A lot of the financial management of the common man happens as a result of informal advice received from various sources – friends and family, TV/media commercial advertisements, newspaper headlines and so on. Some of the people advising us may be financially prudent and have our interests at heart. However, some of the other unverified and commercial sources are bound to act out of vested interests. So it is critical for us to steer clear of such sources of misinformation. In the long run, it is important we build our own knowledge and make our investment or borrowing decisions out of our own judgment.
This blog consolidates a few such commonly peddled misconceptions that often get passed on to us as financial advice. We urge our readers and customers to beware of these problems and stay safe.
1.Your income is only going to keep rising with time, so it’s OK if expenses increase.
This is an assumption that many of the youngsters make. Unless you have a Government job, there is no guarantee that your job will be secure indefinitely. Especially during Covid times, we saw several stable businesses and companies go bust, thus causing a job crisis among a large section of our population. Even if your job is retained, it might involve stagnant salaries or even pay cuts.
So it is important to focus equally on planning and pruning your expenses. Don’t blindly think about increasing your salary alone, at the cost of health and personal well-being. Remember, a rupee saved is a rupee earned.
2. Good debt is fine, only bad debt is a problem.
Technically, there is no such thing as good debt. Unless of course somebody is giving money to borrow at Zero interest! For companies, borrowing happens to be a common funding source because their revenue generated is estimated to be much higher than the debt interest to be repaid. Their cost of capital is reasonable, so this kind of debt is permissible. Even here, companies must be careful about the extent of debt on their balance sheets, ensuring their liabilities are under control.
However, for individuals, hardly any type of debt qualifies as good debt. Your salary credit sits in a savings account merely gaining 2.5-3% interest. But you have accumulated credit card bills worth thousands of rupees. Does it make financial sense? By paying only the minimum amount due, you are in effect paying anywhere between 18-40% as interest and penalty!! Same is the case with bank overdrafts, or instalment purchases. Read the fine print, work out the actual repayment you are due to make. Then compare it to the appreciation of your capital. Any debt that costs you more than what you earn on your investments or funds in hand is bad debt. Stay away from it. We recommend chit funds as a good alternative for this.
3. I’ve got a credit card approved. That must mean my financial position is strong. Why would they give me credit otherwise!
It’s true that credit card companies desperately try to woo customers with tempting card offers in order to find new customers. But as soon as you show interest, they start looking into your credit-worthiness. If your credit score is poor or if your repayment capacity looks a little shaky, they might still offer you a credit card. But the catch here is – you are designated as a high risk customer in their records. The interest rates you are charged are much higher, the non-repayment penalties are exorbitant. Your credit limits are also curtailed. In effect you land up repaying more for less. A person with a very good credit score would get a car loan at much lower interest rates than you, for instance. So beware, work on improving your credit worthiness rather than blindly acquiring a credit card or loan.
4. The chances of emergencies are very low. There is no point wasting money, keep it aside for such rare cases.
Wrong. This assumption is completely misguided and dangerous. When you are young and healthy, everything looks safe and fit and healthy to you. So you can’t imagine any contingencies falling upon you. But emergencies can come in various forms – family health issues, accidents, job losses, business downsides, and so on. Who would have thought a disease called Covid would wipe out the savings of millions of people in the world for medical expenses!
So please pay utmost importance to creating a contingency fund. It should be a reasonable amount, and easily accessible in some high liquidity instrument. We recommend chit funds as a good option for this.
We at Shanthala Chits consider ourselves as financial partners of our valued readers and customers. The financial stability and prosperity of our investors is our primary goal. Educating our people on money management and financial matters is of prime importance in order to meet this goal in the long term. So we thought of passing on this message to our readers and investors. Hope you found them useful. Write to us, leave your comments below to share your experiences. We would love to hear from you!
Shanthala Chits is a Government approved chit fund company with a 25-year successful track record and thousands of satisfied customers. Shanthala Chits is registered under the Chit Fund Act of 1982, the Government of Karnataka. We are one of the most popular chit fund houses in Bengaluru, known for our prompt customer support and secure investments. Get in touch with us and start with an investment scheme. We will be glad to help you out with the right scheme that matches your needs.
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