While doing your financial planning, one should know about his needs and wants, which will help you to plan and prioritise your investments and cost
World is a global village today you could buy things across the globe sitting in India. Almost everything can be purchased with the swipe of a card. In case of more, cheap and quick loans are easily accessible since lenders offer zero interest loan, processing fee waiver and many such schemes.
Financial planning plays a vital role in credit management of an individual. These days we have to manage different forms of loans – home loan, car loan, personal loan, student loan and credit card repayments, etc. Thus, it is very important to follow a disciplined approach to minimise the interest we pay on these instruments. The priority is to understand the difference between needs and wants. Needs generally refers to your basic needs that are important for survival, but wants are those needs which will not impact your survival. For e.g. buying a home is a needs but going on an international holidays is a want.
When you think of a loan, the first and foremost question to ask yourself, is this your need or want? Can you survive without this? Like taking a home is a need; but not car, and therefore a home loan is preferred over other loans. The house is an appreciating asset, home loan for that is available at low interest rates with tax benefits, which is not the case with other loans. A good financial expert like us; will always advise for a asset backed loans that will grow multi folds over a period of time and increase your overall net worth. For e.g. your asset grows at 10%pa (capital appreciation) and your interest on loan is also 10% pa; so there is no actual impact on your portfolio.
The second question to ask is whether it is a necessary to incur the cost now or it can be done later. For example: Taking a loan for an international trip will make it even more expensive, such type of wants can be delayed. The correct way is to save money for your trip and then travel. In this scenario; you will not only save the interest but also the amount paid towards various charges like processing fees, documentation etc
When you are going to spend money on your wants, you need to think twice before you buy anything. Let's say your requirement is to buy a fridge and at the nearby store there is a special offer. Buying fridge alone will not have any discount offers, but if you buy it with latest TV & home theatre, you will get up to 20% discount. What should a person do now? It is an offer which anyone would take advantage of. You decided to avail the offer and you buy it on EMIs. You are very happy, but have you done the right thing?
In ideal scenario, you should have bought the fridge only. The money which you spent on TV & home theatre along with the cost of processing fees and interest will be more than 20%. At the end of the year, you made a loss while availing the discount scheme. A financial expert will advise you to go for SIP instead of EMIs (with the money left after buying a fridge). You will make more returns without any pressure of EMIs.
If you already have multiple loans going on following tips will help in prioritising the order in which loans should be paid off whenever surplus cash flow is there.
Make list of the different loans and the interest rates being charged including outstanding balance on the credit cards
Identify which loans have prepayment penalty and which ones don't. If a loan has a heavy prepayment penalty weigh the amount vis-a-vis money being saved in form of interest payment
To clear off loans fast, one or all of the following routes can be taken Making lump sum payments to clear of part of the loan or complete amount. Making additional regular payments either quarterly or monthly this will help reduce the outstanding loan principal amount
Refinancing the loan with same organisation or another organisation, the key here is to maintain the monthly EMI outflow and reduce the tenure instead.
Bottom-line is every rupee saved is money earned. While doing your financial planning, one should know about his needs and wants, which will help you to plan and prioritise your investments and cost.
The writer is head - Anand Rathi Preferred Services
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