Manage Debt, Money Basics

7 financial mistakes you must avoid

Everybody makes mistakes. The repercussions of a mistake could be trivial or grave. A financial mistake is one such blunder that can create big problems if they are not Mistakeresolved immediately.

  1.  Lack of goals: Most people don’t plan to fail; they just fail to plan. A good percentage of people are still not aware of what is financial planning and how to go about it. In simple words, financial planning is taking a disciplined approach to achieving your pre-determined financial goals. A good financial plan is based on strong goals. Well-articulated goals with a detailed break-up into long-term, mid- term and short-term, specific steps on how to achieve them and checking the progress periodically are basic ingredients of financial planning. As you can see it all starts with a goal.
  2. Lack of income protection: Living without income protection is just like “flying without a net”. A financial plan is incomplete without adequate cover. One major goal of a financial plan is to maintain the life style of your family whether you are with them or not. A common mistake we make is buying life insurance policies such as endowment plans or money back and hoping to reap returns. Remember, returns from such policies are much less compared to traditional investment products such as stocks, mutual funds, gold or real estate. So why not separate investment and insurance completely? Most salesmen will not give you this advice because the commission in plain vanilla term policies is the lowest. Protect yourself with an inexpensive term policy providing sufficient life cover. The thumb rule for your life cover is your annual income multiplied by 20. You can add family floater mediclaim or health insurance policies for self and family members. It’s a way of making sure that your family will continue to enjoy the current life standard.
  3. Lack of investments: Start saving as early as possible. Generally, a person should start saving and investing money from the day of getting first salary. By starting your financial plan at the earliest, you are allowing your money to grow by the sheer power of compounding. Don’t be over-enthusiastic about it either. Develop a regular and disciplined investment approach. Select a few good equity funds and do a Regular Investment Plan. Increase the investment amount as your income increases. Don’t wait for a lump sum amount to be accumulated to invest and don’t try to time the market.
  4. Too much of loans and debt: Don’t stretch yourself too much with a mortgage. Buy within your means. It’s not worth the sleepless nights. It’s always advisable to resist the temptation and control unnecessary expenses. It includes loans, mortgages and credit card expenditure. House loan and car loan may be necessary but do some analysis about how much you really need and what can you comfortably be able to pay back. Keep a tight leash on personal loans and credit card debt. They can be a drain on your finances as the interest rates are much higher. You must have a plan to reduce the loan and pay off the debt gradually.
  5. Only debt/fixed income instruments: Putting your entire investment amount into the debt instrument is like settling for a bonsai instead of a huge teak wood tree which you could have. It’s good to be safe but too much of safety will not make your money grow. There are many among us who keep their money in FDs (fixed deposits), PPF, insurance policies, National Saving Certificates (NSC) etc. It’s good to have them but they should not have all your money. You must have a healthy mix of equity and debt in your portfolio. Equity gives you growth and debt gives safety with peace of mind.
  6. Over-indulgence in stocks: By watching too much of business news channel and reading business journals we start believing that we know all about stocks and the way companies work. Listening to equity analysts gives us more encouragement. We think we can beat the market. But the truth is most people fail to make money at the stock market and end up wasting their precious time and wealth. Sit with a certified Financial Planner and chalk out a long term plan for yourself. Remember “slow and steady wins the race”.
  7. Owning too many products: “Wide diversification is only required when investors do not understand what they are doing.” The unavoidable risk from over diversification clearly articulated in this powerful quote by Warren Buffett. The right portfolio should be built by optimum allocation into different asset classes. A good financial planner should be able to tell you the right proportion as per your profile. Within a particular asset class it’s better to do thorough research and put your money in a few select products. For example if you are investing in mutual funds then buying too many of them is not advisable. Similarly if you are an investor in stock market it’s advisable to pick the right stocks and stick with them. We keep adding more products to the portfolio because we fall for what the salesmen and advertisements tell us. Do your own research or consult a certified financial planner for such decisions. It’s important to own the right ones and not too many.
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Manage Debt, Money Basics

Indicators to know that your financial life is in trouble

The condition of an individual’s financial life is not apparent only based on the income he earns. Sometimes, even after earning well, your financial life may not be in the best of colour. Many people are also comfortable living in the assumption that all is well. However, there are some broad signs or indicators which will tell you that your financial life is in trouble. Remember that the more valid these signs are, the more are the chances that you are heading towards financial disaster, and the more critical it is for you to take proactive steps to rectify the problem. Let’s look at some indicators which tell you that your financial life is in trouble:

You cannot survive without an income for 3 months Income is different from wealth. It is seen many a time that people earn pretty well, but if they lose their job suddenly, they are grappling for even the basic expenses. This is because they have not saved up enough to meet contingencies. If you have been working or in a business for a few years, then you should have a good back up in place which will help you survive for atleast for 3 months. When your expenses are very high and you do not have much left even when you are earning, you are stepping in to financial disaster. This is the first indicator to show that your financial position is shaky.

You pay high EMIs on depreciating assets Having too many liabilities on your books is not good. It is worse if you have debt which does not result in an appreciation of your assets. For instance, having high amount of personal loans, credit card debt or even car loans which result in high EMI outflow from your monthly salary is a very unhealthy practice. As a thumb rule, your total EMI outflow should not exceed 40% of your monthly take home pay. If you have a home loan, the EMI towards this will constitute a sizeable portion. It is therefore better to avoid other kind of debt which does not increase your asset value. When you realise you are paying high EMIs on depreciating assets, this is another indicator of financial trouble. It is not easy to get a better paying job with the skills you possess: Professionally, you must grow and advance in your career, such that it translates to better income and higher savings. However, if you find that you are not able to move upwards in your career despite repeated attempts, it means that you are going to be stuck with the same salary every year, or be happy with a small hike. This is turn means that your investments will be limited, resulting in limited wealth building opportunities. Take a proactive step in honing your skills and building your career for a better financial life as well.

Spending on social functions Majority of people in India believe in spending unnecessarily on social functions, either as a status symbol or keeping in line with traditions. Although this may be an important part of your life, spending too much on social functions is a mere waste of money and does not yield anything. If you realise that you have been spending too much on such functions, you can be sure that you are headed for financial trouble. A good way of finding this out is to list out all the expenses you incurred in the past 3-5 years on various social functions and see how much of your income has not been put to good use.

Working for long, but no ‘asset’ If you have been working for at least 3 to 5 years, but still have no asset, then it means your financial life is in trouble. You should have some investment in fixed deposits or gold or mutual funds or have a small part of down payment saved for your future house. If you do not have any of this, it means you have been very careless in your financial life and must immediately put your finances in order.

The initial signs of a troubled financial life will not take long to manifest into a bigger problem which can be very difficult to handle. It is important to start at the earliest and rectify your past mistakes.

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Manage Debt, Money Basics

Tips To Control Your Spending

Control your spendingIncome levels have shot up over the past decade. Higher income levels have also brought about a change in lifestyle and spending patterns. Nowadays, it is very easy to spend compared to saving and investing it, as the incentive to spend is huge. Advertising and marketing have reached new heights, with each brand claiming that it is the best in the market. In such a situation, it is very important to have a control on spending, with discipline and planning. Unrestrained and random spending can be very harmful, both in the short term as well as in the long term.

Here are a few tips to control your urge to spend:

Draw a budget and spend in line with this: As much as you may hate it, a budget is a strict yes and an important pre-requisite to efficient financial planning. A budget helps you track your expenses, cut back on unnecessary expenses and improve cash flows. A clear budget helps you to prioritize your spending patterns and avoid wasteful expenses. Put together a spending plan by listing both necessary items like food, grocery, utilities and transport as well as discretionary items like entertainment, dining out etc. A budget is the first step to help you control your expenses. When you do not have a tab on your expenses, you tend to over-spend and exceed your limits.

Avoid impulse spending: Impulse spending refers to reckless, unplanned spending which comes at the cost of your monthly investments. Such expenses are always out of your budgets and come in the way of realising your financial goals. Avoid such expenses and always try to distract yourself by doing something else to keep you from spending impulsively.

Unsubscribe from online shopping emails: Many a time we subscribe to mailers which give details of online deals and offers. Sometimes we are included in the mailing list of such mailers without our knowledge. While such mailers can be advantageous as they help you get good shopping deals, you should remain subscribed to them only if you know to control your shopping desires. Most people get carried away by such mailers and are tempted to shop for things they may not even need, just because they get it for cheap. Just because something is on sale doesn’t mean you have to buy it. If you think you will be swayed by such offers which results in impulse buying, it is better to unsubscribe from such mailers.

Use credit cards smartly: Credit cards are the most dangerous weapons which can get you tangled in a debt trap if not used with care. Remember to read the terms and conditions of the card before applying and getting the same. The interest rates and penalties on late payments are humongous and can deplete your cash balance faster than you imagine. Try and pay off the entire outstanding amount before the due date, as unpaid amounts carry exorbitant interest rates. Nowadays it is also possible to convert large ticket purchases on your credit cards into Equated Monthly Installments (EMIs). Always avoid the EMI route, as this also carries an interest. If you are unable to pay EMIs, it can result in a debt loop and increase interest outflow. Borrowing cash on credit cards also is expensive and should be avoided.

Take a break when you are confused: If you are shopping in a mall and find something which is very attractive, but quite expensive and not necessary for you, then take some time off to think if you really need it at that point in time. Walk away from the shop and spend some time analysing if you can do without the product for some time, and if yes, wait for the right time to buy it.

Keep yourself occupied to avoid ‘boredom shopping’: It is often seen that some people start browsing online shopping sites simply because they are bored and want to do something different. This can spell trouble for your wallet, as randomly browsing shopping websites may result in you spending unnecessarily. Keep yourself busy to avoid this.

Do not visit shops unnecessarily: Window shopping is okay, but if your ‘window shopping’ translates to actual shopping every time you step out, this is not healthy. Do not visit shops and malls simply to kill time. Experts also recommend leaving behind your credit card when you step out, in order to cut back on impulse spending.

Be strict with children: Although it is good to cater to your children’s needs, allowing them to dictate your monthly budget is not good. Kids are an important contributor to impulse spending. Teach them to earn their toys and not take it for granted that they will get it at any cost.

Spending is like a craze and can get dangerous if not kept in check. The critical factor in controlling excessive spending habits is to have a control of your needs and wants and following your monthly budgets strictly.

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Credit Card Debt
Manage Debt, Money Basics

Situations when you shouldn’t use your credit card

"Life just seems to be getting simpler by the day," remarked 22-year-old Swati, a software developer with a leading MNC. She was referring to the convenience provided by modern-day living aids like plastic money, online shopping, e-payments, deferred payments and the like.

"Really," quipped her grandmother. "We never had any of those in our days, but we did manage to save some money out of whatever little your grandfather brought home." After discussing the pros and cons of credit cards, Swati realized the trap she was getting into.

Credit Card Debt

Typically, credit cards would temporarily boost her purchasing power, allowing her to give into temptations and spend money that she did not as yet have in her account. But in case she is unable to pay in time, there would be a pile of accumulated charges and higher bills for delayed payments that she will have to deal with.

Here are the rules for minimizing the use of credit cards:

1. Keep some cash in hand or pay 38 per cent rate of interest
It is better to have some cash in hand as withdrawals through credit card from an ATM are subject to interest at around 2.85 per cent compound interest per month. The clock starts ticking from the day of withdrawal and effective annual rate of interest would amount to almost 38 per cent. Besides, a transaction fee will be  levied on the amount withdrawn.

2. Swipe only when you are sure
Banks generally offer an interest-free period of 20-50 days to credit card holders. Try not to use your card if you are not sure of repaying the amount within this period. Credit card defaults are not only charged a late payment fee but also attract an interest of up to 3 per cent on the outstanding amount from the date of transaction.

The whole point of credit cards, the way they are rendered most profitable, is that we dig ourselves into debt and stay trapped there forever.

3. Avoid jumping your credit limit
Avoid using your credit card if your expenditure is already close to your credit limit set by your bank. Some banks permit overshooting the original credit limit, at an additional charge on the overdrawn amount.

4. Discounts and sales: Look the other way
A batch of credit cards fattens a wallet before it thins the wallet.

If you are a compulsive shopaholic, try to leave your credit cards at home when you go for a first round of window shopping. Come back and thoroughly check your wardrobes to figure out what you really need to buy. Next time take your cards along and try to avoid the temptation to overspend.

5. Reward points might not really be rewarding
Spend only when you really need something, and not for accumulating 1,000 reward points on the first swipe of your credit card.

6. Use money cards or travelers cheques while travelling abroad
It is always safer and wiser to carry travelers cheques or money cards for which you have paid in the local currency. Transactions through international credit card are billed at the rate of exchange prevailing on the date of purchase and additionally attract a charge of 3 per cent on the amount.
ATM withdrawals through international credit cards are levied with huge transaction fees and service charges.

As a thumb rule, try to restrict your spends through credit card to 40 per cent of the credit limit.

7. Is your online transaction secure?
Crosscheck the genuineness and safety of the website when using your credit card for online transactions.

So, be judicious not only in your expenditure, but especially so in your expenditure through credit cards. Remember that it is not only the amount that appears when you swipe, but also an added compound interest that you might finally end up paying if you are not able to afford the expenditure at that point of time.

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Manage Debt, Money Basics

How to Create a Monthly Budget

budgetCreating and following a budget is one of the most difficult things for many people to do. Just thinking about all of your finances can make you wish you were getting your teeth drilled as the better alternative! However, making a budget and sticking to it is important to a strong financial future and can help you prevent a bankruptcy filing. Truth be told, creating a budget can be fun because it allows you to take control of your life.

Gather Your Expense Materials

The first step to creating a budget is to find and gather all of your monthly bills. This includes everything that you pay on a monthly basis, such as credit cards, utilities, cable, Internet, etcetera. You will also need to find any bills that you have to pay less frequently than every month, such as perhaps auto insurance or car registration. Once you have all of your expenses together, you are ready for the next step.

Determine Your Income

Figuring out your monthly income should be a far easier task than getting together all of your bills. Most people are paid every two weeks, so your pay stubs or bank statements should do. If you receive any other type of income on a monthly or less frequent basis, make sure to take note of it. You will want to make sure to only account for your after tax income, it makes little sense to include income in your budget that will be immediately taken by the government!

Create the Income Portion of Your Budget

You can begin creating your budget in a word processing program on your computer or the old fashioned way (by hand, of course). Create a monthly income column. Divide the column into regular income and irregular income. It would look something like this:

Calculate your irregular income by calculating the total amount of income you receive in a year that is not your regular paychecks, and divide by 12 (12 months in the year). For example, if you are paid $3,000 once a year in June, divide $3,000 by 12 months to get an average additional income of $250 per month.

Create the Expenses Portion of Your Budget

Start creating the expenses section of your budget below or next to the “Monthly Income” section. Create a category for each type of expense you have each month. For example, your expense section may start to look like this:

Monthly Expenses

Remember to also create an Irregular Expense category, just like you did for your irregular monthly income! For example, if you have to pay $150 a year for car registration and $1000 a year for auto insurance you would have a category of Irregular Expenses for $95.83 per month. You get that number, as before, by dividing your total yearly irregular expenses $1,150 by 12 months. For your irregular expenses, set aside that $95.83 into a savings account so that you have the full amount when the time comes to make the payment!

Savings Expense Category

Don’t forget to create an expense category for savings! Some people do not like to think of savings as an expense, but in reality, it is being subtracted from your monthly income. It is very important to save money each month not only to buy gifts, go on vacations, but to create an emergency fund. Many financial planners recommend people have an emergency fund of  6 months worth of income in case they lose their job. If you save each month, you can get to your savings goal much more quickly.

Subtract Expenses from Income

Subtract your total expenses each month from your total income each month from your budget table. Anything left over can be put into savings or other categories. If you have a negative balance in your budget, you need to reduce your expenses (or increase your income).

In my opinion, it doesn’t matter how much you are earning, its about what percentage you can save from your earnings.

Please feel free to comments or questions in the box below.

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