I met my ex-colleague Amit over coffee.
As we sipped coffee, I could sense that he wanted to share something with me but was holding himself back. When he called me up, he mentioned that there is something he wanted to discuss.
I started, “So, all OK with you Amit?”
He opened up. “Not really”, he replied.
“What happened?”, I was curious.
“My finances are not in the best shape. In fact, it could not be worse than this. I have too many problems”, Amit confessed reluctantly.
As far as I knew about Amit, he did not have a problem with income. In fact, he worked with a large company as a Sales Head and earned quite well. So, I was further curious to know what actually happened.
As the discussion went on we pinned down several problems, 9 to be precise. Many of these he didn’t even realise he had.
Now these financial problems can happen to anyone. Let’s see what they are and how best to avoid or come out of them.
Amit’s 9 Financial Problems – or yours?
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Overspending
Amit got married about an year ago. In preparation, he went on a shopping spree. He bought things left, right and centre, including those he did not really need. A new car, new furniture for the house and expensive crockery. He also bought a holiday time-share package, which required him make a heavy upfront payment for 25 years of holidays. He clearly went beyond his means.
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Not knowing where does the money go
When I asked Amit what is the breakup of his monthly expenses he found it really hard to recall. Broadly, there was rent, EMIs, groceries, movies and eating out. But that did not total up. Somethings were still missing? I asked him to check his credit card statement.
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Large tax deduction
When Amit saw his salary slips from January to March, a large amount being deducted towards income tax. He did not realise that he had not planned for any tax savings beyond a couple of traditional insurance and the mandatory Employee Provident Fund. It resulted in a big, unnecessary outgo, something he was just not ready for at this stage.
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Underinsured
Since he mentioned insurance, I happened to ask him about his insurance cover. The only thing he remembered clearly was the amount of premium he paid and that was about Rs. 50,000 per year. These were policies that his father had got him to subscribe. It was safe to believe that they were traditional policies. Hence, insurance cover would not exceed a few lakhs of rupees – too low for his life stage and income levels.
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Burdened by loans and EMIs
Amit had taken up a housing loan last year to buy an under construction property. He recently also bought the car and a holiday time-share, both on EMI. He had made several other expenses on his credit card, which too he converted into EMIs. The EMIs totalled up to more than 70% of his take home income. Big burden!
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A low credit score
I asked Amit if he was aware of his credit score. He drew a total blank. We immediately logged onto CIBIL’s website and requested the free credit report and score. Amit’s score turned out to be 550, a low score by any standard. Ideally, a good credit score is over 750. A lot of work is required here too.
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Not saving enough
This one is a foregone conclusion. The overspending and payment of all those EMIs leave very little surplus with Amit and thus he can invest very little for any future needs he has.
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A 4% portfolio
If there was a surplus, it remained in the savings bank account earning a measly 4% rate of interest. In times when inflation, or the rate at which prices rise, is hovering in the range of 8 to 10%, Amit is losing the value of his money. He did a quick calculation in his mind, “I get 4% on my savings bank account while inflation is taking away 10%. Net net I am losing 6%. Gosh!“
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Absence of Emergency funds
Amit is also not prepared to handle any financial emergency. For any reason, if he ceases to have a job, he cannot survive even a single month. Unless, he decides to sell off the under construction house OR borrow more money.
Amit felt exhausted after the discussion. He was wondering how did he land up in this mess of a situation.
Why is he facing so many problems with his finances that too all at once?
The root of all financial problems
As Amit raised his concerns, I said, “There is just one answer to it, which is the root of all these problems. It is ‘the lack of a financial plan.’
Let’s me give you the cliche first.
“Failing to plan is planning to fail”.
You need to put in place a plan that will enable you to put down your goals and what do you want your money to do for your – not just for now but in the foreseeable future too. It will bring in a much needed focus and help you set out an action plan to push your money in the right direction.”
“That’s all fine my friend, but how do I get out of the current situation. What should I do immediately to get out of these financial problems?”, Amit’s had a valid concern.
“Amit, yes you need to take some immediate steps. Here are they.”, I listed for him.
The Immediate Steps
- Talk to your spouse, take her into confidence about the current situation. You both need to be on board to clear this mess.
- Build a cash budget. Include all your income and expenses. Every single item that you can think of.
- Next, identify and cut down all and any expenditure that is not a NECESSITY. Stop using your Credit Card for a few months.
- Save more and more and more.
- Activate a sweep in Fixed Deposit with your Bank account. It will earn you slightly more interest than just a 4%. Later based on the plan, you can direct your savings appropriately for an emergency fund.
- Return or Transfer your holiday time-share. It will bring in some money.
- If car is not too important, you can let that go too. It will reduce not just your EMI burden but your maintenance burden as well.
- Work towards repaying your loans as much as you can, as fast as you can.
- Do not enquire about new loans from banks or financial institutions. For every such enquiry, they query the CIBIL database to check your credit history and that can have a negative impact on your credit score.