Authored by Neha Kalia, Consultant-The AZAD Programme
In this busy world, we are always trying to juggle many things. No one really has the time to become an expert at everything. Managing finances can be quite complex and is usually something we all tend to put off. Here are some common but costly mistakes you could be making without even realizing.
1. Not paying your credit card bill in full each month
Do you know that credit card companies charge in the neighborhood of 30% per annum as interest on your outstanding balance if you don’t pay it off in full every month? Just to give you some perspective, Home Loans are in the region of 11% while unsecured personal loans are in the region of 16% p.a. Besides some loan sharks, this is probably the most expensive credit you can find on the planet!
You can and should continue to use credit cards for the convenience that they provide but when you get that bill at the end of the month, beg, borrow, steal (well not literally) but make sure you repay your entire monthly credit card bill in full and on time.
2. Not claiming tax advantage for your second property
Most of us know that we can claim tax benefit for interest and principal repayment for a self-occupied house. And we know that this benefit is limited to Rs. 1,50,000 of interest and Rs. 2,00,000 of principal repayment. But do you know that your second mortgaged property can also help you save tax?
Whether you actually rent it out or not, you can claim the EMI as an expense when calculating ‘Income from property’ in your income tax returns. In case you are incurring a loss under the heading ‘income from property’, it can be set-off against your income thereby brining down your taxable income. And what’s more there is no cap on this amount. So speak to your CA and figure out how you can use your second mortgage to reduce your tax burden.
3. Not transferring your old Employee Provident Fund (EPF) accounts
When we change jobs, getting our EPF account transferred is usually last on our priority list. It involves considerable effort to get it done. Letting your account remain with the old employer wasn’t such a bad thing in the past since your EPF balance was earning a very good interest rate.
However since 2011 the government has smartened up on this front and if you do not make a deposit in your EPF account for 36 consecutive months, it stops accruing interest. And if you finally wake up and withdraw your balance, you have sealed your fate.
What you should do instead of withdrawing the inactive balance is to ensure that your old account (even if it is inactive) is transferred to your active EPF account. This way you will earn interest retrospectively on your inactive balance as well. So make it a priority to get the account transferred.
4. Thinking you are well insured when you are not
The only thing worse than being uninsured is being underinsured. Having the illusion of financial security shattered at an already challenging time can be devastating. Can you imagine telling your spouse all along, “Don’t worry if something happens to me, my life insurance will take care of all your needs”. And if the worst happens, imagine your spouse’s horror at receiving a ‘princely’ sum of say Rs. 6 lac!
The general rule of thumb is to have a cover of approximately 10 times your gross annual income. So if you have been financially savvy and have taken life insurance, check to see if it will provide the financial security your family needs.
Since income is a dynamic variable, you should review your insurance cover from time to time. If your income increases significantly with time, you should also think of enhancing your cover. Taking on debt like a home loan should also prompt you to increase your cover accordingly.
5. Waiting to become financially comfortable before you start planning for the future
We have an interesting paradox when it comes to financial planning. People who have a good amount of investible surplus get attracted to the idea of financial planning while those on a limited income who actually need professional help with money, shy away from it. A person with a monthly salary of Rs. 50,000 needs to be much more financially prudent than someone who makes Rs. 5,00,000.
So, irrespective of your income level, take charge of your own financial destiny. Seek and get involved with financial planning at an early age. Make sure that you take advice only from qualified sources that have your best interests in mind.