Stop Bingeing! Get Fitter!
A D.I.E.T Plan for Improved
Financial Health.
It is the biggest festive season of the year, a
time we all look forward to. It is also the time when many of us indulge
mindlessly in Bingeing; Bingeing on Sweets, Entertainment, Shopping, and the
list goes on and on. While bingeing can manifest itself in countless ways, one
thing is certain: regardless of what we choose to binge on, bingeing is sure to
have a debilitating impact on our physical, emotional and financial health. Bingeing,
along with excessive Debt, can erode our hard earned savings, weaken the very
foundation of our Financial Well-Being and leave us vulnerable to the
uncertainties of the future.
In this blog, we talk
briefly about the financial impact of bingeing and excessive Debt, and how one
can overcome these challenges by following a Financial D.I.E.T Plan. A
Financial D.I.E.T focuses on FOUR key areas that demand our immediate
attention; these are:
(D) Debt, (I) Investment Costs, (E)
Expense, (T) Taxes
So here’s how, by
focusing on these FOUR key areas, you can cut down on your financial excesses
and lay the foundation for an improved financial health.
Eliminate Debt: Debt can be your biggest roadblock on your way
to achieving your financial goals. Here are some of the most popular forms of
debt, and how one should approach them.
1. Credit Card Debt / Outstanding: This is probably one of the worst forms of Debt
in terms of the exorbitant penal interest rates applicable. Debts like these
need to be foreclosed at the earliest opportunity available since they can, in
no time, snowball into an unmitigated financial crisis. In case you find it
difficult to clear your credit card outstanding at one go, make sure that you
convert your outstanding amount into EMIs to at least benefit from a lower rate
of interest. While E-Commerce portals and Financial Institutions lure you into occasional
festive time splurges, by way of discounts and offers on your Card, it is in your
own interest to understand the immediate and long term ramifications of your
actions on your overall financial health.
2. Personal Loan: While one might argue that certain financial exigencies might force one
to avail a personal loan, it is equally important to understand that the best
way to tide over financial emergencies is to have a contingency fund in place;
a fund that can comfortably cover at least 6 months of all your non-negotiable
expenses. More importantly, given the high interest rates on personal loans,
these are best avoided. By the way, for the ones who have already availed these
loans, the only good thing to do now would be to foreclose them at the earliest
instance possible.
3. Car Loan: A
car could mean many things to many people. For some it could be an object of
desire. For others it could mean a status symbol. While for a good number of
people the decision to buy a car might be driven by peer pressure or other
psychological factors, there are an equally good number who might consider
buying a car purely for its usefulness in their personal lives. For youngsters
though, who may have just kick started their journey towards financial
independence, it is important to make sure that the decision to buy a car should
be rational, and must necessarily be driven by its utility value and not by any
other considerations whatsoever. Secondly, a car, being a depreciating asset, will
ultimately go down to scrap value in a matter of time. Hence it is extremely important
to make sure that you aren’t taking a loan to fund a depreciating asset like a
car. For the ones who have availed a car loan, it’s better to foreclose it as
the earliest.
4. Home Loan: Home
loans do come with a host of benefits such as competitive interest rates, tax
benefits on both principal and interest, income linked subsidies for eligible
individuals. These loans when used judiciously can help the customer derive
maximum benefits. Thus, any decision to foreclose a home loan should be taken
after carefully considering the benefits offered by these loans. An important
thing to note though is that, how much ever be the benefits associated with a Home
Loan, the fact remains that beyond a point, it is bound to leave a dent in your
finances.
While certain types of Debt, at times may be unavoidable, one still
needs to exercise caution when availing any form of Debt. With quick and easy
money available at the tap of a button, there is a growing propensity among
individuals, especially youngsters to fall for the lure of short term splurges,
eventually leading them into a Debt Trap. Thus reducing one’s exposure to Debt,
or better still, becoming debt free will be a giant leap towards improved
financial health.
Minimize Investment Costs: Investment costs often find little to zero attention space in our overall scheme of things. However the impact of costs on an investment portfolio can at times be too huge to ignore. One such critical cost that can impact the portfolio of a long term investor is the cost of churning investments too often. For instance, a long term investor trying to time her market entry / exit in a bid to maximize her gains may end up frequently churning his portfolio thereby adding to the costs, but with little or no control over the outcome of his moves. Similarly, an investor with very little conviction in his holdings may get swayed too often by the market noises and end up making frequent changes to his portfolio, in effect increasing the costs, but without any control over the result.
For a long term investor, this impact of frequent churning of the investment portfolio results in the costs snowballing to a point where it begins to eat into a substantial chunk of his Investment Returns. The impact is so deceptively subtle that by the time one realizes it, heavy irreversible damage would have already been done to the portfolio. Thus it is in the larger interest of every investor to be mindful of the costs incurred in transactions related to her investments
Reduce Expenses: One of the best ways to curb your spending is
to undertake a serious budgeting exercise. While undertaking this exercise, you
have to make sure that your family is involved too. Budgeting is a simple yet
powerful exercise that provides us with ample clarity on the nature of our
spending as well as on our degree of spending. For e.g. out of my total monthly
spending, how much money do I spend on fixed (non-negotiable expenses) and how
much of my spending is discretionary (that which is not absolutely necessary at
this point). This realization helps us plug the leaks in our spending habits. While
the non-negotiable expenses are critical expenses and can’t be done away with,
it is the discretionary ones that one can look at targeting if one feels the
need to save more. Thus budgeting will help you decide how much you can save
out of your current income without seriously compromising on your life style. It
helps us set aside the savings for each month right at the beginning of the
month i.e. even before we begin our spending for the month. It is in this
regard that budgeting as a family exercise can be really value adding.
Optimize Tax
Outgo: From a tax savings perspective, it is important to choose the
appropriate tax regime (Old Tax Regime or New Tax Regime) as it can have a
significant bearing on the taxes saved. The choice of a suitable tax regime
depends on the number and type of tax savings options / deductions (e.g. 80C,
80D, 80CCD(1b), 24(B)) availed in a given financial year. Note that the new tax
regime disallows some of the most popular deductions that we have been availing
under the old regime. Hence this aspect needs careful consideration before opting
for a suitable tax regime. Ultimately, after deciding on the deductions to be
availed and the tax regime, to derive maximum benefits, one has to pick
instruments that fare better both in terms of risk adjusted returns and
liquidity. Once the right instruments for tax savings have been identified, invest
within the limits defined under each section to leverage the benefits.
Conclusion:
Following this D.I.E.T. Plan requires us to be
Prudent, Patient and Disciplined in our approach. For many of the young, the
momentary thrill of extravagance and indulgence overpowers these important
attributes, and makes them fall for short term pleasures. Awareness, beginning at a very early age, along with a balanced
D.I.E.T seems to be the only solution to nipping this problem in the bud.
A balanced D.I.E.T not only reduces your risk
of financial collapse, it will, over a period of time, help your savings grow
in size. With a consistently growing Savings Kitty, you will be able to deploy
a larger chunk of your savings to efficient instruments.
So Stop Bingeing … Get Fit with a balanced D.I.E.T…
Lunge ahead towards your Financial Well-Being.
Note: While Financial Planning helps you make the
most of your present savings, it is equally important to make sure that your
savings grows at a reasonable pace too, for you to see any meaningful growth in
your wealth over a period of time. Our disposable savings can grow only when
there is consistent growth in our income. Thus while managing our current
savings is definitely going to be our prime focus area at all times, increasing
our disposable income is also of equal significance. Hence, focusing on our
personal skill building and career growth is extremely important from a
financial well-being perspective.
About the author
Deepak Rameshan, CERTIFIED FINANCIAL PLANNERCM, Dip TD, MMS.
Deepak Rameshan is a CFPCM professional, and has been working in the financial services domain for close to 13 years. He holds a Master’s Degree in Management Studies and a Diploma in Training & Development and has been actively engaged in Training & Content Development during this period. As a Personal Finance Enthusiast and an avid researcher of the subject, Deepak has delivered several Investor Awareness Workshops over the years covering areas such as Risk Planning & Insurance, Retirement & Goal planning, Tax Planning and a few other specialized areas. He takes keen interest in writing and has penned numerous articles for this blog, addressing some of the most relevant concerns that individuals face with respect to their finances.
“Financial Planning Standards Board Ltd. (FPSB Ltd.) is the proprietor of the CFP
CM, CERTIFIED FINANCIAL PLANNER
CM and
marks outside the United States, including in India, and permits qualified individuals to use these marks to indicate that they have met FPSB Ltd.’s initial and ongoing certification requirements.”
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