1. Why is having a bank savings account scared?

Please don’t be one of those who still keep cash locked up in cupboards, under mattresses and so on. Its never too soon to have a savings bank account. There are many reasons for this. Firstly, money by itself is constantly losing value thanks to inflationInflation is a common term thrown around in economics lessons and by politicians around election time. What it means in simple language is that prices of things you buy, stuff, keeps increasing every year. It happens because the economy in... More. Hence, you must store money in a way that there is always some value addition. A savings bank account is possibly the safest way to do that. So far in India, all scheduled commercial banks have been able to protect the savings accounts for their customers. Distinguish this from co-operative banks which are not as regulated as the former.

For many of us, the first bank account is opened thanks to our first jobs, which is not a bad time to start thinking about this. However, there is nothing stopping you from opening one even sooner to deposit all those birthday money cheques, summer job cheques or simply your pocket money. Because the second reason for opening a bank account is getting into the habit of saving. By keeping money out of reach you will be able to resist the temptation to spend immediately. Moreover, when it comes to investing, it can happen through an automatic debit from your account. This is more a behavioural learning rather than a financial concept. But it is an important first step which should not be skipped or delayed.

If you keep moving jobs, chances are that your bank account might change. Try to migrate your original account itself to your new job, if that is not possible. Be sure to transfer out all your money and close the account and any mandates linked to it.

Now if you are a non-working member of a family, a home maker, you may feel there is no need to have a bank account because your spouse or parent (in case you are an adult) has one. You can’t be more wrong. While your bank account will need to be replenished by the earning member of your family, having one will build a saving discipline that is invaluable. Moreover, as mentioned earlier it will help your money earn an interest which can compensate for the loss of value (to an extent) thanks to inflationInflation is a common term thrown around in economics lessons and by politicians around election time. What it means in simple language is that prices of things you buy, stuff, keeps increasing every year. It happens because the economy in... More.

So, as a first step go ahead and open that bank account.

2. Why should you and your spouse share an account?

If you are married and have a household to manage with your spouse, it is always a good idea to have at least one joint account. It doesn’t matter whether one or both spouses are earning. The idea is to manage all household expenses. Some of you may prefer it and it is perhaps the most suitable to keep it separate from your salary account, a fixed sum every month can get transferred into this account. This money is then used for all household expenses and both spouses have access, cheque signing authority and ability to pay bills from this account. Alternatively, one spouse can make his or her salary account a joint account and use that for expense. The second arrangement requires more thought put into who is earning more, in a more secure job and hinges on the play between two egos and trust.

Nevertheless, the objective is to have both spouses involved in and aware of all household related expenditure and for that reason a joint account is a must.

3. Why are fixed deposits not an investmentAn investment is made to give you a return. You make an investment if you use your money to buy either physical assets like property or financial assets like bonds and equity with an aim to receive income or gains...?

I like to classify investments as money contributed towards buying assets which can help you create wealth. What is the purpose of a fixed deposit? For a bank customer like you and me, a fixed deposit helps you save money in a more gainful manner than leaving it in a bank savings account. You choose a tenure, say 1,3 or 5 years (there are several other maturity periods you can choose from) and buy a fixed deposit for a portion of the money in your bank savings account. This deposit will earn you a fixed return, just like your savings account but the interest paid is higher. It is higher because, unlike money in your savings account, you can’t access this money before the maturity (there may be a penalty to break the deposit).

For the bank, this is money that they use to further lend to individuals and corporates. Effectively a fixed deposit is a loan you have given to the bank and you get an interest. Your principal will not grow and hence, don’t consider it as an investmentAn investment is made to give you a return. You make an investment if you use your money to buy either physical assets like property or financial assets like bonds and equity with an aim to receive income or gains....

The concept of inflationInflation is a common term thrown around in economics lessons and by politicians around election time. What it means in simple language is that prices of things you buy, stuff, keeps increasing every year. It happens because the economy in... More once again gains importance here even over long periods, a fixed deposit interest is sometimes unable to cover the loss of value in your money due to inflationInflation is a common term thrown around in economics lessons and by politicians around election time. What it means in simple language is that prices of things you buy, stuff, keeps increasing every year. It happens because the economy in... More. With your principal amount not growing and interest gain getting eaten up partially by inflationInflation is a common term thrown around in economics lessons and by politicians around election time. What it means in simple language is that prices of things you buy, stuff, keeps increasing every year. It happens because the economy in... More, this type of safe keeping of money can hardly be an investmentAn investment is made to give you a return. You make an investment if you use your money to buy either physical assets like property or financial assets like bonds and equity with an aim to receive income or gains....

Having said that, fixed deposits do serve a purpose for short term parking of money, amounts which you know you will need in say the next up to 18 months or even money that you want to keep aside for contingencies.

4. Why should taking a loan is not be your first option?

You want to buy something, a refrigerator, an expensive phone, a bike, a car or a house, don’t fool yourself into believing you can afford it simply because you can afford the loan repayment amounts. Understand one basic calculation, most loans come at a cost, this cost is then built into the monthly repayment. So, what you are paying is the price for the product and an interest.

Now take the case of a house, which many of us consider buying the first chance we get. However, most of us can’t afford the house we want to live in. So, we take a loan. A housing loan repayment of the equated monthly instalment is a combination of interest and principal repayment, however in the initial years you will be repaying a lot more interest and very little principal. Hence, a loan can afford you the place but for several years (because a housing loan typically is issued for 20 years) you are simply paying a cost to the bank. Ask yourself, can you afford this additional cost? It is not just the price of the house, but the cost of the loan which you must bear. It gets broken down to a neat monthly figure and hence, you feel its not much. But do calculate the total interest you will pay over the tenure of the loan to understand if you still want to take it.

Moreover, because this monthly figure seems low, you tend to over stretch the cost and the size of the house you buy. Don’t make that mistake. Apartments in cities come with monthly maintenance costs which are also proportionate to the size. Secondly, you may simply not need a big house but may be tempted to buy it because the EMI seems low. Instead, buy a house that is a size which suits your needs and the money you save can be invested gainfully for wealth creation in other financial securities. There are of course tax benefits attached to buying your own home, however, this is a complex decision and one must figure out whether the tax benefit is worth taking on the additional cost. A loan also ties you down, to a job, the same house, location and so on. So, think hard before tying yourself down and spending that kind of money.

A car loan has similar issues. It is of a much shorter duration hence, your relative interest cost will be lower as a proportion however, just because the EMI seems low don’t buy a car that you would otherwise not be able to afford. Remember, along with running costs, you have to pay insurance (higher the value of the car, greater the insurance pay out), servicing costs, repairs, everything will be higher if you buy that luxury sedan instead of the basic hatchback that serves your needs.

Another popular loan is an education loan. You want to go for that expensive course overseas, one of the simplest ways is to take an education loan which you can repay post finishing your degree. However, it has become harder to find jobs overseas to be able to comfortably repay your rupee loan. If you are going to come back to India and work, the rupee salary will not be enough to comfortably repay the foreign education loan. There are many things to consider before taking that loan, the certainty of job prospects and your discipline in pursuing a lucrative career are some of them.

Else you will be left with a hefty loan right at the start of your profession innings and that can’t do anything good for your self esteem and confidence.

5. Why is it okay then to buy some electronics on EMI?

All of us have been faced with this choice – to put that phone purchase on EMI. That could be okay, if two conditions are fulfilled

First, it is an interest free EMI and second you have the discipline to pay your bills on time. If either of this is not your behavioural bias then it is better to stay away.

Ultimately, if you are buying something on EMI, you will also be tempted to buy the next thing and the one after that. Soon your house will be full on things that you cannot afford. It is okay to have one EMI to repay a month, but when you have 3-4 or 5, you will find that your entire salary goes in simply repaying EMI’s for small things that you can’t afford.

6. Why saving before EMI is a good way to start?

A good way to start, is to save (go back to Investing 101) You will find that saving is not a difficult habit, if you indulge in it every day. Being regular means,

you can put aside smaller amounts and you end up spending else.

Try this, every time you withdraw money from your bank or the ATM, take out Rs 500 less. You will find that at the end of the month you have more leftover in your account than you bargained for. What it has cost you is perhaps forgoing 1.5 cups of coffee at a café or maybe a t shirt on discount.

But at the end of the month you will feel richer and more confident as well.

If you earn in cash or haven’t built that all important habit of using a bank account, then take Rs 100 everyday and put it in a sealed piggy bank. Rs 100 a day will not seem like much but at the end of the month you will have Rs 3000 and at the end of three months this will be Rs 9000 and if you keep up the habit for 6 months you will have Rs 18000. Increase that to Rs 200 a day and this amount can be Rs 36000 after 6 months. It is perhaps now enough to buy that phone that you would have otherwise bought on EMI. All you had to do was save regular for six months.

You may argue that going for the interest free EMI was a better option but remember what we spoke about earlier. Often over spending is not limited to a one-time offense, it recurs and before you know it spreads to all kinds of things you buy, not just electronics.

Choosing your savings rather than an EMI.

This strategy is not so effective when it comes to saving for larger expenses like higher education. There your choice will be to either try for scholarships to finance or work hard on a basic course in India which can help you get a well-paying job. Then you save up for your higher education.

7. Why you need to understand charges other than the interest rate on your loan?

Continuing our discussion on loans, remember your interest cost is not the only charge. There are processing fees, late payment fees if your EMI payment gets delayed, pre-payment fees in some cases if you want to repay sooner than the term. All this adds up in your total cost for the loan. Not all charges apply to each loan but make sure you ask about the other charges involved in taking any kind of a loan.

8. Why its okay to use your debit card and online account?

For one, using a card helps you keep better account of your expenditure as you can cross check everything from an account statement. If you want to maintain a budget for spending, using a card is useful. A debit card uses only the money you have in your savings account and a credit card lets you buy on credit which means you can spend money you don’t yet have.

While there is no concern of over spending with a debit card as the limit is automatically defined by the money you have. In case of a credit card you can over spend. However, credit cards too come with a limit.

Use a credit card only if you have discipline in spending and repaying. If you don’t have either of these two then, stick to paying by debit card or better still use online banking.

It is quite safe to do these transactions online as there are several checks. Firstly, you will have to enter details of the payment, its prudent not to save these details online. Secondly, there will always be an OTP confirmation before the payment is put through. Thirdly, each time a payment is made you will get a confirmation message. Hence, safety of the transaction will not be an issue if you are well versed with processes online.

9. Why using a credit card is also good?

Many of us are vary of using a credit card and with good reason. An overdue credit card payment can continue for months and years adding more and more interest cost. The interest charge per month on a credit card due is around 3% per month!

So, if you are using a credit card, make sure you don’t keep the payment overdue.

Here is how you can take advantage of credit cards. Most credit cards come with a 50 day cycle. What that means is that from the date your billing cycle starts you have 50 days to make a payment on your card. The cycle itself is for 30 days. So, let’s say, your credit card billing cycle begins on the 11^th of every month and ends of the 10^th of the next month, all the spends on the card made between this period will fall due after another 20 days on the 30^th of the month. Usually, card companies give a grace period of a day or two to account of bank holidays.

This means you have a total of 50 days to repay.

Even if you have the money, if you have the discipline to pay on time you can stretch your cash by using a credit card. This happens because you can pay for your spend in month 1 with the salary you will receive in month 3. However, using a credit card is all about discipline. Discipline in spending, in repaying and in planning your spends in a manner that you utilise this 50 day cycle most efficiently.

If you are unable to maintain this discipline, you are likely to find yourself in a big bad soup and its then best to stay away from credit cards and stick to spending the money you have in your bank account.

10. Why having too many wallets is not good?

It’s the same reason why your credit card can become a bad idea from a lucrative money stretching option. Using payment wallet requires a lot of discipline. If you have too many wallets, you are likely to lose track mentally of how much you are spending on what app or website. At the end of the month you will find that your bank account has depleted way more than you imagined. This can happen if you use one app for paying your taxi, another for paying your pizza delivery and yet another for your online groceries. Remember all this can be paid using your debit card or net banking too. That way the source is directly your bank account and you get to see one outstanding amount each time.

If each of your wallets has a different amount remaining as balance you may be lured into thinking that you still have a lot of free cash. However, ultimately it is all linked to your bank account and coming out of that one source. The wallets create a false sense of abundance which can lead you to go over budget very easily. While they are convenient and do give you some cash back benefits, try to use your bank account as much as possible. These days debit card use also has cash backs and usually those have a greater maximum limit as compared to a wallet cash back.