The year 2014 was clearly an eventful one, that started with high inflation and high uncertainty about the economy. But that, however, slowly but surely started giving way to optimism in general, lowering inflation and by and large, brighter prospects for the economy, particularly after the arrival of the Modi government. While we still await all of this translating into tangible benefits on the ground, there are a few things you can do to get smarter about your personal finances in 2015. Here we take a look at some of them:
1 Simplify your finances
Human life has a tendency to get complicated, and this can happen with your finances too. After all, you not only have to make a lot more choices and financial decisions today compared to your father or forefathers, but also have to keep track of more details ranging from credit card dues to various loan and bank accounts, and from stock market investments to health and retirement plans. But once things become messy, people not only start missing due dates and paying lots of late fees, but also adding a huge pile of debt and, thus, the penalties for making mistakes just keep on escalating.
Therefore, learning how to winnow down your choices and streamline your finances is as much important as increasing and diversifying your portfolio. In fact, streamlining your financial life not only helps you manage your portfolio well, but also fattens your pocketbook.
2 Prioritise your spending & stick to the budget
You are more likely to face financial problems, if you have been extravagant in your expenses. However, in a bid to tide over the current crisis and also avoid such crises in future, you need to adhere to some financial disciplines, and making a budget and sticking to it is one of them. It is also important to prioritise your spending and keep track of your spends on a regular basis to ensure that your money is going to the right places. However, don't be too hard on yourself. Leave an amount for occasional splurging as well, so that you do not feel deprived.
3 Streamline your debts
One of the important lessons the financial turmoil has taught us is to avoid over-reliance on debt, particularly for self indulgence. This lesson has assumed more significance in view of the fact that today driven by easy availability of finance and plastic money -debt has become a way of our life, with very few of us being sure how to get out of it. You should, therefore, ensure that at least all your high-cost debt is paid off well in time so that your family members don't have to suffer in case you are no more.
Even if you can technically afford the monthly payments on the debt you're carrying, having a lot of debt is still a financial burden and could be preventing you from getting ahead. Pay down your debt as quickly as possible so that you can enjoy the benefits of a debt-free lifestyle.
4 Avoid counting on tomorrow's income
Counting on tomorrow's income to spend today is one of our greatest mistakes, which has already been proved by the recent financial turmoil. In fact, up until the financial meltdown hit us, the spending levels of individuals, especially in the 25-35-year age group, have been almost equal to their income, if not more.
With the easily-available loans and credit cards they were tempted to indulge even without being able to afford the expense. Now with pay cuts and job losses, they are facing the worse. However, even if you keep your job now, the prevalence of pay cuts makes it clear that you can't count on an ever-expanding pay check to make up for your spending. Therefore, just bank on whatever you already have and avoid counting on tomorrow's income as far as possible.
5 Avoid expensive silly mistakes
You probably know that banks charge very high interest rates on outstanding amounts on credit cards. Most people also know that it's very expensive to withdraw cash or borrow money on their credit cards. But what a lot of people do not know is that only by paying the total outstanding amount at the end of the month you can avoid paying high interest.
Citing an example, he says that if you total bill is Rs 21000 and you minimum due is Rs 1050 (5% of the total outstanding) and you pay Rs 20,000 (as a round figure), you will not be charged interest only on Rs 1000 (which is the unpaid amount) but on the entire Rs 21,000 since you haven't paid the total bill amount. So, you're better advised to pay a little extra (if you like to round off) than even a little less.
Likewise, look for ways to pay down expensive debt. It's not uncommon to find people with outstanding personal loans at interest rates of 17-18% while having savings balances or money in fixed deposits yielding them half of that rate. Given that your deposit rates might come down before your personal loan rates, you're best advised to pay it down.
6 Start paying your bills on time
If you are one of those who avoid paying bills -such as mortgage, phone, credit card and utility bills - on time, you are wasting lots of money without realizing it. For instance, if you have four credit cards and you are not clearing the minimum dues on time, you would be paying at least Rs 2,400 in late charges alone. However, if the same amount is invested every month in a scheme that earns, say, 10% annually, it can actually fetch you Rs 32 lakh in 25 years. And we have not yet factored in the savings resulting from the timely payment of other bills!
7 Look for opportunities to refinance your home loan
It seems fairly certain that interest rates will be lowered in early 2015. The RBI now also mandates that banks can no longer charge pre-payment penalties on home loan foreclosures. What it means for you is that if another bank is willing to offer you a home loan at a significantly lower interest rate (and a low processing fee), it might be worth taking a look at it.
On a 20-year loan, for instance, a 1% reduction in interest rate reduces your EMI by about Rs 67 per lakh or Rs 1675 on a Rs 25-lakh loan. Now if the saved amount, ie, Rs 1675, is invested every month in a scheme that earns, say, 10% annually, it can actually fetch you more than Rs 12 lakh in 20 years. Just imagine how much you can save just by switching to a low interest loan.
8 Don't get into the latest investment fads
There will at least be one fad that will be doing the rounds. Learn to identify this and more importantly, avoid it. It may not be suitable for you. Evaluate it before you plunge into it. Remember that traditional investment tools like PPF are still a better saving option than most of the so-called new generation investment options.
9 Cover your liabilities
It is pretty evident that an economic recession, a pay cut or higher interest rates on loans would all have much less of a negative impact on your family's financial future than the death of the bread winner of the family. However, few people realize the importance of having sufficient risk cover as most people look at insurance as a no return investment. Also, as the financial needs of individuals have evolved over time, there is heightened importance of risk protection combined with wealth creation. Insurance products can help provide an important protective shield around ones financial goals and retirement savings. It also helps in effectively managing a diversity of risks and allows one to enter their retirement years with more confidence. Therefore, make sure you have enough insurance to cover at least all your future liabilities, if nothing more.
10 Have realistic expectations
There's nothing wrong with hoping for the 'best' from your investments, but you could be heading for trouble if your financial goals are based on unrealistic assumptions. For instance, lots of stocks have generated more than 100 per cent returns during the great bull run of recent years. However, it doesn't mean that you should always expect the same kind of return from the stock markets. The recent market meltdown is a case in point. Therefore, when Warren Buffett says that earning more than 12 per cent in stock markets is pure dumb luck and you laugh at it, you're surely in for a trouble!
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