Detox your finances

Follow this 5-step detox programme to purge the toxins that are adversely affecting your financial health

My doctor recently advised me to undertake a comprehensive detox programme. Thus for the past month, I been eating my greens and going for my walks. During one such walk, an interesting thought struck me: if detoxification can improve one's physical health, financial detoxification can improve one's financial health!

Presenting the detox programme. Although each individual's life situation is different, anyone can follow this programme to get his or her finances in 'fine fettle'.

Step 1: Check-up

My detox started with an overall check-up. You too need to subject your finances to a thorough examination. Every individual has assets, liabilities, income and expenses. Your assets should always be more than your liabilities and your expenses lesser than your income.

If any one of these elements is out of sync, it leads to financial distress, which you need to fix. This is the 'diet' part of your financial detox programme. Once we get this part right, then comes the exercise part where we will make your money work harder.

Step 2: Debt end

The only way in which your liabilities can be more than your assets is if you have taken loans or have credit card bills outstanding. A credit card is perhaps the most dangerous enemy of a good savings habit. It's like this.

Buying something gives you pleasure whereas paying for it doesn't. What if you could only retain the positive payoff without experiencing the negative emotion? Using a credit card allows you to do precisely this.

Use a credit card if you must, but under no circumstances let the credit revolve. At over 35 per cent per annum, India has perhaps the most expensive credit card interest rates in the world. Get into the habit of paying off the amount spent on the card the very next day without waiting for the payment due date. Better still, use a debit card or cold cash for purchases.

Quite a few people keep credit card debt and invest in fixed deposits and mutual funds. This doesn't make sense. The money invested earns far lesser interest than the money owed. Your priority should be to retire the high-cost debt. You cannot binge eat, exercise moderately and still expect to be healthy, can you? The eating plan has to be in place for the exercise to work.

If you do not have personal assets to defray the card outstandings, take a personal loan from your bank for the purpose. What you would be doing is substituting the high-cost debt with a low cost one.

Step 3: Sound budgeting

The goal here is to put as much distance as is possible between income and expense. Also, understand that while it is important to plan, doing it to the second decimal point is unnecessary.

Broad allocations to major expense heads like groceries, entertainment, and fuel, would give you more than a good idea of where things are headed. Even for monthly budgets, do weekly reviews to help you make adjustments in the coming week.

This way, there is no chance that you can overspend and defer savings to the next month. But don't fall prey to the credit card debt. Someone I know set up a budget and then ended up overspending on her credit card. I actually advised her to take a pair of scissors and cut the card into two. Today, she is debt-free and financially much better off than what she was a year ago.

Now we turn to the 'exercise part' of the programme—where we'll make your money work hard. In this regard, you should put it to work with the twin objectives of protection and growth.

Step 4: Healthy investing

The first priority should be medical insurance to shelter and safeguard your family from the cost of any medical emergency.

Medical insurance

You simply can't compromise on this expense, since the State does not cover medical costs. Everyone without exception should get a medical cover. Else, when emergency strikes, in addition to the consequences on your health, the repercussions on your finances can be disastrous.

If you are salaried, more often than not the employer arranges for medical insurance. Here too, most aren't aware of the exact amount of coverage. Ideally, have a family floater policy for a minimum amount of Rs 5 lakh. The premium for a family of four comprising husband, wife and two kids would be in the region of Rs 8,000 – Rs 8,500 per annum.

Life insurance

The basic financial tenet regarding insurance is that it's a cost and not an investment. Combining insurance with investment almost always leads to sub-optimal returns. Firstly, buy insurance only if your family needs it.

Secondly, always opt for a term insurance policy, which is the cheapest and the purest form of insurance. A 30-year-old can get a Rs 10 lakh cover for a premium of Rs 3,500 to Rs 4,000 per annum. If you find your insurance expensive, consider surrendering the policy. Sometimes you make the right decision, at other times you make the decision right.

Now we come to heavy lifting—the serious part of the exercise. I too will graduate to doing more intensive cardio and strength training. In terms of your finances, the Public Provident Fund will provide the strength building.

Public Provident Fund [PPF]

PPF is the best fixed income investment that you can make. An annual contribution of Rs 70,000 will get you around Rs 32 lakh in 20 years. Look at it as a fund for the education needs of your children. If you are married, get your spouse to invest too and you will have a retirement fund ready.

Home purchase

homeThere is never a good time to buy a house. The sooner you do it, the better it will be. With supply being limited and a billion people and counting, housing in India is never going to be cheap. Opt for housing finance, even if you have your own funds.

Home loans are the cheapest loans that are on offer. The opportunity cost of the funds, unlike in the case of the aforementioned credit card, if wisely invested, will almost always be higher than the interest rate on the home loan.

Equity

By now, all of us know too well that making money in the equity market is easy and losing it is easier. However, always know what you buy, and buy what you know. If you invest on tips and recommendations, you are literally kissing your money good bye.

If you buy a stock directly, it has to be something that you have done your homework on. A better overall policy would be to use mutual funds. The flavour of choice should be plain vanilla with a minimum track record of over five years. Don't time the market. It's never worked, it never will. Invest for the long-term. If you follow these simple steps, you can't lose. Yes, there will be intermittent dips and falls, but over time, you will win.

Emergency fund

Money lying idle in the bank is all too common. At the same time, investing the last penny that you have is also not desirable. Have no more than three month expense requirement available at any time. Out of this, cash equivalent to a month's expense could be kept in the savings account and the rest invested in a money market scheme.

Last but not the least, be persistent. The secret of success is constancy to purpose. It's really not that difficult to achieve financial freedom. The only tough part is to keep doing the right things day in day out, month in month out, year in year out.

And lastly, as my personal trainer says, all the so-called 'secrets of success' will not work unless... you do.

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Sandeep Shanbhag
Sandeep Shanbhag, a Mumbai-based Chartered Accountant and Director of Wonderland Consultants, a tax and investment advisory firm in the business for over 20 years. He writes regular columns on investment and tax planning in newspapers and websites such as DNA, moneycontrol.com and rediff.com

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