The High Cost of Financial Mistakes:

“I have decided to discontinue my life insurance policy”, said my good friend.  He bought an endowment plan from a life insurance company five years ago for a sum of Rs.8 lakh and was paying an annual premium of about Rs.43,700.

I was surprised why he would want to discontinue life insurance cover in his young working age. I wondered he might have suddenly inherited some native land worth crores which would take care of his dependants throughout their lifetime in his absence.

I asked the reason and he replied in desperation, “I simply cannot afford it now as the insurance premium is very expensive and my loan EMI has started on the new house bought recently”!

I did not appreciate the reason which guided him to take a decision of discontinuing the life insurance policy. The reason was of affordability and not because my friend did not require life insurance anymore. Nonetheless, I guided him to first buy a pure term insurance cover – the cheapest form of insurance, increase his sum assured which would also cover the home loan and then discontinue the endowment policy.

I have observed umpteen such cases where people have second thoughts about a financial product but after buying it. They are then stuck up with products which they do not really require or are not beneficial to the core.

Are you also one of those who buy a financial product first and regret later? We all make financial blunders at one point or the other in our lives. Some of us realize it early on and try to rectify them. Some of us drag along with the mistakes not realizing the consequences it may have on the financial situation for the rest of our lives.

The impact that these financial decisions have on an average salaried individual is huge compared to a high net worth individual. I have observed many instances of high net worth individuals (HNIs) where life insurance has been bought even if not required. A case of excess insurance! The super rich have built so much of wealth early on in life that the families and even next 2 generations would more than survive in their absence! Still, HNIs pay crores of rupees in insurance premiums annually for policies they do not require and which otherwise could be channelized into investment options which earn better returns. However, it does not really make a difference to their financial situation.

On the other hand, in the case of my good friend,  his decision to buy an expensive insurance cover only to discontinue it five years later costs him an opportunity to save more and invest more for the down payment of his new house. Also, the surrender value which he will now receive after discontinuing the policy will be far lower than the total premium paid.

Now picture this. Had my friend bought a pure term insurance cover five years back instead of an endowment plan, he would have paid an annual premium of Rs.2,180 for the same cover of Rs.8 lakh. So he would have saved about Rs.41,555 (43735-2180). Had he parked the savings on premium payment in a bank fixed deposit (assuming 8.5 per cent return p.a) and utilized it for the down payment of the house, he would have taken Rs. 2.67 lakh less loan. The number may appear small in present value for just one year but grows big after the effect of compounding for the entire loan tenure. 

On a lesser loan of Rs.32.3 lakh (35-2.67) he would have saved 3.8 lakh interest during the loan tenure! Further, the money saved on interest every year could have been invested in suitable avenues and would already have started generating additional income for him. (Refer to the table for the entire calculation)

As observed above, every financial decision is likely to have a bearing on other areas of personal finance. Secondly, the repercussions of financial mistakes are felt over a really longer period of time and it hits hard in the long run when an individual, particularly the average salaried class, falls short of funds to achieve his financial goals like children education, retirement, etc.

Here is a snapshot of some common financial mistakes usually committed and their possible consequences:

So what should one do to avoid mistakes or at least take quick action to minimize their impact?

Most people do not have the time, inclination or the knowledge to do the due diligence before committing their money in various financial instruments. They have no inkling what are they saving for and how much saving is sufficient to meet the desired goals.

There has to be a basic level of involvement required in personal finance matters. This implies not leaving buying of financial products entirely to your brokers, distributors, bankers, relationship managers, agents, friends, relatives, etc and be involved only in signing papers and issuing cheques. While we invest so much of our time everyday to earn money, we need to invest time to take decisions to manage that hard earned money as well. This particularly includes buying any financial product - equity share, mutual fund, insurance, pension policy, etc. 

We are fortunate to be living in an information age where huge amounts of simple & easy to understand content on personal finance is available - be it newspapers, blogs, websites and that too absolutely free. For more comprehensive solutions, we have certified financial planners who offer quality advice to people without the thrust on product selling and earning fat commissions. Even second opinions can be taken with other financial experts like we take in the case of medical issues from doctors. Ultimately, it all boils down to how involved one is in personal finance matters. One need not be a super expert on every aspect of managing finances but at least some basic acumen to a reasonable extent should be gradually developed so that financial mistakes can be avoided. Financial Literacy is the key here!

Cheap premium should not be the sole

reason to choose an online term insurance

plan

 

With the increasing internet density in India, it has become possible to buy financial products online. This ranges from equity shares, mutual funds and now life insurance. This article deals with online term insurance plans.

Insurance companies are advertising online term plans in a big way. I compiled premium data of few insurance companies offering online term plans and found the rates very competitive. The huge price war in this category has resulted in companies like Aegon Religare, Bharti AXA and Aviva offering life insurance for as low as Rs.4,500-5,000. And, these online term plans come at less than half the cost of the traditional offline term plans.

 

 

Note: Premium Cost Data compiled from Company Online Calculators and inclusive of Service tax, exclusive of additional riders

This low premium is on account of three reasons:

•  No agent costs involved in the absence of an intermediary, i.e., you will directly buy the term plan from the life insurance company.
•  Low operational costs such as storage of forms and data entry.
• Profile of online customers perceived to be carrying low mortality risk as they have the resources for better healthcare and lifestyle.

 

Most term insurance products more or less bear the same features, the only distinguishing factor being the premium cost and customer service. While some buyers may have a bad experience with a particular company, there may be an equal number, if not more, who would have a good hassle free experience with the same company.  So should you buy a term cover based only on a comparison of premium cost?  The ANSWER is a big ‘NO’.  There are many other factors which need to be assessed in conjunction with low premium. In fact, once you shortlist any term plan based on the factors discussed below, then you can compare them further in terms of premium cost.  These factors have been addressed below in detail:

 

1. Claim settlement ratio (CSR): This should be the starting point in selecting an online term insurance plan (or for that matter any insurance plan). If the claim is rejected by the insurance company, the whole purpose of taking insurance is defeated and your family members will be deprived of financial security which you had planned for them. A poor claim settlement ratio (CSR), (40% would mean that 4 out of 10 claims are settled and the rest are refused) would imply that a company does not pay its customers when claims are made.

 

Typically, older insurance firms will have better CSR than the new insurance players. As seen in the table below, LIC, ICICI Prudential and HDFC Standard Life have the highest claim settlement ratio of 97 per cent in 2011-12.

  

 

 

Source: IRDA & Company Wesbite

Early claims made within 2-3 years of buying a policy are rigorously investigated by insurance companies and hence take time in the settlement process (as long as six months). So new insurance companies who have set up shop in around 2009-10 would obviously have claims made within three years of buying the policy.

 

I analysed the repudiation ratios of all 23 life insurance companies for cases greater than 2 years of policy buy. Of these, Shriram (founded in 2007) had the highest repudiation ratio of 31 per cent in 2011-12. This means that of all the claims rejected by the company, 31 per cent were related to cases of greater than 2 years. Its claim settlement ratio in 2011-12 was 65 per cent.

So, in case you come across a company which has been around for at least five years and still has not consistently improved its CSR year-on-year, then it should be a cause for concern. It may be charging very low premiums vis-a-vis its peers but would have a poor claim settlement history. So preferably choose a company which is in the life insurance business for at least five years since its inception and has a high CSR.

 

More importantly, it is also your responsibility to disclose

• your complete medical information
• smoking & drinking habits, if any
• other life insurance policies that you hold

 

If you fill in the online application sincerely and meticulously, there is a good chance that your claim will not be denied.

 

2. Coverage:  Choose a company which gives you the maximum coverage in terms of age. It is prudent to buy a life cover which would insure you at least till the period you retire, i.e, 60 or may be more. For instance, say you buy a life insurance product at the age of 25 and the product has a maximum covering term of 30 years. In that case, your life insurance contract will expire at the age of 55 and you will be left short of 5 years of insurance coverage as you would still be working then.

 

Further, financial responsibilities may not end at 60 in the case of late marriages and having children at a higher age.

Many online term plans come with fixed tenures of 15, 20, 25 and 30 years. There are few companies which offer coverage till the age of 75 while others do not insure you beyond the age of 60. So it is best to opt for a policy that can be customised to your needs.

At the end of the day, what matters to you is your family’s security. Just to save a couple of thousands every year, you do not want to risk your family’s financial requirements in the event of the insurance company rejecting their claim at the most critical time. So shortlist life insurance companies by checking their claim settlement ratio and coverage rather than just comparing their premium costs.

 

 

Assess the risks, not just the benefits in continuing home loan at a lower rate

Few weeks back, I had covered an article on home loan titled ‘Prepay your home loan in small chunks and reduce your liability’.

Conventional wisdom states that one should pay off home loan as fast as possible and become debt-free. But I have come across a section of people who find it beneficial to continue their home loans! Such financial decision is guided by the following logic:

• If the investment rate is more than the rate of interest charged on the loan, i.e, if the return on investment is higher than the interest paid on home loan, then it is beneficial to continue the loan and invest the surplus amount in high yielding options.

• Under S/24 of the Income Tax Act, interest paid on home loan is allowed as deduction from total income up to a maximum limit of Rs.1.5 lakh per annum.

But are these benefits worth enough to live on debt for a roof which you can’t claim your own for a major part of your productive working life?

I am not going into the calculation part in this article but there are a few issues here which I would like to highlight.  

This strategy is unlikely to work for borrowers who take such financial decisions for a short term on an ad hoc basis depending upon the attractiveness of investment options in a particular year. It will not work for the simple reason that interest charged on home loan is compounded on a monthly basis, so the effective interest rate is higher.  On the other hand, most fixed income investment options like fixed deposit offer returns on a compounded annual basis and hence the difference compared to the interest rate would not be much. Rather than repaying the loan, investing the surplus funds in equities with a short term horizon is also risky. So a borrower is better off to repay the loan in the initial years as the interest component is huge.

Now, let us assume the case of a borrower who had taken a home loan at fixed rate of 8.5 per cent per annum few years ago. He adopts the strategy of delaying his loan prepayment and instead builds an investment corpus to pay off the liability at the near end of the tenure.

Even if the investment returns are high over a longer period of time than the interest paid, this approach may prove to be a risky proposition. The borrower needs to have a fundamental understanding of the following issues:

 1. Evaluating safety net: 

This involves assessing one’s security and well-being in the event of a worst case scenario like loss of job or death of the bread earner in the family saddled with debt. The borrower needs to address the following questions:

• What if I lose my job tomorrow? Will I have the capacity to repay home loan alongside my normal household expenses?
• If I am physically incapacitated, partially or completely by any accident, will I have the capacity to repay home loan?
• If I cannot repay my home loan in the event of job loss or some unfortunate incident which affect my capacity to earn regular income, do I have a second home to live in? Am I left with no alternate option but to sell the house? 
• What if I am not available for my loved ones tomorrow? Have I bought insurance cover to cover for the repayment of loan liability? If not, how will my loved ones manage to repay the loan.

2. Understanding the difference between asset and liability:  

While doing a cost-benefit analysis of the investment returns vis-à-vis home loan interest payment, some people also take into account the appreciation in property prices. They perceive that if the property being bought on loan has appreciated more than exponentially compared to the interest paid during the tenure, there is no harm in continuing the loan at a lower rate and pay interest on it.

Most people do not understand a fundamental fact which is that the capital gains on property is notional unless it is bought as an investment asset and planned to be liquidated eventually. On the other hand, interest paid on home loan is for real and goes out of the personal pocket every month.

The house that is self-occupied can never be an asset, it is a security for a roof over the borrower’s head. When it comes to personal finance matters, an asset should be perceived as an item which generates additional income. On the other hand, the house is a liability and will remain with the bank as mortgage unless and until the entire loan is paid with interest. 

Conclusion: Giving priority to repayment of the home loan does not mean one compromises on other financial goals. Usually, an individual typically takes a home loan near his 30s. After servicing the EMI, he also needs to save for his next logical goal which is children’s education. As a borrower’s income increases, he can repay his loan in small chunks and along side divert a small sum to investments.

The general human tendency when faced with many choices is to opt for a solution which gives the maximum benefit. But one also needs to analyse what kind of risks, if any, are being undertaken to achieve that benefit. It is prudent to take calculated risks in life, particularly in financial matters. At the end of the day, we are all yearning for financial security which can give us peace. No one wants to spend sleepless nights worrying about some mountain of debt. So it is advisable to review one’s financial situation in totality because a financial decision can never be sound until it offers mental peace.

Are you depending only on salary income to grow your wealth?

Thanks to our education system, we have adopted the attitude of studying instead of learning in our school and college days. The traditional school of thought ingrained in our minds right from our childhood days by our parents and teachers has been to earn good grades and pursue higher education so that you get a decent job for financial security. A majority of us,i.e., the working population depend upon salary income to fulfill our needs and aspirations.Our salary takes care of the daily householdexpenses,EMIs,insurancepremiums,contingency expenses,etc. The savings from salary are deployed into investments which in turn generate additional income from us.

For our other financial goals like a vacation, children education and marriage, we depend upon savings from salary.There is too much of reliance only on salary income for a major part of our lives to fulfill our needs and aspirations. In the case of working people, too often, the inadequacy of the salary vis-a-vis their aspirations or even their basic needs compel them to compromise on their standard of living. 

So besides the salary and investments that you make out of it, how do you grow your wealth? Unless you win a lottery or receive inheritance, how is it possible?

Besides this sudden exceptional money, there are opportunities galore. To tap these, all you need is sheer passion and a simple income enhancing idea. Some of these are:

• Favorite past times during weekends can be converted into a money making venture. And it need not essentially require a huge capital amount to be invested. For instance, conducting weekend workshops like dance, cookery,painting, yoga, stitching, photography (popular during summer vacations too) 
• Freelancing
• Blogging
• Teaching (Visiting Faculty)

 These ideas also apply to women who have taken a sabbatical from work to take care of their kids.

Then there are options like earning house rent which can be a good source of regular income.While this would require huge amount of capital initially, it requires the least amount of supervision and effort later on while pursuing a full time job.

Due to financial compulsions, most of us are caught in the work grind. Pursuing parallel part time opportunities which are of our interest and passion can be a truly liberating experience and a great stress buster. Besides, it can support income stream from our regular jobs and this could be utilised to fund say a part of annual vacation trips,EMIs, children's education fees,etc. So a bit of extra income always helps to boost wealth and eventually lead us to the path of financial freedom. And, the only thing you require to pursue a parallel stream of income is PASSION!

Letter from a Widow who is a Chartered Accountant

There are certain basic aspects of our financial life which we take too much for granted. For instance, location of our important documents, nomination status of our investments, bank accounts and insurance policies, will planning,etc.  But just one question makes these issues all the more significant: What if I am not there tomorrow for my loved ones?

Just take a minute over this question. Then further ask yourself the following questions:

· Have I kept all my important financial documents at one central location? If yes, have I communicated this to my family members?

· Have I bought life insurance to secure my family responsibilities that include household expenses, children’s future education expenses, outstanding loans,etc.

 · Do I remember about the nomination status of my old investments?

· Is my spouse just a nominee or a joint holder of my bank accounts and investments?

·  Have I prepared a will?

If the answer to most of the above questions is in the negative, then you need to work on these issues and ensure that in your absence, your family members do not have to go through the financial and legal hassles.

Financial planners usually take care of this basic issues of due-diligence  which are otherwise commonly ignored by the general public.  I am sharing with you all a letter from a widow who recently lost her husband in a road accident. It describes her struggle in coping with financial and legal matters in his aftermath and offers lessons which she has learnt the hard way. It aptly highlighs the importance of financial and estate planning.

Excerpts from the letter:

We always believe we will live forever. Bad things always happen to others.

Only when things hit us bang on your head you realise…Life is so unpredictable…

My husband was an IT guy…all techie…And I am a chartered accountant…Awesome combination you may think…

Techie guy so everything is on his laptop…his to do list…his e-bill and his bank statements in his email…He even maintained a folder which said IMPWDS…wherein he stored all login id and passwords for all his online accounts…And even his laptop had a password… Techie guy so all the passwords were alpha-numeric with a special character not an easy one to crack…Office policy said passwords needed to be changed every 30 days…So every time I accessed his laptop I would realise it’s a new password again…I would simply opt for asking him ‘What’s the latest password’ instead of taking the strain to memorise it.

You may think me being a Chartered Accountant would means everything is documented and filed properly…Alas many of my chartered accountant friends would agree that the precision we follow with our office documents and papers do not flow in to day to day home life…At office you have be epitome of Reliability/Competent/Diligent etc but…at home front there is always a tomorrow…

One fine morning my hubby expired in a bike accident on his way home from office…. He was just 33…His laptop with all his data crashed…everything on his hard disk wiped off…No folder of IMPWDS to refer back to…His mobile with all the numbers on it was smashed…But that was just the beginning…I realised I had lot to learn…

9 years married to one of the best human beings…with no kids…just the two of us to fall back on….but now I stood all alone and lost…

Being chartered accountant helped in more ways than one but it was not enough…I needed help…His saving bank accounts, his salary bank accounts had no nominee…On his insurance his mom was the nominee and it was almost 2 years back she had expired… but this was just a start…I didn’t know the password to his email account where all his e-bill came…I didn’t know which expenses he paid by standing instructions…

To read the full letter, click on the link below:

http://thingslearntaftermithun.blogspot.in/

Prepay home loan in small chunks and reduce your liability:

Ever wondered how much interest you end up paying on your home loan throughout the entire tenure. If you never pondered about this figure, it will come as a big shocker for you. Since the interest on home loan is compounded monthly, you will end up paying an amount which is near equivalent to the loan amount or most probably even higher than that. Say, for instance, you have taken a home loan of Rs.50 lakh at 10 per cent interest for a period of 20 years. The cumulative interest that is chargeable on this loan is a huge Rs.65.8 lakh. A home loan is the biggest liability an individual takes on in his lifetime and spends a major part of his working life to repay it.

Banks usually recover huge interest in the initial years of the loan tenure, wherein the interest component is very high, at least 80-85 per cent of the total EMI. Sadly, most people end up repaying a major portion of the loan towards the end of the tenure. 

Additionally, the 1-2 per cent prepayment penalty imposed by the bank in the initial years of the loan act as a deterrent to repay. Even restrictive practices like foreclosure charges discourage borrowers to switch to another bank with a cheaper loan offer. It is like a punishment for repaying the bank’s money before time!

Recently, in a major relief to home loan borrowers, the RBI has directed banks to remove the prepayment penalties and foreclosure charges on floating rate home loans with immediate effect. This means that you can prepay as much as you want at any time of the year. This does not imply that you repay only when you have a big lump sum amount on hand. You can even prepay in small chunks every month or every quarter which will reduce your liability to a great extent.

Picture this - Suppose you have a loan of Rs.50 lakh for tenure of 20 years at an interest rate of 10 per cent per annum. The EMI for the loan comes to Rs.48,251. Over and above this, suppose you pay Rs.1000 every month from the first month as part prepayment towards the principal amount, you would save an amount of Rs.4.7 lakh and get to reduce the loan tenure by 1.1years. The detailed table assuming different scenarios is explained below for a loan of Rs.50 lakh for 20 years @ 10 per cent interest:

Principal Prepayment                    Tenure Reduction                     Interest Saved

 (per month - in Rs)                           (in years)                               (in Rs)

         1,000                                            1.1                                       4.7 lakh

         2,000                                            2.3                                       8.8 lakh

         3,000                                            3.1                                       12 lakh

         5,000                                            4.7                                       18 lakh

Thus prepaying the loan amount regularly in small instalments will eventually make a big difference in the total interest paid and the loan tenure. Creating your own loan amortization schedule and setting a deadline to repay your loan will certainly help in this regard. The end result is that the faster you pay off your home loan, the greater savings you will have on hand to grow your investment corpus. And with your biggest liability being paid off, you would already be on the path of financial freedom.

Risk planning before borrowing a home loan:

Borrowing a home loan is one of the important financial decisions in an individual’s life. Managing financial resources after taking a home loan could be as taxing as hunting for a value-for-money property. The obvious risks involved in taking up a home loan liability include sale of house by bank in the event of the borrower’s death or loan default, rise in interest rates, decrease in repayment capacity due to loss of job or other unforeseen factors. Proper risk planning will enable a home loan borrower to take care of the EMI payments and also to manage other financial goals. This includes: 

1. Reserve emergency funds:  Payment for a property purchase includes some amount of home loan and the balance as down payment from a borrower’s own funds. Making a down payment for a house is one of the events which usually entail a big cash outflow from an individual’s savings. The borrower should make sure he does not hit rock-bottom in his savings post the property transaction. Contingency funds (preferably six month expenses) will help a borrower tide over unexpected circumstances like a medical emergency or loss of job. 

2.Assess EMI affordability:  Before taking a loan, a borrower should assess how much monthly instalment he can afford to pay from his net take-home salary apart from meeting his household & personal expenses. Additional expenses in the new home in the immediate term like interior decoration, painting and furniture need to be discounted. Further, maintenance expenses in a new building will be higher compared to an old building. There are instances where many families decide to stay separate from their dependant parents after buying a new flat and maintain two homes. In such cases, household expenses are likely to be on the higher side. All these factors need to be discounted while assessing the EMI capacity.

3.  Study EMI structure: A borrower should know the EMI break-up as it will help him take prepayment decisions and also decide upon the tenure of the loan.  The EMI payment of a loan has a principal and interest portion.  

   Many people are not aware that in the initial years of repaying loan, interest component is very high compared to principal repayment.  For instance, suppose Mr.A borrows a home loan of Rs.45 lakhs for tenure of 20 years at an interest rate of 10.75 per cent per annum from SBI. The EMI comes to Rs.45,686. In the first EMI, i.e, Rs.40313, 88 per cent of the instalment goes towards interest payment while the rest goes in principal. Effectively, the loan will be reduced by just Rs.5,373 in the first month and Rs.67,749 in the first year. Similarly, for the first five years of the loan, the total interest charges come to a whopping Rs.23,16,741, which is 51 per cent of the loan amount.  This is assuming Mr.A did not repay any amount during this period. The principal amount at the end of five years would have reduced by just Rs.4,24,419, which is 9.4 per cent of the original loan amount.

   It thus becomes crucial to prepay small chunks every month or quarter in the initial years which will reduce the outstanding amount. Now that the RBI has removed the prepayment penalty charges, a borrower can repay as much as he wants at any time of the year.

 4. Deciding on the tenure of the loan:  The monthly instalment for a loan with a longer tenure will be smaller than the one with a shorter tenure. Many a times, borrowers opt for longer tenure loans thinking that they will repay the loan in 5-6 years and pay less EMI. However, it is important to note that a borrower pays more interest on a loan with a longer tenure or a bigger principal. For instance, Mr.B borrows a loan of Rs.45,00,000 from SBI at 10.75 per cent per annum and prepays the loan at the end of 8 years itself. If he opts for a 20 year loan, he will end up  paying Rs.35,73,686  as interest  over the 8 years whereas the  interest will be Rs. 33,11,290 for a 15 year loan. Effectively, he ends up paying Rs.2,62000 higher interest if he goes for a longer tenure  loan.
 
5. Compare home loan packages across banks: It is prudent to pick 3-4 banks of choice and enquire about home loan packages. A borrower can prepare a questionnaire before making home loan enquiries with bank staff regarding eligibility for home loan, interest rates, tenure of the loan, period for approval & sanction of home loan, reasons for home loan rejections, mortgage & property insurance and incentives available (e.g,waiver of EMI, moratorium period in case of loss of job). While considering different loan packages of banks, a borrower should compare their repayment schedules and the total interest payable over the tenure of the loan. While the EMI calculation will be the same as per formula, the interest portion charged by different banks in the initial years of the loan may vary. A borrower should also enquire about teaser packages where promotional rates or fixed rates are offered in the initial years.
 
 6. Buy insurance to cover home loan risk: A house is in the borrower’s name only after he repays the full loan amount.  In the event of the borrower’s death during the interim loan period, his family can face eviction from the house if they could not afford to pay EMIs. Buying life insurance will help a family pay off the outstanding loan amount in the event of borrower’s death. Term loan insurance is a cheaper and better option compared to home loan protection packages offered by banks. A pure term insurance cover will remain constant for the entire tenure of the loan and will offer a fixed benefit in an unfortunate event. Home loan insurance on the other hand will offer reduced benefit which is in proportion to the outstanding loan amount. Also, an insurance contract bought from a bank may turn void in case a borrower switches to another bank. A new cover will be required to purchase from another lender.
 
7. Pay off your home loan as soon as possible: There have been many debates about whether it is beneficial to continue home loan or prepay them at regular intervals.  The usual argument here is if a borrower gets returns which are better than the interest rate of the home loan, he should invest his savings rather than utilise them in prepayment of loan. Considering the volatility in interest rates, a borrower needs to take into picture the whole tenure of the loan rather than few years where floating interest rates have been lower than investment returns. For instance, in 2009, interest rates were in the range of 8-9 per cent and equity markets were yielding returns of at least 25-30 per cent. Presently, interest rates are hovering around 10-11 per cent and equity markets are yielding poor returns or in the negative.  By the time, a borrower decides to prepay his loan because of the increased burden, the bank would have recovered a major portion of his interest. Keeping a periodic target and clearing off the loan is thus prudent.  Prepaying the loan and receiving legal possession of the house will offer peace of mind to borrower compared to the loan liability hanging over his head.    

Five personal finance resolutions in 2012:

Many new resolutions must have been broken or forgotten already by the end of just second week of 2012. But we all like to start afresh guided by a persistent willingness every time, don’t we? The plan of starting anew provides motivation for any individual to bring about a change in any aspect of life which he/she is not satisfied with. More so, in financial matters because financial worry (severe or mild) is something which plagues every individual. So let us resolve to put our finances in order from 2012.

1.  Review your finances regularly & keep a record: First and foremost, inspect your finances. This exercise includes reviewing your investments, insurance, liabilities and monthly cash flows. This will help generate a view on your financial position and determine your net worth (Financial Assets – Liabilities). You can classify your resultant net worth figure into long term and medium-short term savings. Long term savings will include investments in PPF, NSC, EPF, long term bonds, pension scheme, etc. Medium to short term savings include bank savings, fixed deposits, stocks, equity and debt mutual funds. You can make a habit to review your net worth on a monthly/quarterly basis in an excel sheet and track whether it has grown or declined.
2. Organise your financial documents: Misplacing financial records including insurance policy documents is a common mistake. It could add to unnecessary stress if not found at the crucial hour. Make sure you keep all your financial records at one place. Get into a habit of filing records. You can categorise them into banking, investments and insurance. Intimate your family members about the placement of the financial documents so that they do not have any trouble finding them in your absence.
3. Journal your expense and stick to a budget: You might have some idea about the extra money going out of your pocket during these inflationary times. If you keep a record of every dime spent you will be able to curtail unnecessary spending over a period of time. Journaling your monthly expenses will enable you to get a better grip over your finances. (Know more about budget management in my article dated 8 June, 2011 titled ‘Where is your money going?’)
4. Create an emergency fund: Set aside some funds in the event of emergencies like a medical situation, loss of job, etc. During unfortunate situations, people usually end up redeeming their mutual funds (invested to meet long term goals) or breaking fixed deposits. An emergency fund will help to tide over difficult times. These should not be touched for your day-to-day routine spending. (More on emergency funds in my post dated 16 November 2011 titled ‘Do you have an emergency fund?’)
5. Dump your expensive insurance policies: Do not jumble up your investment and insurance goals. Risk planning should include buying a cover for loss of human life. The loss of life and its financial implications should be considered for a family while buying a life insurance cover rather than investment returns. Term policies are the cheapest and purest form of insurance for this purpose. Investment planning should include saving and investing in equity and debt instruments for meeting short and long term goals of life. Avoid investing in insurance plans that have an investment element. They are expensive and offer mediocre returns compared to regular investment options.
6. Invest in equities: This is the best asset class to beat inflation over a long period of time. If you have investible surplus not required for at least five years, then you will be able to ride the volatility in the stock markets better and yield attractive returns. Investible surplus here means corpus created after meeting household expenses, EMI, insurance premium and other general expenses. The savings should also discount the amount required for any medium term goal like buying an asset or funding child education.

Taking full charge of your financial matters cannot happen overnight but small steps taken will surely bring about a visible change over a period of time. Getting a complete grip on your finances will enable you to plan your future finances better. I wish all my readers a very Happy New Year and Happy Financial Management in 2012.