Setting Financial Goals and Budgeting

Travelling to any place would require a pre-requisite knowledge of the destination details. Likewise, when it comes to money, it is very important that one knows where exactly one wants to end up in terms of the amount of money they want to have and the reason they want to have it and to create a budget around it. To do this, one needs to set financial goals to achieve the objectives that one has set. There are basically three types of financial goals namely

·         Short term goals

·         Mid -term goals

·         Long term goals

Short term goals are those that might require from a month or two to a complete year to reach while mid- term goals, require a minimum of one to five years to achieve completion. Long term goals require five years and above for the same. Once the listing of the goals is done, a specific deadline needs to be established for each corresponding task. Accordingly, these tasks can be later integrated into the corresponding monthly budget. For example:

·         Short term goals – One can easily pay off a sum of 20000 using a credit card in say 3 to 6 months

·         Mid-term goals – One can invest in the savings for a 5 Lakh vehicle in 2 to 3 years.

·         Long term goals – Develop some savings  plan for a  1 crore corpus for retirement

Since all of us are not financially savvy, one needs to be practically knowledgeable about certain matters that we need to know and which will help us in realizing our goals. In this regard, it may be advisable to refer to major finance portals like the Economic Times, LiveMint, and Outlook Money, etc. for expert financial advice, tax breaks and various financial instruments available in the market.

ATTACH BUDGET TO YOUR GOALS

Setting up financial goals is the first step. This is practically done by everybody. However putting together a budget and then sticking to a specific budget criteria is a completely different task. Listed below are some tips which will come in handy while assigning a budget to your financing goals:

·         Make sure that you separate your high interest finance accounts from that of the low ones. Instead of leaving a lot of money idle in Savings Accounts, deploy some in  fixed or recurring deposits, if at all you want to keep a reasonable amount in the bank,

·         Minimize your expenditures and cut down wherever necessary. This does not imply that you become a miser and live a meager living to achieve these financial goals. It is just that if you minimize your extra expenses by buying what is actually needed rather than wanted, you could  save that and invest it to fetch better returns.

·         Financial goals are the key requirements for an overall financial health. The only difference that sets you apart from those rich successful people is the money management mechanism that you follow and the discipline that you exercise in following it.

While making money is important, making it last and in fact making it multiply will be a key element in ultimately determining whether you are able to achieve your financial goals or not. 

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Understanding Payment Banks

Recently India has opened up a new category of Financial Institutions called Payment Banks and it is good to understand them and how they function. A Payments bank is a differentiated bank that will undertake only certain restricted banking functions that the Banking Regulation Act of 1949 allows.It is just like any other bank but operating on a very lower scale without involving any credit risk. In simple words, we can say that the banks which carry out almost all the operations which traditional banks perform except advance loans and issuing credit cards.

The activities which payments banks are supposed to carry out are acceptance of deposits, payments and remittance services, internet banking and function as business correspondent of other banks. At present, payments banks are allowed to collect deposit up to Rs. 1 lac per individual. Although several entities have received the license to start a payments bank, at the time of writing, Airtel and India Posts have started payment banking operations. Payments banks are a new concept for making banking accessible for people who are staying in small towns and villages by integrating with already established distribution networks. They are expected to boost small scale businesses established in areas with low or null banking facilities.

The main objective of payments bank is to widen the spread of payment and financial services to small business, low-income households, and migrant labor workforce in secured technology-driven environment. Even though having the status of a bank the payments banks have some limitations with compare to traditional banks. Also, as every coin has two sides likewise payments banks have its own pros & cons.

Let's see what facilities these banks offer & don't offer. Like all other banks payments banks can take deposits from Indian residents but the maximum amount per person is restricted to Rs. 1 Lac. The payments banks pays interest on those deposits which is usually higher than other traditional banks. These deposits must be invested either in Government Bonds or to be deposited with commercial banks.

With payments banks customer can open only current and saving accounts. There is no restriction on any income level or minimum mandatory balance. Advances Loans & Issuing Credit Cards services are not allowed to perform to payments banks. Payments banks are allowed to issue ATM and debit cards. These cards can also be used to withdraw money from other traditional banks' ATMs.

Like other traditional banks payment bank offers option of online bill payment but in more convenient way. An individual can do cashless transactions as payments banks also offers net & phone banking facilities. Money can be transferred from a payments bank account to other account using NEFT, IMPS and RTGS mechanisms. Compared to traditional banks, the cost of transfer is much less. Payments banks can distribute only risk-free simple financial product like insurance and mutual fund units. Forex service is also available at these banks. In addition, they perform as a bank correspondent of other banks.

Payments banks cater to the banking needs of low-income households, small businesses, the unorganized sectors of the economy. The start-up capital required opening a payments bank is much lower than that of a full-service bank. However, they must fulfill some other criteria like percentage of rural branches, minimum reserve requirement and promoter's holding to get the full license of a payments bank. These banks are not allowed to have subsidiaries or to perform non-banking activities. They must have highly efficient Customer Grievance Cells. They must also distinguish themselves carrying the phrase payments bank always with their name.

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The crippling debt of credit card debts

                            

Credit card debt is like bringing back inflation. While using your credit card wisely can help you to build your credit score, misusing your credit cards can actually hurt your credit!!! The young generation has most fallen into the credit card trap. When you spend with cash, you are able to physically see exactly how much you’re spending. When you spend with credit, it's easy to overspend because no money actually changes hands, and you don't really feel the effects of spending. With several cards in pockets and not paying bills on time creates the main source of a problem. Most Indians fall into a debt trap without even realizing it. After not paying for months, credit debts seem inexplicably larger than the previous month.

You are a young professional with money to spend. You have several credit cards. You pamper your partner with an impressive buying spree. When the bills start arriving, you scramble to pay them before due dates. Month after month, your balances inexplicably seem larger than last months. This is the scenario that confronts many Indians. Credit card usage is relatively new to the vast majority of Indians. Higher disposable incomes have introduced credit cards to more people.

Buy now, pay later - a bait all of us have been lured by sometime or the other. Even more exciting are shopping schemes that allow you to pay in EMIs that are 10 times lower than the MRP of the product you buy. These schemes make our shopping trips easy, but there is a point where they tip from convenience to compulsion. 

So, the next time you see an easy loan deal, think twice. Things that look too good to be true are often just that. You must have heard of the quote “Rather go to bed supper less than rising is debt”, by Sir Benjamin Franklin. This famous quote just gives an indication of the extent of troubles that one might invite, if the debt is not managed properly. A squeaky clean borrowing record has become important today as CIBIL, the credit bureau tracks all loan defaults and delays and each such episode will damage your credit score and hamper your opportunities to get loans and other financial assistance from banks. If you are not disciplined, the new loan will only add to your problems instead of solving them. The loan against property will provide a lot of liquidity, but if the money is used to buy a new car or go on a holiday, you will be digging a deeper hole for yourself.

 Debt traps caused by credit card overspend happen because of the ‘minimum due’ each month. With the economic boom, the rising middle class flocked to credit cards. But in the past six months, credit card default has risen between 50 and 70 percent. As concern about student debt rises, promotional relationships between schools and banks have sounded alarm bells. You may have come through this before but it does not get simpler than this. Follow a simple exercise for a month- track ALL your expenses. Note it down on your phone or at home. When you do this, you will realize where your money is going. Then curtail on the things that you don’t need. Be smart! Don’t let this creeping debt cripple you!

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Reverse Mortgage - Making Money off your home

The reverse mortgage is “a loan agreement in which a homeowner relinquishes equity in their home in exchange for regular payments”. It is similar to a housing loan except that in a housing loan the borrower pays a fixed EMI to the lending bank, while in a reverse mortgage the lender pays the borrower a fixed sum of money on a monthly/quarterly basis, the total payment being equal to the value of the properties and the interest on the amount of loan. After the death of the borrower, the housing company sale the property to recover the amount paid out along with interest at a similar rate.

Reverse mortgage as a product is fairly new to India. In India, the scheme of “reverse mortgage” has been introduced in 2007 by Ministry of Finance to help senior citizens owning a house but having insufficient income to meet their needs. The regulator of monetary policy in India,the Reserve Bank of India has decided the guidelines for lending and eligibility criteria for the borrowers who wants to avail such loans. Dewan Housing Finance Corporation Ltd. was the first institution in the country to introduce reverse mortgage product in the name and style of “Saksham”. Since then, most banks/lending institutions have come up with their own reverse mortgage products. These banks are State Bank of India, Punjab National Bank, Bank of Baroda, Central Bank of India, Union Bank of India, LlC Housing Finance, Indian Bank, Andhra Bank, Corporation Bank and Canara Bank.

The process is simple. If you are an owner of house fulfilling all the criteria mentioned above and have applied for the reverse mortgage loan, then the banks will decide the monetary value of your home based on various factors which drive the market. Based on this monetary value of your home banks will give maximum 60% to the monetary value of your home. The interest rate for such loans can either fixed or floating, depending upon the mutual agreement between the borrower and lender. The borrower has the option to receive the periodic payments on monthly, quarterly basis or in a lump sum. With each installment, the borrower loses the equity in his/her house. These loans are provided for the period of minimum 10 to 15 years, though some banks also offer a period of 20 years. Even if the borrower outlives the tenure, he has the full right to stay in the house. In this case, the loan settlement will be done after the death of the borrower.

The amount received by a borrower is a loan and not his income, so such income through the reverse mortgage is not liable to tax until the borrower transfers the ownership of mortgaged home to repay the loan. Lastly, under the reverse mortgage there is no loss of ownership of the house and all the same time a regular income is arranged at periodic interval, depending upon the mode of disbursement desired.  

But reverse mortgage has failed to gain much popularity in India because of poor marketing strategies and lack of knowledge about it. The reason is the resentment among the heirs and family sentiments. Lengthy pronouncements, announcements and assertions aside, this endeavor only has a morally positive contribution for the general public. And as we see Reverse Mortgage gaining respect by the hour, it’s all the more reason to be optimistic.

Reverse mortgage loan is not new concept. It was introduced way back in 1961, in USA and since then it has been playing the vital role of helping senior citizens in creating required income in their need of an hour. Moreover, we have lost the days when parents used to live with their children until their death. Even if your children want to live with their parents, it might be not possible due to their commitment towards their careers and other roles in life. Some parents have their children settled in foreign countries and they don't want to relocate here. Moreover, we are in the era where everyone wants to have independent lives and sometimes parents also don't want to become a burden to their children. In all such scenarios reverse mortgage is your best option available.

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Insure your Health

It’s 10 in the morning, you are waiting for the call from a doctor’s lab. How about the reports? Positive or negative. You are tensed, deeply worried and then the bell rings. You are suffering from a serious illness. What next- you start thinking about your family, getting admitted and start the treatment, amount of money needed and most important of all- have you secured that much amount of money. The answer would be NO if you do not own a health insurance. Health insurance is an insurance coverage that pays for your medical and surgical expenses incurred. Most of the companies now a days have made health insurance compulsory for their employees because you can never compromise on health. There are other insurance available but health insurance is better because the cost of premium is deductible to the payer and also the returns you receive are tax free. Thus, this would be the most important insurance of all. In case of sudden illness without a health insurance might put you and your family in debt for long years.

The question comes how does it work? It is simple indeed. You pay premium amount monthly or annually. The insurance policy contracts hospitals, clinics and several other health care providers to give benefits to policy holders at a discounted rate. Thus, at the time of illness, you get the amount and best treatment possible can be done without any financial issues. But there are certain pros and cons. The limitation is that if a person is already suffering from illness and then he goes for a health insurance, he might not get an insurance. The reason being that his health expenses at the time of expiration would be high. i.e. the cost for the insurance company increases. The moral of the story is that once you are in a job and start your own living, own a health insurance not just for yourself but for family as well.

There are various types of health insurance available like family floater (spouse, kids, and parents), individual, and top up, critical illness. These can be selected on the basis of your requirement and physical health of the family members. The best among them is the family floater as all members are insured and safeguarded. All you get is a good amount when in need at comparatively low cost. Thus, you must be satisfied once you own health insurance for your loved ones that you have secured an option in case of emergency and mishap in future. This can save you from large debts and will give a good financial support indeed.

The sad part is that in India a majority of the people don’t have health insurance. They believe that they have other insurance policies which will take care of things and also plenty of investments which will financially support them as and when there is need. This thinking needs a change. Health insurance by name itself signifies that it is concerned about your health. It is not a waste of money at all. Investments are a part to save your salary and that is why you go for investments. The purpose of that is entirely different. Ex- president Obama of Obamacare fame also mentioned recently in a speech about health insurance and its benefits. Our government has also come up with such things for our welfare and well-being. Let’s make use of it before we repent and before it is too late.

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