FAQ’S ON HANDLING DEBT
Make a list of your debts, including the creditor, total amount of the debt, monthly payment, and due date. Enlisting all debts in front of you will allow you to see the bigger picture represent your complete debt picture. Don’t just create your list and forget about it. Refer to your debt list periodically, especially as you pay bills. Update your list every few months as the amount of your debt changes.
Pay the bills on time: Late payments make it harder to pay off your debt since you’ll have to pay a late fee for every payment you miss. If you miss two payments in a row and your interest rate and finance charges will increase.
Identify your payments and set an alert to remind you several days before your payment is due. If you miss a payment, don’t wait until the next due date to send your payment, instead, send your payment as soon as you remember to.
There exists a technique called “snowballing”. This is where you single out one of your debts and then concentrate all your efforts on paying this debt off, while making the minimum repayments on everything else. Then, as soon as you have paid your first debt off, you get to work on the next debt and continue until you have cleared them all. Psychologically, it can be rewarding to see your creditors become fewer and fewer.
Consider discussing with your creditors to formulate a better feasible repayment plan by approaching your creditors explaining your situation.
The word…debt…has kind of a stomach-churning ring, doesn’t it? Debt isn’t universally bad.
Classify your debts into good and bad debts. Good debt puts money in your pocket. Bad debt takes money out of your pocket. Debt is rational when it costs less than the return generated with the borrowed funds.
To manage your debts properly, make a list of your bad debts and rank it. High interest loans and credit card debts are always bad. Rank your debts on the basis of their interest rates and not on the basis of their total balances.
Create a plan and pay off your high interest debt.
Include a reminder in the calendar for the due dates of the payments made.
Your credit score is a powerful number that affects your life now and in the future, in ways you might not even imagine. Your score determines interest rates you pay for credit cards and loans, and helps lenders decide whether you even get approved for those credit cards and loans in the first place.
Charge-offs (Situation where the creditor deems the debt to be uncollected), collections, foreclosure can devastate your credit score, making it almost impossible to get approved for anything that requires good credit. The best thing you can do for your credit score is to make your payments on time each month.
Building a solid credit history and maintaining a high credit score can have a dramatic impact on your quality of life now and in the future when you’re considering applying for a loan or even a prepaid debit card.
It is considered most important while buying a House. Purchasing a house is one of the greatest investments you can make in your own future. It’s also one of the most difficult ones to achieve if you don t have a good credit score. Banks are cautious about lending, with more stringent requirements than ever to qualify for a loan.
Even if one is not ready to buy a home, it is important to know that renting a home involves a credit check for most people now. Poor credit score will make it difficult to rent a house or apartment, or it may call for a larger deposit.
Also considered while buying a Car. Car loans are much smaller than house loans, so it is easy to get the loan with a poor credit score. However, a person with poor credit score will be paying much higher interest rates than a person with a good credit score.
If you’re thinking of starting a Business and need a business loan, your credit score and history will factor into your eligibility for small business financing. Regardless of whether you’re starting a business from scratch or trying to get the funds to expand, your individual credit score will affect your ability to get a loan for your business.
FAQ ON ANNUITY AND COMPOUNDING
It is important to understand that saving money and investing money are entirely different things. They have different purposes, and play different roles. Saving money is the process of putting cold, hard cash aside and parking it in extremely safe places. Above all savings mean maintaining cash reserves which makes it easy for you reach for them; available to grab, take hold of, and deploy immediately with minimal delay no matter what is happening around you.
Whereas when you invest money, you don’t keep the money with yourself but instead pool the money with some institutions. Investments are made in banks as FD’s, RD’s, mutual funds, bonds (corporate or government), equity, index funds etc. The money, or capital is used to generate a safe and acceptable rate of return over time, making you wealthier. The returns in the investments are subject to changes in the market. Investing money means suffering volatility in returns and over a period of time investments bring returns.
It is correctly said that spending depletes wealth, savings create wealth and investing grows it.
Q.How does money grow in investing?
In investing there is a concept of compounding. Albert Einstein called compounding as the “the eighth wonder of the world”. “He who understands it, earns it; he who doesn’t, pays it,”.
Compound interest is interest calculated on the initial principal, which also includes all of the accumulated interest of previous periods of a deposit or loan. Compound interest can be thought of as “interest on interest,” and will make a sum grow at a faster rate than simple interest. In simple interest, interest is calculated only on the principal amount.
Suppose the amount invested is Rs.100000 @ 10% for 3 years. The Interest earned on the amount shall be same 10,000 every year. But when the same amount is invested, compound interest shall be 10,000 in 1st year, 11000 in next year and 12100 in the 3rd year.
The rate at which compound interest accrues depends on the frequency of compounding, such that the higher the number of compounding periods, the greater the compound interest. The interest-on-interest effect can generate increasingly positive returns based on the initial principal amount, it has sometimes been referred to as the “miracle of compound interest.”
In short, when you invest money, you invest the principal amount you earn interest. In compounding, the interest earned gets added to the principal and then you on the accumulated interest you earn interest
The interest can be compounded on any frequency schedule from daily to annually. The frequency schedules can be daily, monthly, half yearly and yearly. When calculating compound interest, the number of compounding periods makes a significant difference. The more the compounding frequency, the higher is the returns.
While the magic of compounding is called the eighth wonder of the world or man’s greatest invention, compounding can also work against consumers who have loans that carry very high-interest rates, such as credit card debt. A credit card balance of Rs 20,000 carried at an interest rate of 20% compounded monthly would result in total compound interest of Rs 4,388 over one year or about Rs. 365 per month.
On the positive side, the magic of compounding can work to your advantage when it comes to your investments and can be a potent factor in wealth creation. Exponential growth from compounding interest is also important in mitigating wealth-eroding factors, like rises in the cost of living, inflation, and reduction of purchasing power.
Defined benefit pensions and Social Security are two examples of lifetime guaranteed annuities that pay retirees a steady cash flow over their life time. Now what is an annuity must be a question in everyone’s mind.
Annuities are designed to be a reliable means of securing steady cash flow for an individual during their retirement years. Annuity can also be created to turn a substantial lump sum into steady cash flow, such as for winners of large cash settlements from a lawsuit or from winning the lottery.
An annuity is a contract between the annuitant and an insurance company, who promises to pay you a certain amount of money, on a periodic basis, for a specified period. The annuity provides a kind of retirement-income insurance: You contribute funds to the annuity in exchange for a guaranteed income stream later in life.
Annuities can be classified as fixed or variable annuity. Fixed annuities provide regular periodic payments to the annuitant. Variable annuities allow the owner to receive greater future cash flows if investments of the annuity do well. Variable annuities provide for less stable cash flows than a fixed annuity but allows the annuitant to reap benefits of strong returns for the fund’s investments.
In order to balance risk and the possibilities of return, some features can be added to annuity contracts so that they work as fixed-variable annuities.
There are two primary ways annuities are constructed and used by investors: immediate annuities and deferred annuities.
With an immediate annuity, a lump sum amount is contributed to the annuity account and the annuitant immediately begins to receive regular payments, which can be a specified, fixed amount, or variable depending upon the choice of annuity package. The pay-out will not change for the rest of your life.
Immediate annuity is taken if there is a one-time payment of a large lump sum, such as lottery winnings or an inheritance.Immediate annuities convert a cash pool into a lifelong income stream, providing guaranteed monthly allowance for old age. Sometimes people close to retirement purchase these with some portion of their retirement savings to add to their guaranteed income in retirement.
Example would be selling the home and putting the entire amount in the annuity. Suppose we invest 50 Lakhs in immediate annuity expect to receive a fixed pay-out every month for 10 years.
Deferred annuities are structured to meet a different type of investor need—to accumulate capital over the working life to build a sizable income stream for retirement. The regular contributions made to the annuity account grow tax-sheltered until the income is drawn from the account. This period of regular contributions and tax-sheltered growth is called the accumulated phase. There can be a large lump sum contribution and it shall be followed by smaller contributions.
Annuities are generally not liquid. Deposits into annuity contracts are typically locked up for a period of time, which is known as surrender period. If the amount locked in is withdrawn, the annuitant incurs a penalty. The surrender period or the lock in period varies from 2 to 10 years depending on the particular product.
Individuals seeking stable, guaranteed retirement income should go for annuity. It serves as a means to enable those people to have certain cash flows because the lump sum put into the annuity is illiquid and subject to withdrawal penalties. It is not recommended for younger individuals or for those with liquidity needs to use this financial product.
Life insurance companies and investment companies are the two primary types of financial institutions offering annuity products. Life insurance is bought to deal with mortality risk – that is, the risk of dying prematurely. Policyholders pay an annual premium to the insurance company who will pay out a lump sum upon their death. If the policyholder dies prematurely, the insurer will pay out the death benefit at a net loss to the company.
FAQ ON PERSONAL FINANCE
Demonetization showed us the real power of people in saving money, having insight of future and requirements.But savings just doesn’t mean money kept in cupboards, under the sarees or flour boxes. Huge savings in that manner turned as a nightmare for many individuals. They never got it back into their own pockets.
Had these amount saved would have been put in proper areas like chit, gold, kitty or bank, their money would’ve still been secure and would stay with them.
For all the individuals who save, identification of proper ways of savings and investing is the need which gives us an inclination towards personal finance. Understanding personal finance will ensure a better and secure future.
Our families have always been bit biased. In majority of the they consider women shouldn’t be burdened with the family finances. Finances should be better taken care by the earning member of the family. Women already play different roles in a family of a mother, a daughter, cook, homemaker and many other roles. The conception existing is why do they need be the financiers too?
We’re not aware, we find it technical and full of calculations and at times consciously we stay away from the family financial matters.
Here, this question should be answered by all the women out there.
Life is never certain. With time, things and situation change. What if there is a sudden medical emergency? When your spouse is out of the country and there is a sudden requirement of repairing the roof top due to heavy rain? Or, what if the bore has to be dug deep to access ground water due to water levels decreasing? These are the various turbulent times which may require women to take the front seat.
These are the possible instances where a women’s savings will be handy. It is always advisable for both men and women in the family to handle the finances jointly.
Knowing about finances help women to sharing the load of entire finances. It enables them to tackle situations which require them take responsibility without any distress. It builds a support system for fulfilment of common goals in a family.
Situations are changing rapidly; we have high aspirations, retirement age is shrinking, maintaining health is not easy. So, we have to plan our future accordingly. Consider how the quantity of groceries items are shrinking in the basket every year due to growing prices of commodities without fixed monthly grocery budgets. Things which we used to get for 2,500 in last two three years will hardly come within the same 2,500 this year. We will be compelled to increase our monthly budget or should make real efforts to cut down some of our requirements. But the latter option is not always viable because things catering to our essential needs cannot be dropped. So, the option that we have with ourselves is to increase the budget. We tend to have more responsibilities and we want money to make our lives better. We have higher aspiration and to meet all our needs we need to save.
The question regarding when to start savings? Earlier the better. A quick tip:
Save 50 % of the post-tax income of those starting their career at around age 25 as you may not have many responsibilities. It will be a good beginning. As expenses increase, savings can be up to 30 per cent should be the target.
The first rule of personal finance is “Pay yourself First”.
It simply means that out of your monthly Income, a certain percentage has to be saved before it is spent.
‘Income minus Saving equal to expenses’ should be the rule and not vice-versa.
First out of your income, save the amount of money and then from the remainder, spend money.
Now the question arises, how much do I save?
There exists a 50-20-30 rule which says that, 50% should be the Household expenses including groceries, 30% should be saved for the short term, medium term or long-term goals and 20% should be spent including outing food and travel.
A budget is a basic understanding of how much money you’re spending versus how much money you’re making. And yes, everyone must have a budget. You should budget, keeping in mind that budgets come in all forms. While you can absolutely track your spending and allot rigid allowances for each expense, you can also go more relaxed: For instance, just automating a certain amount of your earnings into your savings account is technically a budget.
There is the golden 50/20/30 rule. Having multiple checking and savings accounts based on your spending habits and goals is also a type of budgeting. You can also have a priority list of spending and deferring your expenses. Rather than making a one-time payment, saving in bits for the one big expenditure will be a great idea.
There are three main things that every family should have it with them. These are:
Emergency fund – At least 3 to 6 months of your household expenses need to be your Emergency fund.
Med-claim – There is no thumb rule to it, but largely depends upon Age, previous health history, 5 lacs for a person below 40 yrs. and 10 Lacs if above 40 yrs. is suggested.
Term Insurance. – 8 to 10 times of gross annual income is suggested. Adding to all this, we should know about Types of plans and investments, Terms and conditions, Important contact persons, proper financial documentation, storing financial documents in at least 2 places
Yes. I have seen most of the push calls and messages coming from the various banks about how to get credit cards easily. Now, it is very easy to get credit cards just with a phone call. People enjoy spending through credit cards but do not actually enjoy paying the bills to the same extent. But one thing everyone needs to understand is, not paying credit card bills fully when it is due is like taking a high interest loan from the bank.
Having credit cards doesn’t limit our spending. Credit cards encourage people to save money that they don’t have. We can spend any amount from the credit cards within the spending.
While this may seem like ‘free money’ at the time, you will have to pay it off to the bank later. It puts a pressure on us at the time of payment and not at the time of using the credit cards.
Credit cards can make life easier and be a great tool, but if they aren’t used wisely, they can become a huge financial burden. If you do decide to use credit cards, remember these simple rules:
- Keep track of all your purchases.
- Don’t spend outside your budget.
- Pay off your balance on all of your credit cards at the end of each month.
This question itself comes with a lot of sub questions that we need to ask ourselves.
Do we think big spenders are rich and wealthy? The answer may be YES or NO.
Do you think being miser makes you wiser?
Most of the wealthy people are careful about their spending. We should look into the habits of a wealthy to decide which shoes do we fit in? They live within the means, they budget their spending, they save on taxes, they borrow very little and they also take professional help in managing their finances.
For the rich, money fades out soon. When income fades, the rich have nothing to fall upon.
We need to understand that being rich does not mean being wealthy. Rich mostly spend whatever they earn. The wealthy keep the money. Your money should work for you and not for others.
Spending depletes wealth. Savings build the wealth. Investing grows it. When income dries, you need wealth to fall back upon. Spending pays others and savings pays yourself.
The starting point would be to begin with small investments
Just as we don’t eat the entire food of the day at the same time but break it into breakfast, lunch, snacks and dinner the same way investments are to be made in different intervals and small amounts.
When making investments, make annual portfolio review a ritual. As we celebrate birthdays and anniversaries devote time to finding out what is working and what is not. Do not assume that letting it lie unattended is a strategy; it is laziness. Review your investments periodically.
Save 50 % of the post-tax income of those starting their career at around age 25. It will be a good beginning. As expenses increase, savings can be up to 30 per cent should be the target
Commit yourself the amount of savings you’ll want to make each day.
While Online Shopping – Add to cart and buy the same in the next day.
Commit your spouse about the amount and purpose of savings.
Have an auto transfer option from your earnings to the investment
Discuss finance with friends. Do not let any opportunity go out of your hands due to lack of funds.
Consult a financial consultant.
There are various instruments in which we can invest our money. For individuals having bank accounts, saving in banks in the form of FD, RD is a good option. For individuals who don’t have a bank account will opt for gold or chits or informally called as kitty. Other advanced and better options include mutual funds, corporate bonds, equities, real estate etc.
In the above-mentioned investment vehicles, identify your risk appetite, i.e. your risk-taking ability.
If you’re (conservative) i.e. prefer no risk – PPF, RD and FD’s will be better option
When you can take moderate risk – PPF, FD, RD, NSC, Mutual funds, equity and Real Estate.
When we love to take risk and understand the concept of risk and return, Equity, mutual funds would serve as a better option.
In all the above combination, investment in Index funds can be the most viable as they will diversify your portfolio risk and returns in a longer tenure is assured.
It is a well-known fact that human needs are ever growing. One should always differentiate between their needs and wants. Needs as we all know are essential for our survival. Wants in the other hand is a translation of our desires, not required for our survival but to satisfy our esteem requirements.
On the basis of needs and wants we can classify our goals as primary goals and secondary goals. Not all goals need to be fulfilled. Our primary goals are immediate and secondary goals can be fulfilled after the primary goals are done with.
So, examples of primary goals are: Emergencies, Med claim, Term insurance, If unmarried – Your marriage, Children education, Marriage of children, House/Property, Retirement, Elder care etc.
Secondary goals can be New Benz car, Foreign trip, visit to pilgrimage, Gadgets, New business venture, some social cause, Purchase additional property.
Yes, we have a variety of options available to help us in saving and investing our money.
Like, FD’s, RD’s, Gold, Chits, Mutual Funds, Equity, Real Estate etc.
There are three things to be considered before choosing the investment vehicles.
Those three things are,
- Liquidity – Do you want the funds immediately or later
- Timeline/Period – (Very short term) (1 year), Later (Medium term) (2-3 years) or after a long time (Long term) (5 years or more).
- Return – Moderate return or high returns
When you look for liquidity you chose an investment vehicle which provides you with cash in hand when you need. It doesn’t take much time to be converted into cash.
For E.g. when you need cash immediately suppose in 1 year, you can invest in FD for 1 year and break it when you need the cash. But if you need money in 1 year and you opt to invest in Real Estate, you may not be able to sell the plot and realize the money. So, liquidity becomes a very important factor to decide which investment vehicle to choose.
The most important decision that a person has to make when they decide their financial goals is their timelines. In simple words, in how many years do I need to buy a house, time I have till my Kid’s higher education, how many years I still have for my daughter’s wedding, which place to visit the next to next summer vacation.
Quantifying this “how” solves our major problems about fixing timelines.
Breaking down the above lines, planning for trip with family requires not only savings but also investment. Money grows in Investment. But the time available for me is 1 year. I need liquidity after 1 years and also moderate returns. I will choose RD as an option. Suppose I need 2 lakhs.
How much do I need to invest every month? If I save 7500 every month for 2 years, I can have 2 Lakhs at the end of two years. Or if I am aware of Mutual Funds and can chose a proper fund then investing in a SIP would also be a better option.
Gold as we all know serves as an easy way of saving money. It provides consumption satisfaction as we have the asset in our hand. Over the period we also know that they grow in value but moderately. They have high liquidity, i.e. they can be readily convertible into cash when and where it is required. It can be held for longer periods. But it comes with a slight disadvantage that there is a risk of safety. It is difficult to keep gold at house as there exists a threat of losing it.
Chits, on the other hand, formally is conducted by an organizer where money from different investors is pooled. A draw by lot takes place and the person who wins the chit withdraws the money. It is a good option to begin with the habit of saving. But it highly depends on the organizers that we chose. Care has to be taken so that the person doesn’t take our money and run away. It should not be made for gaining additional income but helps in accumulating our money for meeting the short-term goals.
Both these investment vehicles have been used for investment since ages but now with better education, better awareness about other options, a better choice can be made for putting our money at work.
Low Risk: FD’s are the most risk-free investment you can invest in. Your money grows at a steady rate and there is zero fluctuation.
Assurance: The tenure period is set. This makes it a locked asset that you won’t break.
Tax Benefits: You can reduce your taxable income by investing in FD’s.
It comes with various Cons as well:
Lower Earnings: Compared to other investment options, FD’s give low returns. On average, the rate of interest is 8-9%. Although it’s risk-free, the earnings are mediocre at best.
The Effect of Inflation:Inflation should be taken into account when making an investment. Inflation tends to nullify the growth of wealth. That’s why it’s important for your money to grow at a rate above the inflation rate. When compared to inflation, FD’s don’t offer good returns. They’re just a decent investment that offers security at the most.
Taxable: In spite of having tax benefits, FD’s don’t entirely save tax. The returns you get after maturity are taxable. This means you won’t get the full benefit of your investment. This is a major drawback.
Low Liquidity: FD’s come with a lock-in period. This takes away the flexibility in your investments. Investors are restricted once they open an FD. They can’t change to other forms of investment with their money. A premature withdrawal has two side effects. First, you’ll be charged a fee for pre-closure. Second, the interest rate will reduce. Both are losses that must be avoided.
Talking about Stock or equity, it is the ownership of shares in a company or business. Let us now look into the pros and cons of investing in stocks.
Highest Returns: Among all investments option, equity/stocks are the best, as the average returns in a systematic manner is 12-15%. Some good investors are able to reach numbers up to 20%.
Liquidity: Another advantage with stock investment is that you can withdraw your money anytime you want. Good investors reallocate their stocks as per market trends. You can alternately reinvest through another approach if prospects are good. This flexibility works better in the long run. It lets you keep control over your money.
Tax-free Dividend: Many companies give out regular dividends on stocks. This is a great way to generate an alternate income. The best part is that it’s not taxable. In general, companies that give out regular dividends tend to perform better.
Defeat Inflation: You generally buy a stock when its value is low. You sell it when the value is higher. With returns being high, stocks are a great option to beat inflation significantly.
Like a coin has two sides, every investment option comes with its respective cons:
Highest Risk: Equity is the least secure investment. But with some strategic planning and proper management, this can be avoided to an extent. If you’re extremely risk averse, it’s better to avoid equity. If you still want the benefits that it offers, invest a small amount and have other channels to back you up.
Reallocation: Equity funds don’t perform all that well. You leave them to mature like FDs and PFs. These funds should be monitored regularly.
According to market fluctuation, certain funds might not perform well. In those times, you should reallocate these funds to a more profitable organisation. This keeps the growth curve positive and ensures your money grows one way or another. This isn’t easy and requires regular monitoring and taking right calls at the right time. A professional advice might help.
To conclude, FD and equity both have their own merits and demerits. It’s up to you to choose what suits you best. If you’re looking for a steady, risk-free, and hands-off investment then FD is a good choice. But, if you’re looking for exponential growth in wealth and are ready to take a risk, equity may be the best bet for you.
When we see something performing spectacularly, we are overcome by the anxiety to book profit and lock it.
If we see something that is not working, we usually let it lie as it is. Losing investments typically become long term investments. Whenever a situation is not favorable, think what ignoring does to our money. Take time to evaluate what is not working and why, and cut losses.
That is more important than booking profits; it can run its course. Own up to mistakes if any and make corrections. Just like the rear-view mirror which ensures us to track our movement while driving our car, reviewing investments ensures a smooth way towards our journey.
In the course of investments, we must keep a regular monitoring of these investments.
Visit the goals, check the timelines. Review if the amount you’re saving is enough to meet your goals in the set timelines. Assess if the investments and incorporate changes without any further delay.
Do not be financially overconfident, neither should you be lazy in dealing with the financial matters.
Active Income is income for which you should be physically working for. No work no pay
Passive Income is something for which you get paid without working i.e. money working for you.
Everyone deserves the best from life and a key component of a good life is financial security. As you get older, your financial safety becomes more important for reasons such as a shorter career horizon, more health concerns, higher tastes and lifestyle expenditure requirements, more dependants and of course more social engagements and other commitments. Your financial security depends on the extent to which immediate and future financial needs have been provided for by a combination of your long-term savings and future earnings and Future earnings should preferably be Passive Income rather than Active Income.
There are Investment Assets that can earn passive income include houses rented out, shares of quoted or unquoted companies earning dividends, Treasury Bills, Bonds and Bank Deposits and units of Mutual Funds and other Collective Investments. It does not include your Owner-occupied house (unless you intend to move out), your personal car, no matter how valuable, or your beautiful collection of jewellery.
A home loan should be taken by keeping three things into consideration,
- the take-home income,
- the down payment amount and
- the home loan interest rate,
one can figure out the worth of the house that one can afford to buy.
If you’re buying a home with a down payment of 20 per cent and the rest on a home loan, and also keeping the income-to-EMI ratio in mind, the affordability arrives at about 4.5 to 5 times of one’s annual income. In other words, you are buying a house which costs about five times of your income. Therefore, when real estate prices go up, affordability becomes a concern, unless income also moves in the same tandem. There exists a general rule that Monthly EMI on the home loan should be less than 30% of monthly income. Total EMI obligations (home plus others) should ideally be less than 50% of monthly income.