Sunday, February 1, 2009

FINANCIAL PLANNING-SOME MORE MYTHS AND FACTS

India’s strength is a strong culture of domestic savings down the ages. This culture took such enduring roots maybe because we were poor and under the rule of foreigners. In today’s changing world we have to revisit our sound ancient values and bring them in line with global realities.

Myth # 4
One component of mother’s milk was discussed as Myth # 3 in FINANCIAL PLANNING- MYTHS AND FACTS. Next important component of the same milk is that taking loans is bad- first save and then buy what you need - says the milk. ‘First save’ advice has stood the test of time. I agree with it totally. India is better off in the present meltdown mainly because of our national saving habit. I don’t agree with ‘loans are bad’ part of the advice which is implied.

In today’s reality, variety of loans is available easily and on attractive terms. One should prefer to buy anything, especially household goods, from where EMI facility is available. Initially till the financial infrastructure is in place one may have to buy cash down but once ones savings [debt-bank fixed deposits (FDs) and /or equity-MFs] give sufficient return to cover the EMI, one should buy only under this facility, of course as far as possible. This applies to all types of purchases-big or small.

The reason is obvious – after the present EMIs has been paid off, the basic pool [fund] will remains intact, this can support the next EMI linked purchase and so on. Simultaneously the pool is also growing as one is adding the monthly expenses as saving plus normal savings into this fund. The day may not be far when one can pay the EMI of the car or even a flat out of the returns from this pool of savings.

The biggest advantage I can think of when EMI is paid from saving occurs when one is in-between jobs. There would be no pressure absolutely for repaying loans as these EMIs are being taken care of by returns from existing savings. Likewise overdraft [OD] on FDs [see my post FINANCIAL PLANNING- SOME TIPS] will be taking care of ones monthly expenses. This should be a tremendous relief. These stress busters should be good enough reason to promote such futuristic concepts. LOANS ARE GOOD NOT BAD.

Myth # 5
In India paying interest is considered as bad financial management. This was true when loans were taken from village money-lenders. In a situation when interest paid on loan is substantially less than returns from use of that loan, what should one do?

Loan against securities [LAS] is a sure-shot method to fast track ones financial status. Banks have a list of approved mutual funds on which loans can be taken. People have suffered because they do not follow the rules of the game and a wonderful instrument of growth gets a bad name in the bargain. 50% of the current NAV is given as loan limit which means that as the value of the fund increases so does ones loan limit. Reverse is also true. This is where the importance of safety net comes in. One should always proceed slowly as speed is invariably injurious to financial health. For more details on LAS please visit my post MONEY PLANT REVISITED.

Myth # 6
One myth which has surprised me the most is that financial planning is for the rich only. The obvious question is what type of planning can poor people do when nothing is left at the end of the month? The truth on the other hand is that financial planning can make poor rich and rich richer. It is all in the mind. Today anybody can open a bank account. Fixed deposits and investment in mutual fund can be started with small amounts. Credit cards with small limits must be available, if not they can be demanded through Consumer Courts. With these same tools in hand the only difference between the rich and the poor would be the size of each transaction. Slowly but steadily the financial status of the poor will start to improve. For actual details on how these tools can be used both by the rich and poor, see post FINANCIAL PLANNING- SOME TIPS.

Myth # 7
Youngsters sincerely believe that it is too early to think of old age. They want to cross the bridge when they come to it. Fine, I can only pray for such people that some old age support schemes are in place by the time they reach this inevitable bridge.

GOD BLESS

For first blog of this series; click here
For previous blog of this series; click here

1 comment:

Toonfactory said...

Great Myth Busters...Really helpful for us, who still think EMIs & Paying Interest on them is bad...

Do you think this is the time to exit Indian stock markets?