GET YOUR PRIORITIES RIGHT

I met my school mate – Satish(37) during our annual get together last year in May 2011. During a casual conversation I told him that I am a financial planner and he became interested to know what I really do. After explaining him about my profession he agreed to meet me at my office to get his financial plan done. Satish is working as Vice President- Operations at a leading FMCG company. We met as planned and after discussing about his financial goals and other financial details, I requested Satish to provide me with all his financial documents related to his income, expense, assets and liabilities in order to analyse and provide the right solution.

After that first meeting in June’ 2011, it took me nearly 4 months of reminders and constant follow up to get all the required documents from him. Satish constantly apologized saying that it would take some time to locate all the documents. Finally the plan was prepared and after discussion we prepared the implementation schedule too. But again due to his job commitments, Satish somehow could not even complete the initial risk cover enhancement or any investment suggestions and we are now at the fag end of completing 1 year.

Satish’s is not an isolated case. I had another client, Raviraj(40), GM in one of the leading companies in the hospitality industry. Raviraj maintained scans of all his investments and insurance documents and was therefore able to provide all his financial documents within 2 weeks of starting our financial planning engagement in September 2011. But once the financial plan was done, it became difficult to contact and communicate with him since Raviraj has to travel constantly to different parts of India as well as South East Asia. Even though the financial plan was ready in September itself, it was discussed only in mid November when Raviraj was fortunately in Mumbai. Now it’s nearly 4 months ever since we met and there is no news on the implementation of the insurance or investment recommendations. At times the emails sent to him are answered after nearly 2 weeks.
Consequences

In both Satish and Raviraj’s case, we find that though both are very keen in putting their financial lives in order, somehow or the other due to job commitments they are not able to give priority to their finances. They did not even feel it necessary to involve their spouse thinking that they already had other family commitments. And what is the end result.

1. Both are heavily underinsured and have excess funds lying idle in savings account earning 4-6% interest when the prevailing inflation in our country is in the excess of 7%. Ultimately this excess cash sometimes gets utilized in buying fancy things which might not be your need but desire.

2. Imagine if in such a situation if god forbid either of them meet with an unfortunate event, and the family income stops, they being the sole earning members of the house. This is a possibility given the fact that today people earn a fat salary but in return they spend countless hours at office under stressful circumstances.

What’s the way ahead?

Just like a manager in an organization knows exactly what is to be done when he is supposed to achieve certain targets, we too need to prioritise our financial goals in such a way that we are constantly reminded of our very own little things which we have planned to achieve within the stipulated time. A few tips here should help.

1. Keep Reminders: People use gadgets like mobile phones or the ipad- off late to set reminders for theirofficial meetings. Why not incorporate meeting your financial planner or meeting your insurance advisor to complete that pending life insurance/ mediclaim proposal, in your reminders!

2. Take responsibility: No one else but you is responsible for your financial future. The more you neglect and   delay planning for your present and future, the more difficult it will be to achieve even basic goals like your retirement planning. Have you thought what would happen to your finances in the event of a job loss? Why wait for calamities to fall on you to meet your planner or to begin your investments?

3. Involve your spouse: Financial planners recommend involving the spouse in financial planning in order to ensure that one person takes charge and religiously helps in implementing the suggestions which is what is the ultimate aim of preparing a plan. It also helps that the spouse is aware of all the financial aspects related to insurance/ investments/ assets/ liabilities of the family. Haven’t we heard of several cases where on the death of the male earning member, the spouse was not even aware of how much insurance cover or loan liability her husband owned?

                                                                                                          

                                                                        by Steven Fernandes

Ghar ki kharidari me na badhane de karj ka bojh

If you don't plan for expenses, you cannot grow

Have you maintained an Emergency Fund?

Mario (35) a manager in a reputed BPO firm had been informed by his office colleague that investment in land was one of the best things to do for earning higher returns. After considering a proposal which came his way, Mario purchased half an acre of agricultural land for sum of 6 lakhs in coastal Maharashtra. For this purpose he utilized his fixed deposits and savings account balance. The shortfall of Rs 2 lakhs was raised from a personal loan. Mario was extremely happy as he felt he had made one of the smartest decisions in his life and created an asset apart from his self occupied property, which also was on loan. A few months later came the news that the company was not doing well and was in the process of closing a few of their processes which included Mario’s. Having worked for only a year in this company, Mario didn’t get anything except 2 months’ salary as notice period and was immediately laid off. Mario started applying for a job but it took him nearly 6 months to get one. During this period Mario found it difficult to manage his home expenses and loan payments. Finally in the 5^th month he sold the land that he had purchased for the same amount and cleared off his personal loan.

Can you avoid getting into such a situation: Job layoffs, sudden illness of self or dependent parents or accidental hospitalisation are events on which we do not have any control? No one can predict the timing or frequency of such events but at least we can be prepared for it. Why does it normally happen that even though we know the monsoon is round the corner, most still purchase the umbrella only after the first showers and after having got wet a couple of times. Getting wet may not be as much depressing as the events mentioned above. A sudden illness, especially if you are not even covered by a medical cover can upset your entire financial life if it turns out to be a major illness or surgery.

How can I be prepared: Firstly one needs to check if the basic insurance’s are in place or not. Evaluate your needs with the help of an expert and cover yourself for untimely death, disability and illness which can be done by purchasing life insurance, Personal accident and mediclaim policies. This is the first level of protection that you need to do. But there could be events which may or may not be covered by the insurance policies that you have bought.  For example, in case of job loss you might not get any unemployment compensation. In case if your parents are senior citizens with pre-existing illnesses, chances are that even they might not be covered by any medical insurance.

Any Thumb rules which we can follow: Ideally if you have a stable job along with a working spouse, try to maintain 3 – 6 months of your monthly expense in liquid form. Liquid form refers to easy availability of cash at any time of day or night. An emergency fund can help you take care of those smaller and bigger sudden expenses such as un- insurable auto repairs, replacing nonfunctional electronic items, non insurable illnesses, etc. It can also come in handy where at times your cashless mediclaim might not get approved and you need to pay upfront cash and claim later. Six months contingency fund is usually suggested for covering extreme situations such as a job loss where it might take that much time for getting a new job and during which you need to still pay your mortgage or insurance payments. In case you have dependent parents either senior citizen or not, but not insurable by any medical coverage, then you need to keep a higher amount.

How should we maintain this emergency fund?

For a contingency fund equal to 3 months of your monthly expense, it is suggested to maintain the same in your savings account which has an ATM card so you have the convenience of withdrawing it any point of time. Nowadays banks provide you a Flexi-Fd facility where deposits above Rs 10000 is automatically converted into fixed deposits and are also liquid, in the sense you can withdraw it using your ATM card and still get FD interest for the period it was maintained. Anything over 3 months can be maintained in a liquid fund offered by mutual fund companies as they offer better returns than savings account. The redeemed money also gets credited the next day into your bank account. Some mutual funds are also offering ATM cards along with the liquid fund schemes which makes it that much more convenient and hassle free.

For those who don’t have enough savings to maintain an emergency fund, it is suggested that you start a recurring deposit to build one. If you are planning to build an emergency fund of say Rs 1 lakh, then look at your surplus that you generate every month and depending on that allocate a part of the surplus to this RD so that you have your emergency fund ready in a few months.

Remember; don’t commit any money to long term investments unless you have made provisions for your emergency fund. This will ensure that you are prepared and provide peace of mind which we all need in today’s uncertain times.

                                                                                       

Involve your Spouse in Financial Planning

I had fixed up a Friday evening appointment with the Nair’s family at their residence, for providing a brief introduction and presentation on Financial Planning. Mr. Nair kept his word of arriving home early as he smilingly opened the door and let me in.

After the initial introduction Mr. Nair gestured at me to go ahead and start the presentation while Mrs. Nair rushed to the kitchen to prepare some tea for both of us. I requested Mr. Nair if he could wait while his wife joined us and then I could start the presentation to which he replied that she wouldn’t understand financial matters as well as he did.

I politely insisted that she should equally take interest and should be aware of the basics at least, which would help both of them take important financial decisions going ahead. Mrs. Nair overheard our conversation and without wasting much time she readily joined us after we were through with the tea.

I have several such instances where the husband has not felt it necessary to involve his better half in discussing financial planning matters or to get a better understanding of the process. In most cases wives too feel that it’s better if their spouses handle all financial matters. The result is that in most cases wives even don’t know where important financial documents such as life insurance policies, Mutual fund statements and house agreement papers are kept.

A lot of times when I tell couples to write down their financial goals separately, I am not surprised to find out that the goals and priorities of both the spouses are different which clearly indicates that the couples do not indulge in joint consultation or sharing of views on financial matters. For some husbands, buying a bigger house is a priority while for the wives its children’s educational funding that bothers them the most. The wife generally gets importance when we start preparing cash-flow statement as most of the grocery, utility bills, maid charges, etc are taken care by her and only she can provide most of the data on the expenses.

In order for couples to benefit from the financial planning process, the following measures are suggested.

1. Start involving your wives into financial matters such as preparing a monthly budget or at least you can make her in charge of writing down your family’s daily expenses. This can be a good beginning point which will also increase her interest into other major financial matters.

2. Begin with casual discussions on your family’s financial goals. Once you both communicate to each other your priorities and concerns then with mutual agreement the couple can actually write down their goals in mutually agreed order. This will help increase focus of the couple who will now on be aware of their priorities.

3. Women should take interest in understanding the financial products that the couple owns or those which have been recommended by their financial planner. The planner can readily help in explaining the characteristics of the products and its impact on their financial portfolio.

4. The couple should jointly maintain a file containing all important financial papers such as Insurance policies, Demat account statement, House property papers, etc. Husbands should keep their wives informed regarding the financial files that he may be maintaining. In case the husband / bread earner meets with an unforeseen tragedy, the spouse will at least be in a better position to take stock of all the financial papers in one file.

Having explained the above things to the Nair’s, it is heartening to note that now Mrs. Nair has taken the lead in managing the family’s budget and has even taken charge of filing the financial papers of the family. I wish this could happen in each family so we could have millions of financially literate and secure families.

Impact of Business News channels on Investors

                                                

The very mention of stock market is enough to infuriate my friend Ashish, 35, who lost big time during the stock market crash in early 2008. For someone who followed the stock market news and views on a particular business channel, it was the very feeling of being left out in the Euphoria that propelled him to invest all his savings in a few real estate and capital goods stocks during the period October to December 2007. Ashish had been following the stock market news almost everyday, sneaking time out from his work and spending time in front of the television screen in his office cafeteria to catch up with the latest buzz.

In March 2008 when Ashish could not bear to see the huge losses that he had incurred in his short stint with the markets, he decided to sell all his holdings at more than 50% loss and promised himself never to invest again in stocks. The analysts who had earlier given buy signals were now recommending selling the holdings to pare the losses.

It is human tendency to expect more and in pursuit of higher returns we are ready to take the plunge even in the absence of proper knowledge of the subject matter. With the advent of so many business channels people are constantly being bombarded with so much information that they are getting confused because each analyst has got different views of the same subject matter.

Secondly, it is has been observed that a lot many people have opened online trading accounts so they can trade online on a daily basis and try and earn that “elusive” extra rupee which seems to be so easy to earn while watching the analysts give you a range of the stocks movement.

In order to avoid being in the situation of Ashish there are a few recommendations that one can follow.

1. Watch the business channels to gain a better understanding and knowledge of sectors, companies and the general economy but don’t use that knowledge to trade in stocks. Remember if it was so easy to make money in the stock market by just following the analysts, then we would have a lot more millionaire investors today and everybody would be doing the same thing which is practically not possible.

2. Please don’t follow the so called “Stop loss” and “Book profits” mantra of the analysts blindly. Set up a proper asset allocation strategy with the help of a good financial planner and everything will fall in place. You will realize that now you have more time for other things than follow the stocks on a daily basis and most importantly-peace of mind.

3. Shun the short term trading strategy as advocated by stock analysts as it will only lead to pain and desperation. Please keep in mind that “Rome was not built in a day”. Equity investments deliver superior returns over other asset classes over a longer period of time. Trust your financial planner and work towards long term wealth creation.

                                                                                      By Steven Fernandes                         

How to manage your Bank Savings account efficiently

Gone are the days when we used to stand in serpentine queues to withdraw money from our local savings bank accounts. Even though the procedure was cumbersome, it ensured that we estimated or budgeted the monthly cash requirement before we filled in the withdrawal slip so we could avoid the trouble of again standing in the queue. Today with the help of automated teller machines (ATM’s) we can conveniently withdraw our monies from several locations. The ATM technology has definitely made our lives a lot easier but if not used in the right manner it can also leave you high and dry.

Take the case of Mr. Aditya, 36 who works for an MNC firm in the senior managerial category and earns a net income of Rs. 75000 per month. His family comprises of his homemaker wife Sarita, 34 and Son-Arnav-5 and they stay in their self owned flat in one of the suburbs of Mumbai. Their monthly expenses including a home loan emi ( Rs. 31300 for a 30lakh loan)  and other living expenses comes to Rs. 60000 per month.  Another Rs. 5000 goes towards an SIP in an equity diversified fund bringing the total outflow per month to Rs. 65000 thereby leaving a surplus of Rs. 10000 per month.

From the day the salary is credited which is usually on the 1^st of the month, the ATM cum debit card is put to maximum use for initial cash withdrawals, Grocery purchases and a few additional purchases at malls with family in the weekends. Aditya has no track as to what his exact monthly expenses are but takes care to maintain sufficient balance for his home loan emi debit. No fixed pattern is applied for cash withdrawals. The withdrawals range in various amounts of Rs. 15000 to 20000 initially in the beginning of the month and then small withdrawals ranging from Rs. 2000 to Rs. 5000 in the latter part of the month and at times he is not even left with minimum balance.

Following this pattern of unplanned withdrawals and expenditure, will never let Aditya realize if he is overspending or making impulsive purchases on things which he doesn’t need. Secondly not maintaining funds for contingency can prove to be fatal if faced with an emergency situation such as a sudden medical expense.

Here are a few guidelines which can be followed to ensure that your savings account is maintained in the most prudent manner.

1. Prepare a family budget: Maintain a simple budget book in which you can jot down the monthly income and expenditure. This exercise needs to be done in  consultation with your spouse as there are a host of family related expenses such as grocery, utility bills, etc which the home maker or working women would be managing directly. Joint consultation helps in including all the possible expenses that the family has to cater to every month and enables near accurate results. Don’t forget to include periodic or annual expenses such as Insurance premiums, Vacation, etc which can be one time or spread over different months. For those who don’t know what their exact monthly expenditure is, can begin with writing down their daily expenses for a month or two and monitor the same which should be good enough to give you a fair idea of what your expenses are going to be. Doing this exercise over several months will enable you to reach near accurate levels.
2. Control your ATM withdrawals: Once you have prepared your budget the next step is to withdraw the amount required for the whole month. Take care to see that you don’t withdraw cash for expenses such as insurance premiums, society maintenance etc. You can keep provision for those payments by maintaining the required amount in the bank and issuing cheques towards those expenses. For eg. If your monthly expenditure on groceries, consumables, utilities, etc is Rs. 20000, while insurance premium and society maintenance is Rs. 10000 and Rs, 3000 respectively then withdraw only Rs. 20000 and maintain upwards of Rs. 13000 to be paid vide cheque.  The budget based expenses will avoid excess withdrawals way beyond your requirements and prevent several trips to your ATM’s.

3. Maintain a separate record of your bank transactions. How many times do you visit the ATM to check the balance in your savings account or to take a mini statement? Others take recourse through their online banking platform. These routine visits can be eliminated if you maintain a small record of your income and various transactions in a separate book or in an excel sheet of your PC.

4. Maintain a contingency fund: There could be events such as a medical emergency which may require urgent or immediate funding. Try and maintain a contingency fund of minimum of 3 times of your monthly expenditure in your savings account. The contingency fund may vary across different families and depend on various factors such as job stability, dependent parents, etc and can be decided in consultation with your financial planner.

Make a beginning today and experience the difference it can do to your lives.

                                                                                          By Steven Fernandes,

                                                                                                    

First time investors in Capital markets? Take the Mutual funds route

The great legendary investor “Warren Buffet’s”, stock picking abilities are part of folklore now. We all know how he created a fortune by identifying and investing in the right businesses when the shares of those companies were down in the dumps. Closer home in India, Mr. Rakesh Jhunjhunwala is one such personality among many who has successfully created wealth by following a similar approach.

What’s common in these two towering investors was their educational background. Mr. Buffet did his masters in Economics while Mr, Jhunjhunwala is a Chartered Accountant. Their educational background and an underlying passion for numbers helped them understand the financials and balance sheets of companies which in turn enabled them to take informed decisions.

The success of such great investors inspires a lot of us, including first time investors to invest in the stock markets directly by purchasing shares of listed entities. While it is good that first time investors have started looking up to equities as long term wealth creators, it’s equally important to know the pitfalls that await them.

Ask yourself these questions before you take the plunge.

1. Do I understand how to evaluate stock

Evaluation of shares would require you to go though the balance sheets of the selected companies and understand the numbers and find out details of the management, future growth prospects, etc. It also requires one to calculate the various fundamental analysis parameters such PE ratios, EPS (earnings per share), etc.

2. Do you have the time to research stocks

The above process would consume a lot of your time. If you are a salaried employee or in business, will you be able to find time for the above activity? A lot of employers are now prohibiting access to financial market websites in order to prevent employees from frittering their time on this activity while in office. Chances are that most of you would neither have the time to devote to this activity nor be able to understand the technique of valuation. Does this mean that first time investors cannot invest in stock markets? The good news is that you can invest in the stock markets by the indirect route of Mutual funds. Mutual funds are pooled investments that are professionally managed by people who understand the stock markets and stock valuations much better than most of us do. Mutual funds in India have been established as trusts and they provide investors with the following benefits.

3. Diversification

We have learnt not to put all eggs in one basket lest we might run the risk of losing all the eggs in case of any adverse eventuality. A single mutual fund scheme invests in a range of companies comprising various sectors in order to provide diversification. So with a limited amount of investment, you can get exposure to several good stocks which might not be possible if you invest directly in shares. For example, if you want to invest a surplus amount of Rs. 10,000 in shares of bluechip companies, you might be able to buy few shares of some companies since the rate per share of good companies might be available in the range of Rs.500 to Rs. 1000 and therefore the desired diversification may not be possible to achieve.

Professional Management

Mutual funds have a professional set up which is well regulated and comprising of their own research team and analyst’s who have their job cut out to study, analyse and identify the right companies and multi baggers according to the investment objectives laid down by the scheme

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Range of products available

Mutual funds provide a range of equity as well as debt schemes to suit the various requirements of investors. Depending on the specific needs and time horizon the products can be selected.

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Liquidity

Mutual funds provide you similar levels of liquidity that comes with investing in shares. For Equity funds, the redemption proceeds are credited in 3 working days post the submission and acceptance of redemption form, while for Debt funds it can take between 1 and 3 days depending on the scheme.

Reduction in transaction costs

Investment in a diversified range of shares would increase your transaction cost along with the de-mat charges which have to be paid every year. In mutual funds the charges would be comparatively lower and are of two types: Exit load if the investment is redeemed within 6 months to 1 year & Recurring charges which are in the range of 2 to 2.5% per year.

It helps in inculcating discipline

Mutual funds offer a recurring investment method which is popularly known as SIP (systematic investment plan). By these method even small amounts ranging from Rs. 100 to Rs. 500 can be invested every month for a pre-decided period according to your set goals. This investment can happen through the ECS (electronic clearing system) mode and is devoid of any hassles. This ensures that once you begin your sip investment, then regularly the debit would happen and ensure savings in a disciplined manner. So go ahead and take an informed decision with the help of your financial planner.

                                                                                           

Spend, don’t splurge, this festival season

BUYING YOUR FIRST HOUSE? LOOK BEFORE YOU LEAP

Life has been tough for Mr. Sunil Sharma (36), an assistant manager with an insurance firm who has been living on rent along with his wife and son in the distant suburbs of Mumbai for the past 3 years. Since last 2 years he has been contemplating buying a 1BHK flat in Mumbai but kept postponing thinking that the property market was overdue for a correction, only to find that rates have been going up. For thousands of families living on rent in the urban areas, it’s their most cherished dream to own a house which they can call their own. Buying real estate is a very emotional decision and involves life’s biggest investment. Care should be taken to think through the entire process in detail before you take that big decision.

Following are some of the aspects which you need to consider in detail in order to take an informed decision.
 Budget:

Its an old saying that “Cut the cloth according to your suit”. More than 90% of the flats today are purchased with the help of a home loan. The banks may provide  you funding of upto 85% of the flat cost, but keep in mind that your EMI payments should not cross maximum of  45% of your take home salary and can be further less  if you are a single income family with kids. For eg. If you are earning a net income of Rs. 50000 per month with monthly expenses of Rs. 20000, then considering present floating home loan interest rate at 11%, the EMI per lakh would be Rs. 1136 and you can take a loan upto Rs. 19 lakhs for an EMI of Rs. 21590.

If you are falling short of the down – payment component, then it’s better to postpone your goal and start saving to bridge that gap. Lot of first time buyers, go for a personal loan (which are offered at between 14-18% interest) to meet the shortfall and then they realize later that it’s difficult to service two loans. Eventually they juggle between trying to maintain adequate balance in their bank account to meet their EMI liabilities and the shortfall in monthly expenses is then made good by the use of credit cards, which further pushes them in a vicious circle.

Factor in Other costs:

In an under – construction / ready flat purchased from builder, you will get the breakup of the total payment to be done which includes not only the flat cost but also charges for stamp duty and registration, electricity meter, club house corpus, one year maintenance etc.  But in a resale flat, you will also have to figure out if there are any unpaid dues owed to society, monthly maintenance cost, cost for painting , furniture, etc.  Take a realistic view on all the costs involved before finalizing the budget.

Location:

Once your budget is decided, you can then get an idea of the choice of flats available within that budget and the areas where it’s available. Sometimes it’s a reverse calculation. You fancy yourself as staying in a particular area / complex and accordingly you can set your budget. Location is important as you will be able to figure out whether all facilities such as public / private transport, Schools, Shopping malls, nearest railway stations are within accessible distance or not. The poorer the connectivity the higher will be your monthly outgo towards commuting and shopping for essential services. If your budget is low then you have to make a choice between a bigger house in a far locality and a smaller house in a well connected locality.

Ready flat / Resale / Under construction  property

Typically this depends on your budget. If given a choice, people most likely would want to buy either a ready to move in new flat or a resale flat of a new construction where all the facilities and connectivity has been provided. These flats of course come at premium or market rates. But if budget is a constraint here, then you can chose under – construction property as it is available typically at a discount over ready flats and you get an opportunity to pay according to the stage wise construction. A word of caution here. You need to check the past track record of the builder and the prevailing market situation before booking an under-construction flat as the possession date might get postponed thereby increasing your cost of staying in a rented house till then.

Get your credit score

Today all financial institutions access the applicant’s credit report from CIBIL, which is the prominent credit bureau, created for assessing the individual’s credit worthiness. In short, a higher credit score indicates that the applicant has a very good credit history while a lower score can indicate vice versa. You need to get your credit score to check if you have been fairly rated by the bureau. If your rating is unfortunately lower due to your previous bank not reporting your timely payments done, then you can always ask that bank to rectify the error and resend the same to CIBIL, which might improve your score and you are then better placed to get your desired home loan as per your eligibility.

It is always better to take an informed decision since it involves your life’s biggest investment. Always involve your spouse or senior family members (if you are not married), including your financial planner in the discussion and take that confident step towards your dream house.

Beware of the Credit Card Debt Trap

You must have heard of the quote “Rather go to bed supper less than rise is debt”, by Sir Benjamin Franklin. This famous quote just gives an indication to the extent of troubles that one might invite if debt is not managed properly.

One of the most common types of debt among our urban class is Credit card debt. Let’s try to understand how one falls into the debt trap.

Sumeet, 26 had gone along with his friends for pre- Diwali shopping at one of the local malls and during the course of a few hours ended up blowing up a couple of thousands which was way beyond what he had planned for. All his purchases were done by credit cards as he did not hold that much cash in his account. When the credit card bill came in next month, he was comforted by the fact that he could make a minimum payment of close to 5% of the outstanding amount and pay the rest in the following month. Little did he realize that he would have to pay an interest on the outstanding at the rate of 3.5% per month (42% annulised). In the interim, Sumeet added a few more debts by purchasing some electronic items and dining at some of the posh restaurants with friends. Sumeet never saved enough to pay back the entire credit card debt and in a few months his debt and interest outgo reached such a level that he started skipping even the minimum amount due. The final nail in the coffin was when he started getting hounded by calls from recovery agents. Had it not been for his father who settled the entire outstanding with the credit card company, Sumeet‘s life would have become miserable.

Even young married couples too fall into the credit card debt trap and by the time they realize, it’s too late.

How does one avoid this pitfall? There are 5 steps you can take to avoid landing yourself in such a situation.

o   Maintain a monthly budget.

o   Maintain a contingency fund

o   Always use your debit cards

o   Maintain a credit card only for emergency.

o   Pay your credit card bills on time

o   Don’t keep more than one credit card

Maintain a monthly budget

This is the first thing which should be done and followed diligently. Prepare a simple cashflow statement of inflows and outflows so you are aware of the possible expenses and surplus (if any) that is generated every month. If there are no surpluses then you can take a hard look at the possible expenses and try to rationalize them and generate surpluses for savings. This exercise will also help you to plan any high value purchases in advance.

Maintain a Contingency Fund

A contingency fund equal to 3 -6 months of your monthly expenses should be maintained in your savings account in order to fund for contingencies such as a hospitalization or loss of job. This fund will enable you to meet the unforeseen expenses and prevent you from borrowing. For example if your monthly expense is Rs. 25000, then you need to maintain at least 75000 in your savings account for contingency purpose.

Always use your debit cards

Usage of your debit cards will keep your purchases under check and you will spend within your means. You will be more disciplined towards your purchases and avoid falling into the credit trap.

Maintain a credit card only for emergency

Credit card has its own advantage too. Given a situation when your family member faces a medical emergency and has to be hospitalized at odd hours, you might not have access to cashless mediclaim or an ATM at that time. The credit card comes in handy in order to pay the initial deposit. But make it a point to pay back the amount within the first payment cycle.

Don’t keep more than one credit card

Nowadays we are bombarded with hundreds of calls from banks to take up a credit card with promises of no membership charges for lifetime. Do your due diligence on the various possible charges including the membership fees, late payment charges and interest rates charged, before signing up for one. Having more than one card will always provide the temptation of making purchases beyond your paying capacity.

Pay your credit card bills on time.

Please remember the credit card debt is the most expensive debt among all categories of debt. The annualized percentage rate can be as high as 42 %.Most of us fall into the credit card debt trap when we fail to pay the credit card outstanding bills and continue paying the “Minimum Amount due”. This results in the company slapping us with late charges penalty and interest on out standings.

Please remember that it’s easy to get into debt but difficult to come out of it.