Category: Personal Finance

Buying Home? Use A Mortgage Calculator to Check Affordability

Buying a home is once in a lifetime decision for average personnel. It requires huge investment and a debt burden over a long period of 15 to 20 years. This critical decision requires careful planning on the part of the buyer. One has to carefully plan the location, the type of home to buy and most important part of planning is to ask how to finance your home.

The various avenues for financing your home could be friends and family, your own savings and last but not the least the mortgage.

Before buying a home and before taking out a mortgage in order to finance your home, it is important for you decide on your affordability. It is essential for you to ask “how much mortgage can I afford ” so that you do not lose your home later. When you take out a home loan, you are required to agree to some terms and conditions of the home loan. If you are found in breach of those the terms, the lenders have the right to seize your home and auction/sell it off to recover the money they had given to you in the form of the loan.

Find out your affordability

So, you can see that it is really important for you to find out your affordability before getting a home loan and before buying a home. So, if you ask how much mortgage can I afford, and if you use a mortgage calculator to find out your affordability, you will be able to decide beforehand which house you can afford to buy and what kind of mortgage you will be required to take.
There are in fact different kinds of mortgage calculators and there are the cost calculators, monthly payment calculators, the ARM calculators, the FRM calculators, the repayment calculators, the amortization calculators and so on.

You can use the cost calculator in order to find out the total costs of a mortgage. This along with the monthly payment calculator will help you to decide as to which mortgage you can actually afford to take. As you are able to decide as to how much you will be required to pay, you may be able to decide as to which is the mortgage on which you can make payments on a regular basis.

The Adjustable Rate Mortgage helps you in finding out how the change in the interest rate changes your payments. The amortization calculator helps you in getting idea on how the monthly and regular payment actually reduces the debt amount i.e how it amortizes the loan. Other than that it helps you in finding out how the payment gets divided into payment towards the principal and the interest.

Thus, before buying a home, try to use a mortgage calculator you will be able to get free mortgage calculator from different websites if you do some research.

Investing With Debt

This might seem huge risk to any body who is reading this. I have applied for a loan from my employer. As per the service rules of my company I am eligible for an interest free loan of Rs 50,000/- payable in 10 equal installments. This loan would put me in some more debt (you can see my current debt position here), but this would be the first time that I would be using the debt amount for leveraging my financial position.

For me I cannot see idle cash sitting around with me and doing nothing. I want it to get moving and for this reason i went for that loan. The options that I have after taking the loan are:

  • Pay off debt
  • Invest in Tax Savings Instruments
  • Purchase of Mutual Funds
  • Go to the stock market

Continue reading →

Debt Reduction Through Procrastinaton

I have never come across procrastination as a positive term till date. Procrastination as I define it, is nothing but not sticking to your commitment made to yourself. As per Wikipedia it is defined as:

Procrastination is a type of avoidance behaviour which is characterised by deferment of actions or tasks to a later time.

I committed to myself that I ll go for a morning walk to keep myself healthy. My behavior in the morning, May be tomorrow or, let me sleep half and hour or so. Same is with other commitments like avoiding high calorie food etc. It can be work related like, I have to complete X job after 3 days why not start tomorrow, anyways its just a days work.

Finally from any angle I look at it, procrastination is a negative term. I found debt is a kind of procrastination, well procrastinating your payments, but in this case there is a cost attached to it, ‘the interest cost’! The more you procrastinate the more expensive your debt becomes.

But I feel that we can use the very nature of procrastination to our benefit. Why not procrastinate our purchases? Say I will buy that tomorrow and pay tomorrow to avoid the cost. Sounds like postponing the purchase. One can say it is similar to postponing things, but I want you to put this as a behavioral change. Procrastinate purchase of things indefinitely unless the sword is on your head to buy that thing.

This is a shift in attitude to purchase things. For example, what I have read many a times on blogs, that prepare a list while going for shopping, in this way you will avoid any extra purchase. But look it at the other way round. Prepare an exhaustive list to purchase and the remove the not so necessary things from the list or set a later date (Procrastination) for those things to purchase. This way you will be using your list to the fullest. If this comes to practice then you are attacking your debt from both sides of your financial management sword.

I want to use procrastination as a tool not to reduce debt but to increase my money management skills or to control my anxiety/impulse to purchase things.

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Benefits Of Financial Planning

Over the past two months I am getting better at extreme frugality practices. I have been saving money to primarily reduce my debt. Sometimes I think if I hadn’t had any debt then I would have saved a lot of money. But yesterday I had a question in my mind, “What I would have done with that money?” The answer to the question was. No idea!” I am clueless as to what to be done with the money that I would save. So I decided to have a financial goal. But again goal setting is not easy when you don’t even know what exactly you want to have from yourself and your life. Planning for future is different from goal setting. A comprehensive financial plan is needed for securing the future and goal setting is only a part of the whole process.

Financial planning can simply be defined as, “A process of managing your finances to meet your goals”.

A quick glance at the definition and you would understand it’s a process and it will inherently bring its advantages over the period of time. The benefits of the financial planning that I can foresee are as follows: Continue reading →

Where Do I Go From Here

Looking at my networth on a regular basis now, I asked myself, where do I go from here now? To answer this I sat down with my finances and took a good hard look at things. I was in approximately Rs.21,000 of credit card debt, and a student loan of Rs. 250,000. Though my equity investments of about Rs. 40,000 give me mental support as I have no money in savings. To make the conditions worse, I have to marry in the next year (Indian marriages are way too expensive) and over that I want to buy a house within the next year, though my finances are screaming at me, “You need to pull a miracle out of nowhere to achieve all this”.
As if I could hear the screams, I made some major changes in my spending and saving habits. I have been following it for the past one month.

The first thing I did is I made a list of every single thing I had to pay out each month using Microsoft Excel. I made separate rows for regular expenses and put provision for 10% contingency. Then I removed those rows which were nonessential services to me.

    1. I removed the news-paper subscription (now I am having a free e-paper from the Times of India and the Economic Times).
    2. I reduced the provision for cell phone bill (I am working consciously to reduce the phone bill).
    3. I have started cooking at home which reduced my expenses on eating out.

In the end, I was able to cut my monthly spending by almost Rs. 2000, money I could use to help myself get out of debt . I am planning to cut down my credit card bill by Rs. 12,000 and after this month, the outstanding against my card shall remain at Rs.8,000.

I then went back to my essential bills and looked at the loans carefully. My goals were to reduce or eliminate these. I went through my service rule book to search for some provisions for money advance from my employer at any lower interest rate. To my amazement I found that I can take an advance upto Rs. 50,000 with 0% interest payable in 10 equal monthly installments.

I plan now to accumulate some 20,000 in the coming months and add these interests free Rs 50,000 from my employer to get rid out of my personal loan. I feel that it will take a few months of dedicated approach towards expense cutting to get out of this bad debt situation. To address the issue of marriage and house purchase I shall plan only after I succeed in getting out of the bad debt that I have accumulated.

A Five Stage Process of Getting Debt Free

It’s over a year and a half that I am in a bad debt situation and surprisingly it’s nearly one and a half years that I am into a paid job. If I correlate the two then I can conclude that steady income flow increased my debt taking tendency. In other words I will say that the security of getting my paycheck made me to overspend.

When I gave it a thought so as to find the reason for the above I could come up with only one reason I can pay it later when I get my paycheck. If I talk in time frames then I was spending future money into present but the problem with this concept is that you cannot account for future expenses (always) which come as an emergency e.g. bike/car repairs, health problems and many such unforeseen incidents/events.

So what happens next? I have already spent that money in the past and now I am stuck with a high credit card bill with no money to pay for, the result a bad debt and more importantly a way to a debt trap.

The cause: credit card spending! No, the cause here is trying to afford that you can’t just by assuming valid reasons for buying at that moment, but later in debt trap you feel that you could have deferred your purchase. For example, I need a new car, (mental process: the car I am driving is making sound, the mileage is very less and asks for more maintenance so why not replace it, I am getting a good deal with XX dealer). Next day you are with a new car along with a big debt on your head.

Now you are desperate to get out of it but you can’t as you cannot overclock your debt reduction process due to a simple reason, you don’t have any extra source of income and the debt brings interest and other charges with itself which further enhances it.

In this case my mind stopped thinking constructively for alternatives for reducing the debt as it is already preoccupied by the huge debt. The result, time wastage over trivial things and not be able to devise a plan. So what should I do? Well there is a way, which I am following and trying to get out of debt. Continue reading →

Overclocking my Debt Reduction

After reading this comment from Ryan posted at Blogging away debt I started thinking upon the general conditions which are responsible for getting us into debt. I started comparing the comment by the term Overclocking used in electronics.

“Overclocking is defined as making a particular component (of your computer hardware) run at speed higher than its rated speed. When you make the component run faster, you obviously derive better performance from it without spending extra on faster hardware. This is done by altering the default settings, providing extra power to the component and making sure that there is a proper cooling in place as components tend to heat up when they are clocked.”

Premature consumption, I would agree as my reason for getting into a debt trap. Getting a credit card in hand and the ability to pay in the next billing cycle made me to purchase things which I couldn’t afford and ended up buying many things. Finally I had to convert my purchases into installments. Now I am paying off those installments for the past nine months. Initially I took measures for reducing the debt but after nine months I still found myself into the same mess primarily because of loss of focus.

Now again back on track (focused for debt reduction) I want to speed up the process of debt reduction much similar to Overclocking but I realized that this is not easy, I have a single constant source of income (my salary). I have given a thought on the idea to take more debt at a lower interest rate invest it in the booming Indian market and after 3 months pay off my CC debt. Borrowing money from my parents and pay off the debt and then later on pay back in installments without interest. But again all these solutions would “over heat” me in the sense that I would still be in debt (some other kind of debt instead of credit card debt).

So finally I decided to wait, control my spending, (have not given a thought to alternative source of income), have a disciplined approach for debt reduction and get out of debt.

Getting on Track

Back to money matters again! I seriously apologize to all those who have visited my Money Kitchen in the past few months for such a long break. I won’t go into the reasons as they are beyond the scope and context of this website. In this post I planned to brief you about my financial condition over the past few months.

I shall be updating my goal for the year, the networth as on today. My preparation, steps to improve my financial condition and the way ahead for the year.

Goal Status:
I am no way near my goal; my current financial status is as follows:
networth-oct.bmp

I do not have to mention the shortfall to reach my goal. I feel this is the time for revision of my goal and a commitment to me, to stick to this revised goal.

Sometimes I think when I can’t stick to my goal for a short term of one then how would I be able to follow my long term goal if I set any. After seeing my pathetic performance over the year I can still say that setting up goal make you think and work towards your goal whatever it may be.

Now something about my mistakes

  • I lost track of my goal, my financial status and even this website and the purpose for which it was created during the past few months.
  • I learnt a hard lesson of lending money to my friend without a formal contract. I had to write it off. In other words giving money to your friend is spending money you will never get it back. Now no friend no money, you lose on both the fronts.
  • I did not have insurance for my motor vehicle, which cost me dear after my recent accident. No I realize that I don’t have a life insurance though my employer covers me for my health insurance.

The Revised Goal:

  • To reduce the debt component by at least Rs 40,000/- by year end that would include both the credit card debt and the personal loan component.
  • Try to reduce the student’s loan component by Rs 50000/- by the end of March 2008.
  • To have a life insurance and get my bike insured.

Systematic Investment Plan

Systematic investment plans (SIP) are coming out as a popular investment option. SIPs involve investment on a systematic basis over a period of time. Under a SIP option, as investor commits making regular investments in a particular mutual fund/deposit. Investing in mutual funds through systematic investment plans is easier and efficient. It helps to grow one’s investment over a period of time.

The SIP option is available with all types of funds like equity, income or gilt. SIP is a long-term investment plan. The investor needs to set aside some amount of money every month for investing in a fund like a diversified equity fund or balanced fund. The investor needs to give post-dated cheques or debit advice to the fund house. The investor can put more amount also as per the policy of the fund. He can change the SIP structure only in the multiples of the SIP amount. In case an investor is investing in two different schemes of the same fund he can fill in a common SIP form for all the schemes. However, if the first holder in those schemes is different, they will have to fill different SIP forms, as the first holder has to sign on the form.

The investor invests a specific amount for a continuous period, at regular intervals. So, the investor can save compulsorily a fixed amount each month. He can also avail the advantage of rupee cost averaging. The investor automatically participates in the market swings. The amount of investment remaining the same, the investor buys more number of units in a declining market and less number of units in a rising market. By investing consistently the same amount at regular intervals, the investor’s average cost per unit will be lower than the average market price, irrespective of how the market is rising, falling or fluctuating. The advantage of rupee cost averaging is that the net asset value (NAV) is averaged out, as the investor will be entering the fund at different NAVs, which may be higher or lower depending on the market condition. As such, the returns are enhanced under the SIP schemes.

Rupee cost averaging offers its greatest benefit with investments that tend to regularly fluctuate in price. When one invests the same amount in a fund at regular intervals over time, he buys more units when the price is lower. Thus, he may reduce his average cost per share over time. Thus, rupee cost averaging helps make market fluctuations work for the investor, and reduces the risk of investing all his money just before a market downturn.
SIPs can be especially effective when used in buying equity funds. The NAVs of these funds can vary widely. Through rupee cost averaging, an SIP can make this volatility work for the investor. It is to be noted that rupee cost averaging may not work well if the market rises continuously.

As it is systematic, SIP ensures that one plans for his long-term goals along with the short-term goals. SIPs offer a disciplined investment plan and help reduce the susceptibility to market fluctuations. It helps preserve capital and also translates into substantial creation of wealth in the long run.

An investor who is not having a lump-sum amount to invest and also does not want to take much risk on his investment should always select a SIP option. This will enable him to invest regularly. Some plans now also offer additional features like life insurance.
The investor is at a liberty to enter or exit from the scheme whenever he wishes to , depending on the market conditions. He can redeem his units any time irrespective of whether he has completed his minimum investment in that scheme or not. SIP offers more flexibility and helps identify funds that suit one’s risk-return profile. In case of SIPs, the asset allocation keeps pace with the investor’s changing risk return profile Also; it offers instant liquidity whenever required.

An Article from Economic Times Dated 1st April 2006

Hello World

I finally installed WordPress. Now i have to start with my postings.

Why a new Blog?

I have done some soul searching. I learned that ; “I am very much into money”, well this means that I want to earn money, make money, save money, play with money and also to spend some money.

Big Plans ! isn’t it? but the problem is how to keep track of all these activities and have a regular motivation seeing my current financial level. So i decided to have a blog for my own, which will be my personal finance journey towards my goals.