Many smart individuals resort to financial planning to handle their finances better. They make a budget, invest towards their goals, and plan their taxes. Yet, despite everything their financial plan could fall short.
The reason is not hard to understand. While all other activities of financial planning are undertaken, managing debt burden is often ignored. This ignorance unbalances even a good financial plan, and makes it go awry. This is why it is crucial to have effective financial management. To enjoy the effective financial planning, managing your debt is important. Do you know how you can do so? If you don’t here are some tips for you -
How to manage your debt
• Identify your liabilities
The first and the foremost task is to know how much you owe and to whom. Until and unless you know your actual liabilities you cannot make a plan to repay them. So, work out the details of your debts, their interest rate, the outstanding amount and the outstanding tenure. Once you know how much you owe at any given time, you can proceed to service your debt.
• Repay on time
One of the most important ways to manage your loans is to repay them on time. Every loan has a monthly repayment date. Stick by this date to avoid late payment fees and charges. Paying on time is also good for your credit score which is negatively impacted in case of a default. To ensure timely repayments you can opt for direct ECS with your bank. Your bank account would be automatically debited at a particular date for every instalment due. Your repayment would be done and you would be spared the burden of remembering the date.
• Avoid bad loans
Personal loans and credit card loans, though easily available, are not a very good choice. It is because of two reasons. Firstly, they have very high interest rates. Secondly, they are unsecured loans which put a negative impact on your credit score. Try and avoid these unsecured loans. Instead, opt for secured loans like loan against property or loan against your investments. These loans are secured against your assets. They have a lower interest outgo and are also good for your credit score.
• Prepayment is not always good
Though prepayment reduces your loan liability, it is not always a good choice. In many cases prepayment involves a charge. Even in those instances where prepayments are free, you incur an opportunity cost. The money you spend on prepaying your debt if invested elsewhere might yield you higher returns than the interest you are paying. Let’s understand it with an example –
Suppose you have Rs.50, 000 in surplus funds. You can either prepay your home loan or invest this money in a good scheme. Your home loan’s interest rate is, say, 9% per annum while the investment avenue promises you 12% returns. If you prepay the loan you would be saving the 9% interest outgo on Rs.50, 000. However, you would be losing the 12% return which you can earn if the money is invested. Since the investment return is better than the debt interest rate, prepayment is not a good option.
So, always weigh the scales before prepaying your debt. Try and direct your additional funds to lucrative investment avenues instead to earn higher returns.
• EMI v/s monthly income ratio
Ideally, your debt EMIs should not exceed 15% to 20% of your monthly income. You should have at least 80% to 90% of your earned income in hand (after paying off the debt instalment) to meet your lifestyle costs and for saving. If EMIs are more than 20% of your income, it might create a cashflow problem. So, when you are choosing loans, ensure that the EMIs don’t put a strain on your income.
• Use your loans for tax planning
Home loans and education loans give you tax benefits. The interest you pay on home loans is exempted under Section 24 while the interest paid on education loan is exempted under Section 80EE. Since your loans give you tax relief, use the benefits if you have these loans.
Managing your debt is an important aspect of the financial planning process. For an effective financial management and to reap the benefits of financial planning in business, don’t forget to include debt management into the planning process.
Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
Earning money is a great and ecstatic experience. Especially, for people who have just started on a new job, receiving their monthly salaries can be exciting. However, a lot of youngsters today are more interested in spending that money instead of investing it. It is important to inculcate setting financial goals early in life and reap the benefits of financial planning. There is a common misconception that financial planning and investing money is only for older people. On the contrary, it is very beneficial to set up financial goals at an early stage.Setting goals the right wayPeople invest money so that they can have enough money to meet their financial goals in the future. Here is some goal setting tips using an example. Let’s see how to set financial goals and some common financial goals of Mohan, a government employee. A lot of people in the country have various types of financial goals and the above-mentioned are some such examples of goals on their wish list. However, from a financial and investment standpoint, these goals are vague.For instance, let’s take the first goal: Buy a car.Invariably, there are a lot of follow-up questions that arise when Mohan says that he wants to buy a car.What type of car does he want to buy? How much does the car cost? When does he want to buy it: Next month, next year or two years later?Goal setting tips It is very important to ask the aforementioned questions because only then can you set a goal that is clear and definite.There are two very important factors to consider whenever you set a goal: a) Time estimateb) Cost estimateWhen you know these two components, it becomes easier to take the right course of action in order to achieve the goal.In this example, Mohan can say: “I would like to buy a car that costs Rs 8 lakh in the next twelve months.”Benefits of financial planning1) Achieving your milestonesIt is crucial to meet financial goals at the right time. Imagine if you have reached your retirement age but your retirement fund is not as large as you expected! Proper financial planning can help you meet your goals successfully. 2) Beating inflationAs the years pass, inflation reduces the purchasing power of an individual. For example, imagine you have Rs 100. With this amount, you can buy 10 glasses of milk today. But after ten years, you may be able to buy only 5 glasses (or less) with the same amount. As a result, it is important to actively plan and monitor your financial situation regularly. 3) Back-up in case of emergenciesNobody knows when an emergency situation can rise up. Situations such as accidents, loss of job, or other unforeseen events do happen. But when they occur, it is always better to be prepared financially. By creating an emergency fund, you can take care of yourself and your family during such events.ConclusionSetting goals is necessary. But for these goals to fructify, it is necessary to do it the right way. Identify your financial needs and requirements as precisely as possible. And once you do that, you can make better investment decisions. What next?Everyone has goals. But they keep changing at different stages of life due to evolving circumstances. At an early age, new career beginners are eager to save or spend on a new vehicle or lifestyle appearances. However, as they grow older, priorities shift and goals such as family and retirement come into play. DisclaimerInvestment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
Changes are bound to happen in your life as you go through different stages in life. What you want now may not be the same as what you wanted ten years ago. People change, and so do their goals and aspirations. This is why planning and goal setting must be a part of one’s financial management.Setting financial goals is easy. In this article, let’s explore the different financial goals for life stages, financial goals and strategy, how financial goals change over time and why you need to plan accordingly for each life stage.Different life stagesOnce you start earning, the different stages in life can be listed in the following manner: Early career yearsThis stage includes people from the ages of 25-35. At this stage, you have just started working. You are fresh out of college and it’s probably the first time you have financial independence. In many cases, the income is generally not very high. Some of the most common financial goals at this stage include paying off college debt, buying a car and building savings for the future. A lot of people avoid thinking of financial planning at this stage. However, it is very important to be mindful of your income and expenses in order to avoid problems like debt traps.Career-building stageThis stage includes people from the ages of 35-50. The income, expenditure and overall lifestyle of individuals would have changed dramatically compared to the previous life stage. During these years, people are looking to improve their careers. Additional responsibilities come in the form of family and children. If you were looking to buy furnishings for your rented house in the previous life stage, you are probably more interested in buying a house itself during this stage. Other goals include: a) Higher savings and investments for the futureb) Adequate life and health insurance plans for the entire family c) Greater contribution towards retirement fundd) Repayment of EMIs on home loan, vehicle loan etc.Pre-retirement years This stage includes people from the ages of 50-60. As retirement approaches, the income of people reaches peak levels. As a result, they generally try to use their wealth for helping the family. At this stage in life, the main financial goals are:a) Paying for their kids’ college education and wedding costs b) Repayment of all their debt: It is important to repay all your debts before you retirec) Building a retirement kitty: Higher savings means greater financial independence during retirementd) Reassessment of asset allocation: It is time to slowly transfer funds from high-risk investments to safer avenues Post-retirement yearsThis stage includes people who are above 60. During this stage in life, you may not have a steady source of income. However, if health supports, you can still earn money if you wish. Many people start new businesses and indulge in part-time jobs during the early stages of retirement. Other people may want a more laidback lifestyle. They travel to new places and pick up new hobbies to spend the time.Proper management of savings and estate planning are some of the important financial goals at this stage in life.ConclusionChange is a natural part of life. But as an individual, it is very important to accommodate these changes financially. As you grow older, your life goals and financial goals change. That’s why it is necessary to monitor your goals from time to time and make the required changes in your financial plan. What next?It is natural to have different (and opposing) financial goals at each life stage. But which goal should be given the priority? Find out in the next article about the importance of prioritising goals. DisclaimerInvestment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
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