Caught in a Debt Trap, Erred on Investments and Have No Insurance Cover? Check These Solutions & Implement
Last Updated : July 17, 2020, 7:09 p.m.
Achieving financial independence is vital to withstand uncertain times successfully. Individuals having less debts, high savings and investments in the right assets will most likely live a tension-free financial life. But many owing to indiscipline, lack of adequate income growth and having invested in the wrong avenue are finding things very hard to deal with. However, there are solutions by which you can get rid of tight financial situations. It is important to execute solutions swiftly rather than waiting and letting the situation deteriorate. Here’s a list of solutions to the common financial problems that many face these days.
Burdened with Massive Credit Card Debt? Look to Clear it as Soon as Possible
Credit cards have raised infinite possibilities by helping people book their travel tickets, buy the latest smartphone, dine at luxurious restaurants, and much more. What’s more, people get discounts, rewards and cashback on these privileges. However, one must not lose sight of their income and liabilities when shopping with credit cards . Unfortunately, many lose and end up piling the debts at an interest rate of 2.50%-3.50% per month, accumulating to 30%-45% a year. Ideally, one must pay all their dues on or before the due date and avoid being caught in this vicious debt cycle. The moment you pay the bill partially, you put yourself in massive debt as felt through the interest rate shown above.
If your credit card debt is too high, use your savings to clear it. If you don’t have savings, take a personal loan to wipe off the debt. But do it fast so that you won’t have to take a greater personal loan amount. Personal loans come at a much lower interest rate of around 10%-20% per annum. And if you take it at the right time, you will pay a much lower EMI compared to when you further your credit card debt.
Time Your Home Loan Balance Transfer Perfectly
A home loan balance transfer is a process by which you can transfer the outstanding loan balance to another lender at a lower interest rate. The balance transfer helps you gain more when you do it at the right time. You could ask, what is the right time for a balance transfer? Ideally, the balance transfer fetches more savings when done in the initial years of the loan rather than when there are very few years left. So, if the home loan is for 20 years, look for a balance transfer in 8-10 years, instead of doing it when the loan has run for 15 years. Consider an example below to understand the dynamics.
Example – Sohan and Mohan apply for a 20-year home loan of INR 60 lakh each at 8.20% per annum. If Sohan does a balance transfer at the end of 10 years and Mohan does it at the end of 15 years, how will that affect their repayment assuming the rate of interest is 7.50% per annum on a transfer? Let’s find out in the table below.
| Repayment Aspects | Sohan | Mohan |
|---|---|---|
| Loan Amount | INR 60,00,000 | INR 60,00,000 |
| EMI @ 8.20% | INR 50,936 | INR 50,936 |
| Total Interest Outgo @ 8.20% | INR 62,24,591 | INR 62,24,591 |
| Interest Paid Till 10 Years @ 8.20% | INR 42,74,160 | - |
| Interest Paid Till 15 Years @ 8.20% | - | INR 56,68,697 |
| Outstanding Balance after 10 Years @ 8.20% | INR 41,61,863 | - |
| Outstanding Balance after 15 Years @ 8.20% | - | INR 25,00,254 |
| EMI @ 7.50% for another 10 Years | INR 49,402 | - |
| Interest Payable for another 10 Years | INR 17,66,383 | - |
| EMI @ 7.50% for another 5 Years | - | INR 50,100 |
| Interest Payable for another 5 Years | - | INR 5,05,744 |
| Interest Paid @ 8.20% for 10 Years + Interest Payable @ 7.50% for another 10 Years | INR 60,40,543 | - |
| Interest Paid @ 8.20% for 15 Years + Interest Payable @ 7.50% for another 5 Years | - | INR 61,74,441 |
| Savings on a Balance Transfer | INR 1,84,048 | INR 50,150 |
From the table, you can clearly see Sohan saving way beyond than Mohan on doing a balance transfer much earlier than the latter. This was just an illustration to show how you should go about a balance transfer. Remember, the new lender will also levy a balance transfer fee, which could be a certain percentage of the transferred balance or a flat amount. For example, SBI charges INR 5,000 + 18% Goods and Services Tax (GST) for a balance transfer.
Finding it Hard to Deal with Losses on Direct Stock Investments? Maybe You Should Transfer Money to Mutual Funds
Buying stocks and selling them at a high price makes your pocket fat. But the flip side is the volatility that stock investments witness and when the market goes through a panic selling mode, you start losing money at a heap. In case you have invested in stocks directly without any knowledge and are bearing losses because of a bearish trend, wait for your investment to recover some lost ground.
Once it reaches the comfort level, take out the investments and put them in a mutual fund. Even mutual funds are subject to market risks. But they are managed professionally by experts instead of direct stock investments where things are left on you. These experts use their market intelligence to find out the stocks where they can keep your money in and take out from it when they deem so.
Just do a risk analysis of yourself. See how much risk you can afford. If you can afford high, equity funds are for you. In case you can’t take much risk, debt funds are there for you. If your risk is in between, a hybrid fund could suit you. While equity funds and debt funds invest mainly in equity and debt instruments, respectively, hybrid funds invest in both.
Goals and investment horizon also matter when choosing a mutual fund. Long-term goals like retirement corpus, funds for education and home purchase can be best achieved via equity funds. When you look to invest for a short period of upto 3 years, choose debt funds that are the best bet for the same.
Sticking to the Same SIP Amount Year after Year? Increase the Investment Amount Else You Will Fall Short
Investments are made in mutual funds via a Systematic Investment Plan (SIP) and lump sum, with the former being more popular than the latter. The reason is pretty simple. Managing small amounts monthly is doable for most compared to putting one large sum upfront in a mutual fund scheme. SIP investments can be made with as low as INR 500. With an SIP, you put a fixed sum of money every month in a mutual fund scheme. But sticking to the same SIP amount throughout your investment journey can generate a corpus less than you would if you increase the investment periodically. Yes, there’s a step-up SIP by which you can increase the investment year after year. You just need to notify the same to the Asset Management Company (AMC) whose mutual funds you have invested in or through CAMS or any other mutual fund transfer agency. Let’s consider an example to understand this better.
Example – You invest in an equity mutual fund with an SIP of INR 10,000. Assuming the annual return to be 12%, you could generate around INR 22.19 lakh over 10 years. If you use a step-up SIP wherein you increase the investment by 5% every year, you could generate around INR 27.53 lakh, around INR 5 lakh more in the said time period. The monthly SIP amount in the second year will be INR 10,500 and INR 11,025 in the third year and so on. The increase in the annual income can help you invest an extra amount every year.
Have Subscribed to an Individual Health Insurance Plan? Think of a Family Floater at a Reasonable Premium
Health insurers allow you to deal with expensive medical treatments these days by providing you attractive health insurance plans. With these plans, you get medical treatments without having to pay for it from your pocket. There are many health insurance plans of which an individual insurance plan and a family floater plan are the most popular ones. If you have an individual health insurance plan, it will cover for the ailments caused to you only and not your family members. To get them covered too, ask the insurer if they can upgrade the existing insurance policy to a family floater one by adding your family members to it. It might lead to an increase in the premium amount. But ensure the premium amount is reasonably priced so that you can afford it. Apart from that, you should ensure the cover amount is substantially high and have a cover against maximum diseases/conditions.
Don’t Have a Life Insurance Yet? Get it As Soon as Possible
Just as an investment is necessary to create wealth for the future, life insurance is needed to give your family members the financial protection when you won’t be there with them anymore. In case you have not begun paying life insurance premiums, ensure you do it soon and not leave it too late and too little for your family members after your death. Compare the life insurance plans based on premium, cover amount and riders and choose the one that you feel can cover your family members adequately.