Article published in Mumbai Mirror (Times of India) on 5th Jan 2018. Link: https://mumbaimirror.
“Spend less, save more” is a great resolution, but how do you actually achieve it? An expert offers advice.
The definition of insanity is doing the same thing over and over again and expecting a different result. Yet, when it comes to finance, that’s exactly what most of us do. If you’re determined to make this the year when things finally start to go your way, all it requires is some sensible shifting — which means, move out of wrong loans, investments, expenses and move into the right ones. Here are a few suggestions on how to achieve this.
Credit card payments
One of the biggest mistakes one makes is to pay off only the minimum amount due towards credit card debt. It’s vital to remember that you’re paying an annual interest rate that’s upward of 36 per cent on the rest of the amount; plus, if you’re doing this regularly, your debt is steadily mounting too. Consider the fact that if you have an account (a deposit) with the same bank, the amount in it will earn no more than around 6.5 per cent annual interest (current rate). Paying out 36 per cent when you’re earning only 6.5 per cent is the quickest way to go bankrupt.
What if you don’t have the money to pay off the debt you’ve accrued on your card? Take a personal loan from your bank to pay it — the annual interest on a personal loan will be around 10 to 12 per cent. You could also take a top-up loan on your existing home loan — the interest rate will be around 8.5 per cent to 10 per cent annually. Use this to repay the entire credit card debt in one-go and promise yourself that you will only use credit cards for revolving credit henceforth.
Regular spending fasts
It’s great to reduce what you spend to pay off loans, but it’s perhaps even more important to stop wasting your money. Just like you do a religious fast or a detox fast, at least a couple of times a year, make it a point to swear off spending, say for a whole month. So, for that month (and you can do this twice, even thrice a year — the more often, the better) you cannot go impulse shopping; you just have to dig into your wardrobe and make do with whatever you have. No takeaways or posh brunches or lunches either. Spend only on what you absolutely have to — like the groceries. Try it out, and every year, add one more ‘no-spend month’.
The problem with any fast, however, is that when it ends, you tend to overcompensate for what you missed out on. Make sure that doesn’t happen here. Whatever you save on your spending fasts should be parked directly into your emergency fund (this must ideally have a reserve of six months’ income (to a year’s income).
Ensure you’re insured
The earning member/s of the family should always have life cover — a sum of money that the family will receive in the event of his/her death. Worldwide, the rule of thumb is to multiply your annual salary by 20 to arrive at the ideal ‘cover value’ for life insurance for an earning member of the family. India is the only country in the world where insurance is seen as investment — this perspective is gravely flawed as, if you’re looking for an investment, you would probably make double by investing the money in mutual funds. Insure yourself for the sake of insurance — the way you do a car.
Besides, today, a medical policy for Rs 3 lakhs to Rs 5 lakhs is a must for anyone between the ages of 30 and 35. As you get older, your family’s medical cover should be at least Rs 10 lakhs.
Reduce and delay
Reduce you expenses — your movies, parties, coffees, restaurant visits etc. — by cutting down on these gradually. If you go for one movie a week, cut it down to one a month and then one every two months and so on; if you dine out once every fortnight, cut it down to once a month and then to once every two months etc. Reducing your expenses thus will allow you to accept the changes without feeling the pinch. If you absolutely must have something or must do something (like go on a holiday), delay it. Put off the expense till the next month or the month after. By the time the month comes around, you may not even want that thing anymore. Remember a penny saved, is a penny earned.
Save first, spend later
Savings (for your emergency fund and for investments) must be deducted FIRST from your income; whatever is left may be used for expenses. Most of us live the other way around — spending first, then parking the remaining money in investments. Ideally, 30 per cent (or more) of your income — whether you earn a lot or a little — must be saved. If that seems impossible, step it up slowly. Start by saving at least 10 per cent of each pay-check and keep increasing this every quarter.
What to invest in
While choosing products to invest in, consider the following: the purpose of investment; when do you require the money? and the future value this investment will amount to (inflation adjusted). Answering these will allow you to understand your risk appetite and then you can work out how much to invest in equity and how much to reserve in debt products.
Saving and investing are habits like any other, and with time, they just become something you do instinctively. While smoking or drinking may give you a buzz now and make you sick later, these great habits work the other way. It may feel a bit tough now — when you first take them up — but down the road, developing these habits will help you lead a fulfilling life.
Article published in Mumbai Mirror (Times of India) on 5th Jan 2018. Link: https://mumbaimirror.
His interests include birding & adventure activities.