We all tend to get complacent, when the going is good. Take the example of Mumbai resident, Naresh Kumar. He earns well, Rs 1.55 lakh a month after the mandatory deductions and taxes. The cash inflows, hence, has been quite abundant due to a high take home salary. However, all was not that well and Kumar had been feeling the effects of a cash crunch off late.
Kumar, however, could not believe it, first. He was in denial mode for a long time. Nevertheless, the problems were there for all to see.
Kavita, Kumar’s wife, has been asking him to carry out some home improvement work for more than a year now. He wanted to do it. However, he surprisingly did not have the necessary finances required to do-up their place. For the home improvement work, Kumar would have to cough up Rs 2.5 lakh. Kumar has been adding his expenses, some needed and others of questionable merit.
He had taken a home loan, about a year-and-half ago and has been paying the Equated Monthly Installments (EMIs) since. He pays Rs 66,000 every month. He also has taken a car loan, for which he pays an EMI of Rs 7,700.
Apart from that, his family went on a trip abroad recently, which cost them more than Rs 2 lakh. He took care to part fund his family's holiday. So, that EMI is adding up to their monthly expenses to the tune of Rs 4,300.
As you can see, Kumar is in a tight corner and that set him thinking, better late than never. He resolved to iron out his finances and bring it back on track. Here's how -
Loan rationalisation: Kumar had a thought. His interest on his home loan was 12.75 per cent every year. This being the first residential property, his interest outgo to the extent of Rs 1.5 lakh was available as a deduction. However, he had been investing about Rs 5,000 a month in a recurring deposit, which is yielding about 8 per cent. He figured that he could stop the low yielding recurring deposit and channel this money towards repaying the home loan.
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Expense rationalisation: The family expenses have been ballooning. In the past couple of years, the expenses have gone up significantly. His son had taken admission in an international school in the city and that sets Kumar back by Rs 3.5 lakh, a year.
He has been feeling the effect of this outflow and had been debating if he had bitten off more than he could chew. He had been mulling about getting the son back to his previous CBSE school as the tuition fee is lower there. The outflow in the previous school would be a fraction of what Naresh is currently incurring in the new school.
Similarly, he is now mulling about selling his other car, on which he is incurring an annual expense of more than Rs 20,000. He can afford to sell this car, as his wife seldom travels out and when she has to she could always use the much cheaper public transportation.
Lifestyle expenses: The other item they want to bring down is the amount spent towards entertainment. Their expense on a monthly basis has been the ballpark figure of Rs 6,000. They want to bring this down by watching movies at home. They anyway have a LED television and a home theatre.
The last item which they plan to turn their attention to, is their vacations. They have now decided to only go on domestic vacations for the next few years, until they build a cash chest to pay for their trips abroad.
Goals: They next turned their attention to some of the near term goals. These include improving on their current home or renovating it, buying a bigger home in the next three years and contributing or saving for Kumar's sister's wedding which can happen anytime. The source for that would be the provident fund, which he plans to tap.
After evaluating the goals, they have postponed the home improvement, to next year. They plan to do it in phases. For that, they want to start accumulating the required amount. The amount to be accumulated for spending on this for next year is Rs 90,000. They are confident about accumulating it with the cost cutting planned.
Kavita also plans to augment the income by working part-time as a lecturer. She was an academician and gave up her job a few years back, when they started a family.
A bigger home seems difficult to them, for now. That has now been indefinitely postponed. They have decided that they will stay in the present house and if absolutely required, will rent out a bigger home and give the current one on rent.
After doing these, the finances seem to be in much better shape now than what it was before. The challenge in all such cases is implementing the plan and following through, relentlessly. So sit down, see what expenses can be done away with and which ones cannot be avoided. Prioritise your goals and work towards the important ones. This could help in getting your house in order, even if it means doing away with some of the discretionaries.
The writer is a certified financial planner