Financial independence – it is something all of us dream of, but what is it really? It means not being reliant on a job for your daily living. Financial independence means having the power to say “no” to what you disagree with at work, regardless of the consequences. It means being secure about the future and not to have to worry about where the next paycheck is coming from. It also means being debt free. Let’s discuss how to become financially independent in India.
Tip #1: Build an Emergency Fund
Build an emergency fund that contains at least 6 months of your household expenditure. The fund should be kept either in your bank account or in something liquid such as Gold ETFs. Never touch this money unless there’s a medical emergency or a job loss.
Tip #2: Don’t allow your EMIs to get too high
Your EMIs should never be more than 30% of your net take home pay. Generally, you should avoid EMIs as much as possible and take them only if you really have to. Even if you are planning to buy a car, pay as much as possible through your savings, not through EMIs.
Tip #3: Save 50% of your take home pay
If you want to become financially independent in the future, start saving today. This means saving 10% of your take home pay in the first year of your career, 20% in the second year, till you are able to save 50% of your take home pay. Live within your means, make a commitment to save and don’t get into debt as far as possible.
Tip #4: Get Medical Insurance
Get a medical insurance policy that covers you and your family. With healthcare costs rising across India, you can do with all the support that you can get. Medical insurance sustains you in a time of desperate need.
Tip #5: Get Term Insurance
If you are between 30 to 40, and have a spouse and children who are dependent on you get yourself insured for Rs. 1 crore to protect your family in the worst case scenario. Don’t go overboard with the insurance cover, just make sure that it is adequate.
Tip #6: Pay off credit card debt and other high interest loans
You should avoid taking a high interest loan, such as credit card debt or personal loans as much as possible. Even if you do end up with such a loan make sure to pay it off as soon as possible. Don’t allow such loans, especially credit card debt, to pile up, as pretty soon you would be paying an interest rate of 20% to 30% on them. Pay as much as possible in cash or with debit card.
Tip #7: Avoid taking a loan for anything that loses value
By this we mean it is okay to take a loan to buy a home, which would appreciate in value over time. It is not okay to take a loan to buy a car, which would lose value the longer you own it. Even if you do buy a car on a loan, make sure to pay it off as quickly as possible. Similarly avoid purchasing electronics such as LED TVs, home appliances, mobile phones on EMIs.
Tip #8: When to invest in the stock market
Don’t invest in the stock market or in mutual funds till you are debt free, have an emergency fun in place, and have term insurance and medical insurance. Don’t invest any money in the stock market that you might need in the immediate future (one or two years). Only after you are reasonably confident, invest in diversified mutual funds that give you an 8 to 10% return.
Tip #9: Build a Passive Income Stream
There are so many passive income ideas you can use to make an extra income, such as blogging, affiliate marketing, selling on eBay, renting out an apartment, investing in high dividend stocks, writing eBooks and so on. This will offer the extra layer of protection that you need.
Wrap Up
The tips given here will help you take better control over your financial life and achieve true freedom. Just remember that life is not just about making money, enjoy your life as well and make time for friends and family.
Everything You Wanted to Know About Emergency Funds in India
The importance of having an emergency fund cannot be underestimated. An emergency fund is a saving parked in a highly liquid financial instrument, which you can withdraw any time you like, in a moment’s notice. Let’s consider some of the scenarios why you would need an emergency fund.
Scenario #1: You have been let go by your company and are yet to find a new job. Suddenly, you find yourself without a paycheck. How do you pay for the electric bills, house rent, EMIs, etc? This is a problem which is very common with those who work in the private sector.
Scenario #2: There is a medical emergency in your family. Your father needs an urgent heart transplant and the operation costs Rs. 16 lakhs. Where will you get such an amount from, which is more than your savings?
That’s why you need an Emergency Fund. And emergency fund or contingency fund is different from other investments because of it can be immediately converted into cash. While setting an emergency fund, the biggest question on your mind is how much?
How Much Should You Save in an Emergency Fund?
How much you save in a contingency fund depends on the following factors…
Stability of income – You will need a smaller emergency fund if you are a salaried person than you would, if you are self-employed or own a small business.
EMIs or Outstanding loans – If you owe a lot in the form of EMIs and other outstanding loans, you will need a bigger emergency fund.
Number of Dependents – If you have a number of people who rely on you, parents, spouse, children and siblings and are the sole income earner in the family, you will certainly need a bigger emergency fund.
If your spouse is not working and you have dependent parents and children, the size of the fund has to be bigger.
So where to keep the Emergency Fund?
In a Bank Locker – You can have your emergency fund in the form of cash kept in a locker in a bank. This is the most secure way of keeping your money and you can take it out any time you like. The obvious disadvantage is that you won’t earn any interest on cash.
In a Savings Account – You can have a dedicated savings account in a bank. This is extremely liquid and you can withdraw your money any time you like. You will also earn a risk-free interest of 4% to 6% on this (depending on your bank).
Open a Recurring Deposit – You can open a recurring deposit (RD) to hold your emergency fund. This means transferring a fixed amount at regular intervals to your account. This allows you to build your emergency fund gradually over time. You can withdraw this money any time you like and the big advantage is that you will enjoy a high interest rate on an RD.
Buy a Health Insurance Plan – One great alternative is to invest in a health insurance plan. This means having to pay, for example, Rs. 3000 once a year to maintain a health insurance of Rs. 1 lakh, which will be granted to you by the insurer if you are hospitalized for a certain medical emergency.
Invest in Gold ETFs – Gold ETFs are excellent investments and a great way to park your emergency funds. You can benefit from the increase in gold price and be able to withdraw your money any time you like. Gold is the safest financial instrument out there and Gold ETFs, unlike physical gold, are very liquid. You can buy and sell them online.
Invest in a Money Market Fund – Money market funds are mutual funds that invest only in government issued securities and securities issued by banks and corporations. You can withdraw your money from these funds anytime. They are safe and offer high interest rates of 7 to 9%.
Wrap Up
We cannot emphasize enough the importance of having an emergency fund. It is the best assurance you have of being able to tide over a crisis. Generally, you should have an amount worth at least 12 months’ expenses saved in an emergency fund if you are a salaried person and 24 months’ expenses if you are self-employed or own a business.
Pros and Cons of Using Credit Cards in India
If there is one thing you can say about Indians, it’s that we love shopping. We love shopping at malls, at online stores such as Flipkart and Amazon, and we love shopping at the local kirana store. Indians are renowned for being thrifty, and generally we watch over what we spend.
But that’s not always the case. Sometimes, the need to shop more makes us want to spend more than what we have in a pocket or purse. That’s why credit cards are such a boon to so many of us.
Cash is not always readily available. It is limited and there is only so much of it that we can spend. With credit cards, we can spend much beyond an intended budget. Credit cards are useful, but only as long as we use them well.
When you buy something with a credit card, you are essentially paying for them later, unlike with cash, which gets spent immediately. In addition to that, the credit card company charges an interest on every purchase made by you.
Let’s discuss some of the advantages and disadvantage of using credit cards in India.
Pros and Cons of Using Credit Cards in India
Pros
1) Credit Cards are Convenient
When you use credit cards to make your purchases, you don’t have to carry around a thick wad of cash with you all the time. Credit cards make shopping easy and convenient for you, where you are making a big purchase or a small one. It is very easy to pay with a credit card – just one swipe and your payment gets processed.
2) Credit Cards are Safe
When you carry a lot of cash in your wallet or purse, there is a big risk that you could be pick-pocketed or robbed off your money at knife-point. Once your cash is lost, it is lost forever. But if your credit card is lost or stolen, you can easily have it replaced by your bank. Also, credit card companies offer coverage against credit card theft, and reimburse your money if your credit cards get misused by someone else.
3) Credit Cards Help You Shop with Confidence
One of the scariest things about shopping is realizing to your horror at the checkout that you don’t have sufficient money to pay for your purchases. This can be deeply humiliating. With credit cards, this is no longer an issue. You can shop with complete confidence with them.
4) Earn Rewards on Every Purchase Made on Credit Card
Credit card companies offer reward points on every purchase which can be redeemed later for gift vouchers, movie tickets, etc. Credit card companies also allow discounts on purchases made at select outlets.
5) Credit Cards Help You Build a Solid Credit score
Paying your credit card bills on time and in full will help build your credit score. Your credit score is taken into consideration by banks when you apply to them for a loan. A good credit score improves your chances of getting a bank loan.
Cons
1) Credit Cards are NOT Accepted Everywhere
Credit cards are still not accepted everywhere in India. There are many retail outlets, especially small shops that accept only cash.
2) Credit Cards May Trigger Overspending
A big issue with credit cards is that you may not be able to keep a lid on your purchase with them and end up overspending and going beyond your budget. When this happens, you may end up defaulting on your monthly credit card payments, and before long your credit card debt becomes insurmountable. That’s why it is important to shop within your means even when you have a credit card.
3) Credit Cards May Have Hidden Charges
Credit cards charge many hidden fees such as annual fees, joining fees, penalties for any delay in payment of the credit card bills. This is a major negative against them.
Wrap Up
As you have seen from this article, credit cards are not a perfect solution for sure, but they certainly have several advantages. As long as you live within your means and avoid overspending, you will be able to benefit from your credit card. You should certainly apply for a credit card ASAP if you haven’t got one already.
How to Get Out of Credit Card Debt Trap?
In this article, we will give you tips on getting out of the credit card debt. It is important to use your credit cards wisely and not spend beyond your means, regardless of the temptation. You don’t want a large outstanding on your credit card, as a credit card debt settlement would lower your credit score and prevent you from getting a loan in the future.
Tip #1: Use your savings to pay off the bill
A lot of people keep rolling their debt card debt month after month, even though they have enough savings in their bank account or in fixed deposits. This really does not make sense because you would be paying more interest to service the debt than you would be earning on your fixed deposits or other savings in the bank. Break the FDs and use the money to pay off the credit card debt permanently.
Tip #2: Credit Card Balance Transfer
One popular technique recommended by many financial experts to help people get out of the credit card debt trap is to switch all current credit card outstanding amounts to a new credit card. The new credit card would pay off the old credit card debt and offer several advantages such as a lower interest rate and an interest free period for the first 3 months.
Tip #3: Take a loan from family or friends to pay off the credit card debt
This option is an uncomfortable one for many of us. But if you can get an interest free loan from your parents or siblings or from a close friend, it is something you should go for, in order to pay off the credit card debt permanently. But don’t make a habit of asking your friends and family for a loan. Once you pay off the credit card debt, make sure you stay off it forever. Also, pay the loan back within the stipulated time. Not doing so could cause your relations with your friends and family members to sour and lead to arguments.
Tip #4: Pay off the credit card debt using a personal loan
Another option is to take a personal loan from a bank to pay off the credit card debt, especially when your debt is already very high. Now, this doesn’t take away the debt – it merely shifts it from credit card debt to the bank loan. But this makes sense as although the interest rate on a personal loan is 14-18%, it is much lower than the 40% interest on your mounting credit card debt.
Tip #5: Pay off much more than the minimal balance amount
If your credit card debt is so large that you cannot pay it off at once, pay it off gradually, in 4 or 5 parts, over time. Whatever you do, pay much more than the minimal balance amount that is to be paid to avoid getting penalized. Pay off at least 4 to 5 times the minimum balance amount each month if you cannot pay off in full.
Tip #6: Convert the credit card debt to EMI
A lot of banks offer an option to convert your credit card debt to EMI for a period of time ranging from 3 to 24 months.
We hope you found the tips given here on getting out of credit card debt useful. Remember, it is very important to stay out of the credit card debt trap once you get out of it using the advice given here. Make it a point to spend within your means and pay the credit card bills on time and in full. Stay tuned for more tips for Indian investors.