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What do you choose once you start earning? Loans or investments?

financial planning - saving to buy house - budget house

Getting own pay cheques & becoming financially independent is everyone’s dream. Everyone makes their wish list ready once they receive their ‘first pay cheque’!

Apart from shopping, giving parties to friends & family, many of us look for buying own house or getting a bigger one, buying own car & what not.

These all are assets which come with ‘liabilities of loan’ because with a small sum of money, no one can afford them. Our urge to buy these assets via loans, can lead us to trouble.

Since last 18 months, whole world is battling with pandemic & lakhs of families who have lost jobs, faced reduction in incomes have been finding it difficult to pay EMIs on the loans which they have taken to buy such assets.

This is one of the biggest lessons learnt from this pandemic!

Having own house or shifting to a bigger one is a matter of need & pride too. Though its true, we can not ignore the importance of giving our wealth its safety cushion.

Creating assets, getting returns on investments, achieving our goals are all important but tightening ‘safety belt’ to our money & finances is a need.

Why you should not jump to take loans immediately?

Loans come in many types & forms. Today they are more affordable & banks give it to us easily once we complete formalities. Getting loan is simpler as one can have a ‘credit card’ & start using it to own advantage. Many buy appliances, mobiles, laptops just because payments via ‘credits cards ‘are easy but they ignore the fact that, today or tomorrow, they have to pay their bills & it’s a liability.

If they fail to make payments, their ‘credit score’ gets affected & future loan will have its impact too.

On the other hand, credit cards or personal loans are easily available so many a times people end up buying items which are not actually ‘needed’.

A threat of uncertainty of income:

Today, majority of us are working in private sector where competition is stiff, job security is low & payments are uncertain.

Those who are in a profession/business also face uncertainty of income till the time they actually hit their ‘break even’ point.

People often fail to consider this & apply for loan & take liability first.

Change in rate of interest:

Rate of interest on loans is often linked ‘marginal cost of lending rate’ i.e. MCLR or repo rate declared by RBI from time to time. Commercial banks decide their rate of interest based on these two.

Generally, all banks offer ‘flexible rate of interest’ to us while sectioning our loans, this way our applicable rate of interest & amount of EMI can change as per these two benchmark rates because banks can make changes in rate of interest in response to changes in these benchmark rates.

Today, if we consider our cashflows based on EMI we get to pay today, we should be prepared for change in EMIs in future if any.

It’s true that, our income will also increase gradually, but so are our expenses & inflation.

Then, What is the solution?

Build ‘emergency corpus’ first!

It’s a priority & need to build ‘emergency fund’ first once we start earning. If one has a family financially dependent on him/her, then they must build it.

For this, we need to count our monthly household expenses like EMIs, bills payments like electricity bills, grocery expenses, children education expenses, parents’ medical expenses if any.

Such payments when we count, we will come to know our monthly expenses. This way, we must have an amount equivalent to at least 12 months of our monthly expenses marked as our contingency fund.

We can start a recurring deposit or start SIP in debt liquid fund to create the same.

A corpus once accumulated can then be kept in dedicated savings a/c or invested in short term bank FD or debt liquid fund.

This way, through any uncertain situation, we can easily sail through & we wont miss any of our EMI payments.

Buy right amount of insurance:

‘Insurance’ does what fences do to our home! They protect our financial well-being.

When we start earning, if we have a family financially dependent on us then its our duty to have a right & suitable amount of ‘life insurance’.

Life insurance helps our family members to be financially independent throughout even after our death. Its our dream always to be financially independent, to achieve our goals. If unfortunately, something happens to us, then our family must not suffer.

A sum assured from life insurance takes care of all such needs.

Today, there are many insurance policies but ‘term insurance’ is the only type of life insurance which serves this very purpose of life insurance. So, apply for a term insurance for at least 10-15 times of your annual income.

There are methods of calculation for your suitable life insurance cover but you can apply for this much at least.

Another type of insurance is a ‘Health insurance’. It is a must have these days. Growing costs of medical expenses, hospitalization, add to our costs. Medical sciences have advanced over the period of time, life expectancy is also increased but so are costs associated with such expenses.

Health insurance cover gives us support in paying off such expenses when need occur. They bear the cost of ambulance, hospitalization, medical expenses. Its important to opt for a right & suitable health insurance policy for us & family.

Though, our employer is giving the same benefit, we must have our own health insurance policy.

Fix future goals:

Many a times, we buy or posses things & services we don’t need. We spend on it & then have nothing to pay for the things we ‘need’.

So, it’s important to ‘fix our future goals’. When we do so, we can make focused, disciplined & regular investments to achieve them, we can create assets, can judge our capacity to bear loan repayments in better way & have control on our cash flows.

Creating our own assets is a matter of pride, but we must not lose our financial well-being due to this.

Let’s be thoughtful while applying for loans & making investments!!

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