I met a couple of friends recently, and during our conversation, I learnt that one of the major things impacting their wealth-creation journey is high EMIs (equated monthly instalments).
We live in an age of instant gratification. This affects our approach to saving, and subsequently our peace of mind. Anyway, so my friends asked me if there was a way to ease the situation. And my answer was: yes, it is possible, if you are disciplined about it. As a wise man once said, pleasure is short-term; happiness is forever. Here are some tips.
1. Choose the loan amount carefully
As a consumer of financial services, one needs to be careful about choosing the loan amount. It helps to evaluate one’s earning potential through cycles. As a thumb rule, if you cannot repay 50% of the loan in 5 years, it is not worthwhile to go ahead with it.
One of our clients has been disciplined about early repayment, and that has helped him experience peace of mind. Another thing he did was to remove excessive real estate from his portfolio. He sold off one apartment and paid back 50% of the loan. However, the sale took time, as real estate sales are slow in the current situation. So plan ahead.
2. Keep just one credit card
At any point in time, the world wants us to spend more and experience pleasure. It makes us believe that if we do not consume a particular product/service, our life will be incomplete. That may be partly true. However, such pleasure is short-lived, which is why it is important to follow sustainable financial practices. One such method is to reduce the amount of credit cards and have a low limit on the ones you keep…as low as Rs 10,000, if needed. Spend only on the most essential things. Over time, you would experience peace of mind and wellbeing in general. And your wallet stays full too!
3. Exit high-cost loans
Many people have high-cost personal/educational loans, where the interest rate is in initial double-digit figures (if not in the mid-teens!). Given the current economic landscape, taking on a high-cost loan is not recommended whether you are a business-person, a professional, or a salaried worker.
One of our small and medium enterprise (SME) clients reduced his EMIs by paying off a high-cost unsecured loan. Since his compliances and accounting had improved, he was able to substitute it with a lower-cost loan. This also led to an improvement in his credit score.
4. Keep emergency funds handy
Many people borrow from friends and family when their personal funds run out. One friend does this every time he runs out of cash. Once, somebody told him to get a credit card. He proudly replied “I don’t use credit cards.” Although he had money and never defaulted on his borrowing, his problem was his high spending on lifestyle goods and services. When he borrowed funds from friends and family (citing problematic situations) it was not for business, but for pleasure. This is a recipe for financial disaster.
A basic financial principle is to keep a sufficient buffer, whether it is for business or personal use. This helps avoid extreme situations. For example, one of our clients, although he runs a large business, maintains a simple lifestyle as he is aware of the extreme situations caused by addiction to credit.
5. Have a loan repayment plan
About a decade ago, one of our clients purchased a house. His plan was to clear the loan in a couple of years, which he did over 5 years of disciplined repayment.
The clear strategy he followed was to pay 50% of his bonus every year towards loan repayment. The balance 50% was deployed in a long-term investment portfolio. Once the portfolio achieved 50% absolute growth, the capital appreciation was used towards repayment of the remaining 50% loans.
To start your journey to financial well-being, it is critical to master the basics. Once you have mastered them, the journey becomes enjoyable.