready to plan your investments with the goal.
A resolution to define the goals will help you avoid haphazard buying of financial products. It will save you from some very miserable experiences financially.
2. Prepare a Budget:Have you ever wondered as to why your credit card statements show bloated figures? Almost always! Although the conviction of being a careful spender is ingrained in you, but you may still find it difficult to limit your expenses.
You may want to start this year by making an annual budget. List down fixed non-discretionary expenses like rent, EMI, maintenance, school fees, domestic helps salary, driver’s salary for a month. Add to it the utility expenses like electricity bill, groceries, phone bills, petrol and the like. Further. add insurance premiums, SIPs, annual investments, festivals, clothings, vacations, partying. Also, keep aside some amount for medical and other incidental expenses.
Your resolution of allocating a defined amount for all the planned expenditure will, in a way, restrict your freedom on discretionary expenses. Might help you in cutting down on splurging. Your credit card bills may stop surprising you.
You may want to start this year by making an annual budget. List down fixed non-discretionary expenses like rent, EMI, maintenance, school fees, domestic helps salary, driver’s salary for a month. Add to it the utility expenses like electricity bill, groceries, phone bills, petrol and the like. Further. add insurance premiums, SIPs, annual investments, festivals, clothings, vacations, partying. Also, keep aside some amount for medical and other incidental expenses.
Your resolution of allocating a defined amount for all the planned expenditure will, in a way, restrict your freedom on discretionary expenses. Might help you in cutting down on splurging. Your credit card bills may stop surprising you.
3. No overload of loans:Are you sulking under the burden of your house loan, car loan, education loan, personal loan, or home improvement loan? Quite considerably! You know that loan is just a convenient way of making something look affordable, which otherwise you can’t manage from your savings alone. In principle, you would agree that a loan is a loan is a loan i.e. a liability which must be paid off sooner or later.
Bury the charm of buying everything with the help of a loan, instead avail it only when absolutely necessary. For example if you are planning to buy a car ensure that you can pay at least 40-50% of it from your savings. In addition to EMI, there will be a lot more expenses like maintenance, fuel, insurance and servicing. More expensive the car, more will be these expenses.
A resolution of staying away from unnecessary loans can save you from unwanted interest burden.
Bury the charm of buying everything with the help of a loan, instead avail it only when absolutely necessary. For example if you are planning to buy a car ensure that you can pay at least 40-50% of it from your savings. In addition to EMI, there will be a lot more expenses like maintenance, fuel, insurance and servicing. More expensive the car, more will be these expenses.
A resolution of staying away from unnecessary loans can save you from unwanted interest burden.
4. Get your financial house in order:How many times in a year do you go through all the investment documents, insurance policies, loan documents, high item bills, warranty cards? Hardly! You may realize the importance of doing it but still never end up actually spending time on it for some reason or the other.
Buck up for a monthly exercise of consolidating all financial papers. Start with reading fine prints and details of all the documents. Look for inaccuracies in name, address, phone numbers, nominations, maturity amount and maturity date. In case of investments, note down the current value, maturity date and surrender value along with tax implications, if any.
A resolution of going through your financial papers once in a quarter will help you track and monitor your financial house. Also take timely necessary actions if required
Buck up for a monthly exercise of consolidating all financial papers. Start with reading fine prints and details of all the documents. Look for inaccuracies in name, address, phone numbers, nominations, maturity amount and maturity date. In case of investments, note down the current value, maturity date and surrender value along with tax implications, if any.
A resolution of going through your financial papers once in a quarter will help you track and monitor your financial house. Also take timely necessary actions if required
5. Never delay your financial decisions:Can you end a day without replying urgent mails or reverting important phone calls? Unimaginable! You will never dream of postponing your office work but very likely will keep delaying your personal finance decisions. It’s time to prioritize and give necessary time to your personal finance.
There is always an appropriate time for most of the financial decisions. For example, if you delay the decision of buying life insurance, every year added to your age will increase the premium by a considerable amount. If you plan for your vacations well in advance, you might negotiate better deals for logistics and stay.
A New Year resolution of never delaying financial decisions will help you save more and will prepare you better for any emergency.
There is always an appropriate time for most of the financial decisions. For example, if you delay the decision of buying life insurance, every year added to your age will increase the premium by a considerable amount. If you plan for your vacations well in advance, you might negotiate better deals for logistics and stay.
A New Year resolution of never delaying financial decisions will help you save more and will prepare you better for any emergency.
Irregular Income: The Challenge for Professionals
It is fine to pursue your creative instincts or independent status if you either have an inheritance or regular income from your investments or spouse income. But it is not simple when you have huge expenses coming in the form of school fees, electricity bills, petrol bills, restaurant bills and EMIs.
There is no one-size-fit-all solution to this problem. Any strategy you may want to follow is dependent on the following questions:
· What’s your profession? Is your income regular or seasonal?
· What is your standing in your job market? Can you easily make a switchover if required
· How long can you sustain with your current background and experience? What’s your competitive edge? What will you need to enhance yourself further?
· Do you have any fallback option in case your practice doesn’t take on?
· How are you keeping health wise? What about your dependent family members?
· How many dependents do you have? How long do you need to support them? Is there any addition in the family planned? Will you be able to support it?
· What is your risk taking ability?
· What are your short term and long term life goals? What is your savings & expenditure pattern?
· What is your current assets/ liabilities situation?
A Comprehensive Financial Plan can strengthen you well to fight various financial fluctuations in life and can prepare you better to handle these changes. Following are some of the ways:
1. Inspect the lowest earning months:
Examine the reasons. If you feel the reason can exist in future as well. Make the expectation correction regarding your income. It will be judicious to adjust your expenses accordingly.
2. Make your income tax efficient:
Decide your tax status. Be it filing tax as a consultant or a sole proprietor running a firm. Both has its advantages and disadvantages. Make maximum use of all applicable deductions like 80c, 80 D. Keep long term horizons to take advantage of Long term capital gains status.
3. Create an emergency fund:
Keep aside 8 to 10 months expenses plus insurance premiums plus EMis in fixed deposit.
4. Take Insurance:
insurance cover for death, disability, general health of the family, assets and most importantly Professional indemnity.
5. Create a Regular expenses fund:
This is different from the emergency fund. This fund is required to take care of your expenses when your income fluctuates. Most of your monthly and annual expenses remain same in short run. Extrapolate your expenses for the year and keep adding to the fund. It will be useful if all major family members have access to this fund.
6. Shy away from loans:
Long term loans are long term commitments whereas it may not be possible for you to forecast your earnings for more than a year or two. So make maximum purchases on down payment.
If it is a big purchase like house then count EMIs for house loan as regular expense and fund for it in advance.
Avoid rolling over your credit card balances. Liquidate your investments rather taking personal loan for unforeseen expenditure. Taking loan for investments is Big No…No.
If it is a big purchase like house then count EMIs for house loan as regular expense and fund for it in advance.
Avoid rolling over your credit card balances. Liquidate your investments rather taking personal loan for unforeseen expenditure. Taking loan for investments is Big No…No.
7. Keep parking your earnings in Debt instruments for further investments:
This will take care of various sips as well. You can further invest in equities or alternate asset class as per your risk profile and money available for investments.
8. Retirement Planning:
The best part of being an independent professional is that, you Never retire! You can work as long as your health permits. Like an old wine your experience is more valuable provided you keep yourself updated.
This gives you more time to build retirement corpus and leave more money for other goals.
This gives you more time to build retirement corpus and leave more money for other goals.
9. Keep exploring Job options:
This will help you analyze competition and will give you more confidence while charging or increasing your fees.
10. Make a professional enhancement fund:
World is a global village now. People travel across the world and see new things which they expect and demand back home. Your clients can one of those hence your practices should be able to match those expectations or you will lose them in long run.
One must focus on his core area of strength. Do what you are able to do the best! And leave other tasks to experts.
One must focus on his core area of strength. Do what you are able to do the best! And leave other tasks to experts.
Do you have a Financial Disease?
The only thing which emerges before us on hearing the word Disease is Pain, dysfunction and discomfort. Till so far you have been hearing of Medical Diseases, but have you heard of Financial Disease? Medical diseases affect the body of a person and cause dysfunction and distress. On the other hand ‘Financial Diseases’ affect the mind of a person and cause distress and health problems. It is imperative to avoid and cure both in order to stay fit.
Let’s see that how can we identify the symptoms and causes of various financial diseases.
Let’s see that how can we identify the symptoms and causes of various financial diseases.
1. Hyper Insurance/ Over Insurance:
Human life is invaluable but it is still possible to calculate the ideal cover for a person depending upon various factors. These factors can be his projected earning capacity, current and projected expenditure and requirements of the dependents, time frames etc. Hence if you believe in locking all your savings in insurance policies solely, you may be suffering from Hyper Insurance!
Also Life Insurance is never for the person taking the policy or the cover, but it is for his/ her dependents. Insurance cover helps the dependents in case any untoward happens to the bread winner or the financial supporter of the dependents. So if a person with no financial dependents is taking insurance policy, he is suffering from Hyper Insurance.
This disease is very common in youngsters buying insurance for tax savings and aged people being sold insurance for wealth generation.
Human life is invaluable but it is still possible to calculate the ideal cover for a person depending upon various factors. These factors can be his projected earning capacity, current and projected expenditure and requirements of the dependents, time frames etc. Hence if you believe in locking all your savings in insurance policies solely, you may be suffering from Hyper Insurance!
Also Life Insurance is never for the person taking the policy or the cover, but it is for his/ her dependents. Insurance cover helps the dependents in case any untoward happens to the bread winner or the financial supporter of the dependents. So if a person with no financial dependents is taking insurance policy, he is suffering from Hyper Insurance.
This disease is very common in youngsters buying insurance for tax savings and aged people being sold insurance for wealth generation.
2. Hypo insurance/ Underinsurance:
You may have 20 insurance policies but may have never calculated the total Sum Assured. Sum Assured is the amount which you and your dependents will get in case of your death, disability or critical illness. Mostly insurance is seen as the total premium paid where as it is the Sum Assured which is of significance.
Hypo Insurance is very common with recently married couple and parents with small kids. General trend is to buy more number of policies to safeguard the future for example buying a child policy at the birth of child or for his education.
You may have 20 insurance policies but may have never calculated the total Sum Assured. Sum Assured is the amount which you and your dependents will get in case of your death, disability or critical illness. Mostly insurance is seen as the total premium paid where as it is the Sum Assured which is of significance.
Hypo Insurance is very common with recently married couple and parents with small kids. General trend is to buy more number of policies to safeguard the future for example buying a child policy at the birth of child or for his education.
3. Debt Trapping:
There is nothing like good loan or bad loan! Loan is a liability. You do not own an asset, product or investment until you have completely paid for it from your own pocket. It has its own cost attached to it as the Interest you pay. Your purchase may become costlier by 30, 40 or even 100% if you do not get rid of your loans in time. A credit card purchase may cost you 36% more and a personal loan purchase may be 30 to 45% pricey if you do not pay them off timely.
Loans should be taken to address the need of cash crunch for a necessity and not for the conspicuous purchase and speculative activities. It can become a costly mistake. Further options like servicing a loan vs. investing for better returns should be dependent on your overall financial, physical and psychological situation.
If you boast of your multiple credit cards but forget to pay on time or if you do stock market investments taking personal loans, you may be suffering from Debt Trapping.
Debt Trapping is prevalent among youngsters with new jobs and young couples. Impulsive buying is slowly but strongly becoming a habit with young Indians.
There is nothing like good loan or bad loan! Loan is a liability. You do not own an asset, product or investment until you have completely paid for it from your own pocket. It has its own cost attached to it as the Interest you pay. Your purchase may become costlier by 30, 40 or even 100% if you do not get rid of your loans in time. A credit card purchase may cost you 36% more and a personal loan purchase may be 30 to 45% pricey if you do not pay them off timely.
Loans should be taken to address the need of cash crunch for a necessity and not for the conspicuous purchase and speculative activities. It can become a costly mistake. Further options like servicing a loan vs. investing for better returns should be dependent on your overall financial, physical and psychological situation.
If you boast of your multiple credit cards but forget to pay on time or if you do stock market investments taking personal loans, you may be suffering from Debt Trapping.
Debt Trapping is prevalent among youngsters with new jobs and young couples. Impulsive buying is slowly but strongly becoming a habit with young Indians.
4. LRI or Low Returns on Investments:
Safety of money is important but it is equally important to grow your money as well. It is like raising your kids…you cannot keep them off from going to schools, driving vehicles or playing outdoors. It helps them grow. Similarly keeping ALL your money locked in low yielding investments like FDs, traditional insurance policies or NSC’s may hamper its growth. Your investment pattern should comprise of both safety and growth opportunities for your money. Else you may soon be compromising on your life goals.
If you trust only recurring deposits, fixed deposits, PPF or LIC policies, you may be a victim of LRI.
This disease is common among all age groups. It can be inherited… ‘As my father does so!’ syndrome. It can be circumstantial… ‘I have lost my money in market crash!’ syndrome.
Safety of money is important but it is equally important to grow your money as well. It is like raising your kids…you cannot keep them off from going to schools, driving vehicles or playing outdoors. It helps them grow. Similarly keeping ALL your money locked in low yielding investments like FDs, traditional insurance policies or NSC’s may hamper its growth. Your investment pattern should comprise of both safety and growth opportunities for your money. Else you may soon be compromising on your life goals.
If you trust only recurring deposits, fixed deposits, PPF or LIC policies, you may be a victim of LRI.
This disease is common among all age groups. It can be inherited… ‘As my father does so!’ syndrome. It can be circumstantial… ‘I have lost my money in market crash!’ syndrome.
5. Long Term Horizons:
What is this Long Term… 5, 10, 20, 40 or 60 years? How long are you planning to keep investing in particular asset class? You ought to keep the end objective in mind.
Not only you must tie your investments with your life objectives and time horizons but also you must monitor and rebalance them regularly.
If you also do investments for the sake of savings or tax savings specifically, you may also fall prey to LTH (Long term horizons) disease.
It is a new buzz word and people from young to middle age are suffering from it.
What is this Long Term… 5, 10, 20, 40 or 60 years? How long are you planning to keep investing in particular asset class? You ought to keep the end objective in mind.
Not only you must tie your investments with your life objectives and time horizons but also you must monitor and rebalance them regularly.
If you also do investments for the sake of savings or tax savings specifically, you may also fall prey to LTH (Long term horizons) disease.
It is a new buzz word and people from young to middle age are suffering from it.
Is there a remedy?
There is no quick fix remedy to any of these diseases. In personal finance all decisions are interrelated. Every penny that comes in has an effect on every penny that goes out and vice versa. Analysis of your entire life situation (financial, physical and professional) is required before taking any corrective measures
There is no quick fix remedy to any of these diseases. In personal finance all decisions are interrelated. Every penny that comes in has an effect on every penny that goes out and vice versa. Analysis of your entire life situation (financial, physical and professional) is required before taking any corrective measures
And as the adage says…’Prevention is better than cure’, Get your comprehensive financial health check up or comprehensive financial planning done before you are a patient. It is never desirable to be diseased!
You may also like to ponder upon some more realities of life, here is the link:
http://shilpijohri.blogspot.com/2012/10/shake-up-your-dreams-and-wake-up-for.html
http://shilpijohri.blogspot.com/2012/10/shake-up-your-dreams-and-wake-up-for.html
Tame your Home loan: Strategies to reduce it
Easy availability of home loans has accelerated the process of owning your own house. Nisha and Rishi have bought their house three years back. It was a smooth sailing and the home loan to them was Rs.37, 286 EMI to be paid for next 20 years. With the expected salary raises, the amount could have been easily borne. But it was not long before the shockers came. Their bank called them to either increase the EMI or the tenure in order to compensate for the increasing Interest rates, ie, the cost of borrowing. In last one year they were asked to adjust their EMI and tenure for two to three times.
Only a miracle could have saved them now! So should they keep waiting for the bank to be merciful and reduce the home loan burden? This certainly won’t happen but Nisha and Rishi can make this seemingly impossible task possible by employing some thoughtful strategies.
As the saying goes ‘Know your enemy well’! Understanding the concept of home loan is important.
Home loan constitutes of the trio: Principal (the amount borrowed from the lender), Interest (the cost of borrowing: higher the principal, higher the cost of borrowing) and the tenure (the term for which the loan is taken: again, higher the tenure, higher the cost of borrowing).
Reducing any one of them will help us reduce the overall burden of home loan.
1. Never exhaust your borrowing limit:
Banks may be offering up to 85% of the cost of purchase of house but remember the lesser you borrow the lesser you pay back. Ideally your EMI should not go beyond 40% of your monthly expenses.
2. Prepayments:
When you are servicing a loan at 11.25% interest rate, investing in PPF , Fixed deposits, FMPs, Liquid and debt funds etc at 7-9% does not make sense. Liquidate your low yielding investments and use them to make prepayments. Prepayments will reduce the principal directly and thereby reducing the total payback.
There can be prepayment penalty in some cases, usually in first 2-3 years of taking the loan if you make the complete payment. Partial prepayments are usually allowed without any penalty.
3. Increase your EMI:
EMI is calculated by equally dividing the principal plus the interest to be paid in the specified time frame. While paying these monthly installments some portion of the principal is also paid back. EMIs are decided initially by the bank as per the amortization schedule. As the interest rate on the loan is pre decided and distributed accordingly, any further increase in the EMI will go to the principal repayment.
Eg. For a Rs.40 Lakh loan @11% increase in EMI from Rs.41,288 to Rs.46,763 will bring down the total payment from Rs.99 lakh to Rs.78 lakh. Just by putting in Rs.5000 more per month can reduce the loan by Rs. 21 Lakh.
Hence cutting down on your restaurant bills and mall trips or diverting some portion of salary raise and increasing the EMI by few thousand rupees can bring in a lot of peace.
4. Reduce the tenure:
Either you are making prepayments or increasing EMI try to reduce your tenure. If you lucky to witness falling interest rates, choose to reduce your tenure and not the EMI. Simply put, you will payback lesser amount in 180 months than you will be paying in 240 months.
5. Renegotiate the interest rates:
Banks can offer different rates to attract the new customers. These rates can be lower than the old ones. Sometimes they are just teaser rates for first one or two years. In other cases the old customers can also get benefit of such offers by paying some conversion fee. This conversion fee can be 1-2% of the outstanding balance. But if it can reduce your interest rates by 2-2.5% for rest of the EMIs, it can be worth considering.
Banks generally do not communicate such options, hence buyer should be keep in regular touch with the bank to avail any such facility.
6. Use interest saving loans:
‘Interest saving loans’ are linked to your savings account. The amount in your account is considered as the prepayment and the interest is calculated on the outstanding balance thereby reducing the overall burden. Parking your emergency amount in such accounts can be helpful since you have the flexibility to use the money.
7. Consider refinancing:
Refinancing means converting your existing high interest loan to new lower interest one. This will mean foreclosing your existing loan with the current bank and purchasing a new loan with the new bank.
While you will have to bear the penalty if any for foreclosing the loan, at the same time there will be processing fee for the new loan as well.
The option can be worth considering if interest rates offered by the new lender are not just teaser rates for a year or two but will continue during the period of loan. Read the fine prints before you go ahead. Otherwise renegotiating the rates with the current bank is preferable.
Finally:
Any one or a combination of above strategies can be helpful in taming the ‘Home Loan’. But before considering any of the above options a thorough analysis of your present situation and future expectations is necessary. Eg. Increase your EMI only when you are sure of increase in income or there is no incremental expenditure coming up. Similarly make the prepayments once you have done sufficient emergency and risk planning.
So if miracles won’t happen, careful planning and staying informed can help!
If you wish to read about various aspects and costs involved in House purchase or wish to explore about Real Estate investing, following are the links:
http://shilpijohri.blogspot.com/2012/04/road-to-buy-your-dream-house.html
http://shilpijohri.blogspot.com/2013/11/buying-house-plan-for-additional-costs.html
http://shilpijohri.blogspot.com/2012/08/what-is-your-real-reason-for-investing.html
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