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Money Matters! Personal Finances 101
01:25 - The power of accumulation 02:18 - How to do monthly budgeting 05:00 - Start saving in your 20s 06:48 - Discipline is the key 07:15 - Credit Card Basics 09:40 - Leverage your Credit Card 12:00 - Bank Loan Caution (Higher Studies)
Today’s episode is for young professionals who are interested in managing their money wisely.
What is monthly budgeting and how to do it? (1:25)
Using your credit card wisely. (7:15)
How to use the credit for maximum benefits (9:40)
Whether to take a bank loan for higher studies (12:00)
If you have started earning recently, then some tips from an expert can help. Jitendra Chopra – a practicing Chartered Accountant – shares his insights here.
Today’s episode is for young professionals who are interested in managing their money wisely. What is monthly budgeting? How to do it? Using your credit card wisely? Whether to take a bank loan for higher studies? If you have started earning recently then some tips from an expert can help Jitendra Chopra is a practicing-chartered accountant at JK Chopra and associates. He also advises to MJ Finworks, a financial services company. Jitendra is an active member in JCI garden city – youth empowerment organization and Jain international trade organization. Welcome to the episode Jitendra.
Jitendra – Thank you Sir.
Brij – Jitendra in today’s consumption driven economy, ideas like savings budgeting and investing are considered a little bit old school. If you are young and in your 20’s then after you have met your family obligations you still have unmet desires.
Jitendra – True
Brij (01:15) – Enter consumption economy, the problem is you wake up one day in your late 20’s or early 30’s and realise that you have zero savings. Jitendra what are your thoughts on managing funds?
Jitendra (01:28) – I can say the way you manage your time -the similar way you need to manage your funds. Everyone earns salary but how do you utilise that earned money is very crucial. Time once lost, is lost forever, money once spent is over. You cannot recycle the wasted time or money. If money is being spent unwisely, we fall into the trap of debts, not saving anything and not meeting our financial obligation. In case of a person who is in their early 20’s, if we are able to manage the funds in a very disciplined manner, automatically things are in place.
Brij (02:08) – Every money I get some money in my pocket – in my salary account. Now what do I do?
How do I do my monthly budgeting?
Jitendra – I need to consider my entire family into it. If I am staying alone, then I am the family. If I am married definitely me and my spouse. Most budgets fail because people don’t involve them into the budget planning.
Brij – Many times what happens in conversations with money is that people become defensive. So while you are talking money – the other person things that this a blame game where the other person is being told they have done a wrong job but it is being subtly used as a budgeting exercise. One has to watch out for that – Is it not true?
Jitendra – Very true, I think it is a very sensitive topic. We know our income is fixed – very clear, that number is there. Now coming to our expenses part – we can categorise them to Needs, Wants, Savings and Emergencies.
Your needs are the essentials – your house rent, food consumption expenses, mobile bill, internet.
Your wants are your desires that you want to meet – for e.g.,Procuring the latest iPhone – Which can be avoided but there is definitely a desire.
Then coming to savings – savings are planning for a future goal and an early retirement.
Emergencies are something that no one can control – and if something happens, we should be prepared for it. It could be just by taking a medical insurance, regularly paying your insurance premiums so that if something unforeseen happens to you or your family members you are taken care off.
So the entire budget falls into these categories of needs, wants, savings and emergency.
Normally what happens is in the initial years when the salary is low – we keep a higher ratio towards our needs. About 50 – 60% of your money is spent on needs. So initially the ratios could be 60% for your needs, 20% for your wants, 10% for savings and 10% for emergency.
There should be some portion of the money that you are taking care of your wants. Your today’s wants not tomorrow’s.
The other thing is we should know if that the current wants fit into the kitty of your current budget. If it doesn’t fit in, I will end up compromising on my savings and emergency. Which is a clear cut – no.
Brij (04:55) Very nice. So Jitendra does the saving pattern or how you save change as you become older?
Jitendra (05:03) I would explain this with an example. If a person would invest just Rs. 1000 per month and keeps increasing it by 25% every year for a period of 20 years. Totally their investment would be around say 41.15 lakhs. With an (assumed) approximate rate of return of 15% when the tenure is so high it is always better to invest in a risky fund – because you will get higher gains. 15% is the lowest what I’m talking about – you will end up getting something like 91 lakh rupees. That is a good amount.
Coming to a fact that if you need to do the same thing in your 30’s I have the same tenure but 10 years are lost. Now how much amount do I need to invest so I get this return? If you look into the number, it would be really scary to an extent. In 20’s he started of with Rs. 1000 in 30’s he would need to start with 10,300 rupees approximately.
Brij – Wow! So, what you are saying is that if you are starting in your 20’s and you start with 1000 rupees a month, you would eventually save the same amount as what you would save if you started in your 30’s with 1000 and change.
Jitendra – Absolutely. This is the power of compounding. This is the power of compounding – in 20’s I can easily save about Rs. 1000. It is not a big amount. After 3 – 4 years after that, when your salary starts increasing – the ratio should go towards 40% for needs 20% for wants 30 for Savings and 10% for emergency.
Brij (06:48) – Very Nice! – Just like to do time management well you need to have self-discipline. Here also to do good money management you need self-discipline.
Jitendra (06:56) – Discipline is the key for anything and I feel that if you need to be successful, in any aspect – money management, education your business, you need discipline.
Brij (07:08) Very Nice, I think it’s a very valuable way of looking Jitendra, imagine a youngster has just started earning, and is walking around in a mall.
Jitendra – Ok.
Brij – There are so many temptations around, how should one think about making these kinds of purchases on a credit card.
Jitendra – Credit card rate of interest varies from 3 – 4% per month.
Brij – So 3% per month is actually
Jitendra – Yes 36% per annum. If I want to take an iPhone, which is costing around 1.2 lakh rupees, taking the tenure of 12 months, I will end up paying around Rs. 27,000 worth of interest, with a GST of Rs.5,000 which is about Rs. 32,000 – Which is not advisable.
Definitely there are lot of offers going around – there are interest free EMIs – those benefits when they are available can be taken – but not at the cost of paying the interest.
Brij (08:09) What I hear you saying is that even if it is interest free EMI, you should evaluate it against the available funds in the wants section of the budget that you have drawn for yourself. And you have to still leave space for other wants because you cannot just survive on just an iPhone for the rest of the month.
On the other hand, if you are paying for the phone or for anything else with your credit card and if it is not an interest free EMI then you can end up paying a significant amount of money just for the interest part – apart from the basic value for which you are purchasing the product.
Jitendra (08:48) – This practice I follow, I keep my desire living within me for say around 14 days – 15 days and still if I have that urge – I go for it – provided that it meets that wants section ratio which is there.
Brij (09:02) – Very nice, I think it’s a very valuable way of looking that don’t just go for it immediately, at least think of it for a week before you spend that money.
Jitendra – Very true. Very true.
Brij (09:18) – JItendra, I am of the view that a credit card can be a big convenience. Very helpful thing sometimes, when you really need the money and you don’t have immediate cash on hand.
Jitendra – Especially – yes we are taking care with medical insurance where we have done all our precautionary measures. Everything is there. But still sometimes things go beyond our control. During that time this additional benefit in terms of our excess credit limit which is there may come in handy.
Brij – So it is not all bad but it is not all good either
Jitendra – True
Brij – How can I use the credit card in such a way that I am benefitted and not any credit card company. Can you give some ideas?
Jitendra (9:55) – Very much Sir. In fact there are so many ways in which we can use the credit card if you use it in a very disciplined manner, making the most use of the credit cycle available. They normally give 45-50 days for the credit cycle. So plan your purchases in such a way that you finish them in the beginning itself. Something like fixed expenses which are there. Mobile, Electricity bills. House rent. Now a days you get options even for paying house rent through credit card. There are options available available to buy your groceries. See to it your purchases are done much early stage of billing cycle. So you enjoy entire tenure of 45-50 days of credit.
You know what is the fixed amount you are going to spend. Take that amount and keep it in FD for 45-50 days. Have a small interest earned of 2-3% PA interest. It could be penny(like) for one month, but when you look at year end, you might find good valuable amount of 5-6 thousand you have saved.
Another advantage which is available for credit cards could be the rewards section. It is there with most credit cards. Spend money and you get reward points.
There are certain other advantages like I can say. It improves your credit rating, your CIBIL rating. WHich is effectively again going to be useful in future when you want to take a – it could be a car loan or a housing loan. Banks normally go back and see this. If they see that the CIBIL rating is good, you automatically, this one process of getting loan is much easier.
One discipline to be maintained is to see to it that pay the credit card bills on time. That is very very crucial. Time that up with your auto-pay with your SB account – is very easy. I used to initially forget my repayments. All of a sudden I realise a day or two later then you land up paying huge interest costs and the penalty charges. There is no point doing that.
Brij (11:50) – So prompt payments not only improve the ratings but they also reduce the amount of interest you can end up paying. It also keeps your budgeting in check.
Jitendra – Very true!
Brij (12:03) Jitendra, our next topic is loans. Let us say we have a young processional. She has been working of a few years, and now she wants to study abroad. What is the best way to fund it?
Jitendra (12:17) Frankly speaking, I’m not that a great fan for taking education loan and perusing higher studies. Normally higher education cost is very high it is about 35 – 50 lakhs, sometimes it may even go beyond that. Now the question is how have you taken this load, keeping what in mind?
As to – do we have the capability of repaying it? Or have we taken it just because it is available? Because an education loan is an easily available loan compared to the others in our country. Now after doing my graduation, If I’m not assured of my placement? – then how do I repay this loan?
I say going completely on a 100% loan for education can be avoided. But definitely combination of your savings, parents saving and loan – could be possible.
Brij (13:20) If you think that your life will become rosier because you have changed your circumstances with a loan and then education, it is a all a thought in your head, it is not verified and not validated. Then you are taking a huge risk. While the reality of it may or may not play out, the pressure to return the money can actually force you to make choices which may be suboptimal. You may end up taking a job that you don’t like just because now you are under pressure to return the loan.
Jitendra – Very true sir.
Brij (13:55) – There are different creative ways of exploring, how in absence of funds you can still fund your education. Sometimes work experience and education are also replicable with each other. Any chartered accountant would agree with you.
I agree with you that we are under constant bombardment to part with our money, be careful, exercise self-discipline, don’t get into impulse purchasing, come back after a week and while it is important to do monthly budgeting, and important to use the credit card well Jitendra also said in the beginning that do not give up on your wants. Give a compartment to your wants and keep honouring them without letting them grow bigger than what the reality should be. I think that is the key – Balancing between needs and wants and sticking to whatever is the intention of your discipline.
Jitendra – Very true sir, Finally the key is discipline. Everything boils down to that
Brij – So thank you very much it’s been really nice talking to you.
Jitendra – Thank you for the opportunity. It was a pleasure talking to you.