A fat income is all very well. But how you spend could make or break your fortune
Dipta Joshi
HAVING a high-paying job is no guarantee for a lifetime of financial stability. There are scores of stories of the rich and famous who went bankrupt living a flamboyant life, splurging all the wealth they earned. There’s a lesson in their mistakes for even the humblest of us: how you spend matters more than what you earn. If you’re in your thirties and forties now, chances are that you work overtime so you can live a little better. Many of our generation are thus breaking away from the conservative financial practices of our parents. However, it’s easy to go overboard in trying to do so. Here are a few suggestions to help ensure a good balance. Getting value for our money should become a way of life for Indians who are earning more than their parents could ever have dreamed of. Buy a house This is the first step towards a better lifestyle for any earning adult. Most people would like to buy a house as close to their place of work as possible. However, this makes sense only if the job requires us to be at the office each day. Besides, in the initial years of one’s career, one may need to experiment with different companies before settling down for a long innings. If you are willing to take a loan and buy a house, go for something centrally located, which will cater to the longterm needs of your family. With IT-related jobs growing in number, an emerging trend is for people to work from home. Companies increasingly consider this to be acceptable. If your work situation is like this, your criterion for choosing a home, too, will change. Refinance your mortgage Your investment portfolio is not the only aspect of your finances that my require adjustment—your home loan could stand to benefit from one, too. If a reshuffle can reduce your interest outgo, then it’s certainly worth the trouble. But take a careful look at what the “trouble” entails. If transaction costs and fees charged by the refinancing institution nullify the benefits of the lower interest cost, refinancing is not worth the “trouble”. Also, consider whether reshuffling now would be better than at some other time. The most appropriate reasons would be a job relocation, or the need for bigger house in the next couple of years. Make investment plans work One should draw up a savings and investment plan as early as possible in one’s earning career. Some of the things financial experts emphasise are: putting money in growth options that offer compound interest, building up a comfortable retirement kitty, and having adequate insurance for yourself and your dependents. Keeping your short- and long-term financial needs in mind, chalk out your financial plan. Figure out what percentage of your earnings you want to put into equity markets, and through what route. T he array of options, each with its pros and cons, may seem confusing, but remember that you are the best judge of your own needs. It may be worth paying consultation fees to a financial planner to gain clarity on how to meet your needs. Learning on your own, through trial and error, could prove expensive, and difficult to undo. But, of course, you’d need to find a financial planner you can trust. Not everybody who seems to have a financial opinion is the right financial advisor for you. Make sure the planner you hire is not an agent for a particular company, as this would prompt him or her to recommend only that company’s products, even if they are not the best match for your needs. A rule of thumb is to stay away from schemes whose investment plans you cannot understand. Have an emergency fund The older generation may recommend keeping a minimum of three months worth of expenses in a bank savings account. However, perhaps you prefer keeping the money in an option that earns higher interest. Be sure, though, that it’s in an instrument that assures instant repayment options. Should an emergency come along, you don’t want to be kept waiting. If you have kids, or rely on a single income, double the emergency fund recommended above. Don’t pinch pennies with your car A car figures quite high on the priority lists of many people today. May we suggest a little change here: put the car lower on your list than all the essentials discussed above. Although the market for used cars is doing more brisk business than ever before, it’s best to buy new, especially if it’s your first car. A new car’s insurance and warranty could stand you in good stead. And, despite all the homework you put in before buying a used car, you could still end up with a lemon—particularly avoidable if you’re a relatively inexperienced driver. Resist temptation Resist technological temptations until you can really afford them. Smart spenders are not to be found in queues outside shops, waiting to grab the first piece of some new gadget. They would rather wait for the reviews to come in, and for the hoopla over the new technology to cool off. Only then will they go and buy that object of desire—after the price drops. Careful with those credit cards Getting a credit card is easy these days. Using it with restraint is becoming increasingly difficult, given the change in our lifestyles. While one cannot deny the convenience provided by credit cards, let’s not forget that credit card companies charge extremely high interest rates. When we limit our credit card expenses, and pay off the bills completely each month, we are making the best use of our credit cards.
Dipta Joshi
HAVING a high-paying job is no guarantee for a lifetime of financial stability. There are scores of stories of the rich and famous who went bankrupt living a flamboyant life, splurging all the wealth they earned. There’s a lesson in their mistakes for even the humblest of us: how you spend matters more than what you earn. If you’re in your thirties and forties now, chances are that you work overtime so you can live a little better. Many of our generation are thus breaking away from the conservative financial practices of our parents. However, it’s easy to go overboard in trying to do so. Here are a few suggestions to help ensure a good balance. Getting value for our money should become a way of life for Indians who are earning more than their parents could ever have dreamed of. Buy a house This is the first step towards a better lifestyle for any earning adult. Most people would like to buy a house as close to their place of work as possible. However, this makes sense only if the job requires us to be at the office each day. Besides, in the initial years of one’s career, one may need to experiment with different companies before settling down for a long innings. If you are willing to take a loan and buy a house, go for something centrally located, which will cater to the longterm needs of your family. With IT-related jobs growing in number, an emerging trend is for people to work from home. Companies increasingly consider this to be acceptable. If your work situation is like this, your criterion for choosing a home, too, will change. Refinance your mortgage Your investment portfolio is not the only aspect of your finances that my require adjustment—your home loan could stand to benefit from one, too. If a reshuffle can reduce your interest outgo, then it’s certainly worth the trouble. But take a careful look at what the “trouble” entails. If transaction costs and fees charged by the refinancing institution nullify the benefits of the lower interest cost, refinancing is not worth the “trouble”. Also, consider whether reshuffling now would be better than at some other time. The most appropriate reasons would be a job relocation, or the need for bigger house in the next couple of years. Make investment plans work One should draw up a savings and investment plan as early as possible in one’s earning career. Some of the things financial experts emphasise are: putting money in growth options that offer compound interest, building up a comfortable retirement kitty, and having adequate insurance for yourself and your dependents. Keeping your short- and long-term financial needs in mind, chalk out your financial plan. Figure out what percentage of your earnings you want to put into equity markets, and through what route. T he array of options, each with its pros and cons, may seem confusing, but remember that you are the best judge of your own needs. It may be worth paying consultation fees to a financial planner to gain clarity on how to meet your needs. Learning on your own, through trial and error, could prove expensive, and difficult to undo. But, of course, you’d need to find a financial planner you can trust. Not everybody who seems to have a financial opinion is the right financial advisor for you. Make sure the planner you hire is not an agent for a particular company, as this would prompt him or her to recommend only that company’s products, even if they are not the best match for your needs. A rule of thumb is to stay away from schemes whose investment plans you cannot understand. Have an emergency fund The older generation may recommend keeping a minimum of three months worth of expenses in a bank savings account. However, perhaps you prefer keeping the money in an option that earns higher interest. Be sure, though, that it’s in an instrument that assures instant repayment options. Should an emergency come along, you don’t want to be kept waiting. If you have kids, or rely on a single income, double the emergency fund recommended above. Don’t pinch pennies with your car A car figures quite high on the priority lists of many people today. May we suggest a little change here: put the car lower on your list than all the essentials discussed above. Although the market for used cars is doing more brisk business than ever before, it’s best to buy new, especially if it’s your first car. A new car’s insurance and warranty could stand you in good stead. And, despite all the homework you put in before buying a used car, you could still end up with a lemon—particularly avoidable if you’re a relatively inexperienced driver. Resist temptation Resist technological temptations until you can really afford them. Smart spenders are not to be found in queues outside shops, waiting to grab the first piece of some new gadget. They would rather wait for the reviews to come in, and for the hoopla over the new technology to cool off. Only then will they go and buy that object of desire—after the price drops. Careful with those credit cards Getting a credit card is easy these days. Using it with restraint is becoming increasingly difficult, given the change in our lifestyles. While one cannot deny the convenience provided by credit cards, let’s not forget that credit card companies charge extremely high interest rates. When we limit our credit card expenses, and pay off the bills completely each month, we are making the best use of our credit cards.
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