Engineer's Finance

I had a word with one of my friend and he was trusting some one for his Financial Future. This is not his case alone. Most of us do the same. Is it worth doing it? Ever thought about it?

If we don’t learn to manage our own hard earned money, someone will manage it rather honestly mismanage it. Some of these people may be ill-intentioned, like unscrupulous commission-based financial planners who keep calling us for some financial products every now and then. Others may be well-meaning, but may not know what they’re doing, like our parents, If they are not up to date with the financial instruments they can’t guide us in the proper direction and I don’t blame them. I prefer guys like us to take care of our financial future. We should guide them as well since the times have changed and their principles might hold good but definitely not their financial instruments.

Instead of all these things, it is better we start realizing our needs and start equipping ourselves with what we have to learn. In order to take charge try to learn something new everyday regarding personal finance. Once you equip yourself with Personal Finance knowledge try to take care of the situation and ensure that you don’t let anyone else control your Financial Future. It is your money and it should work hard for you.

Your first step should be, learning how to make money work for you and you should not work hard for money.

Let us discuss about Recurring deposit.

Recurring deposit schemes pay you a higher interest rate than the Savings account. Generally it will be higher by at least 2% or so. I have not enquired about the interest rates in every bank but I am sure it will be higher than 8%. You must be wondering why Recurring account interest rates must be higher than Savings account. This is due to the fact that Recurring account demands you to deposit the amount you agreed every month till the time you have agreed upon and you can’t withdraw the amount till the agreed time period ends. If you defer paying then fine will be charged. Generally it is the bank that decides the minimum amount that is required to be paid and mostly time period is minimum one year. There are several banks that provide this facility.

I don’t advise married people to go in for this because financial commitments might crop up every now and then and it is very hard to be attached to it. We can’t have a very strict regime, we prefer to have some relaxations but if you are single then this is the best way to start your savings habit. It forces you to pay and make sure that it is ECS (Electronic Clearing Scheme) and it should be deducted on the day of your salary (for safer side).

You start this way and I am sure by the end of the year you will thank me for doing it.

Hope you plan up your financial future.

It is very important to save up. If you plan to accumulate wealth you should do either of the following, spend little or earn more or save more.

We generally lack the habit of saving it is not that we don’t wish to save but somehow we don’t. This is mainly because we don’t focus on any short term or long term goals. If we do then we do save up money.
My friends were major spend thrifts, but the moment they realized that they wanted to do their MS in US without much financial support, their spending habits changed saving habit improved drastically. Their short term goal was to save up as much as they can so that they can have minimum amount to borrow from the banks for their education. But I never bothered about saving and I was spending as usual without any worries.

I am sure most of us don’t plan up anything. Just make up your mind to save up 20 – 40 % of your Income in a year. Don’t plan anything, just have in mind that you should save up this much amount per month and at last you might use it up for some good cause than you spending it away on useless stuff.

Since we don’t have discipline in savings. It is not a habit for us. We keep savings as our last priority in life. For us paying bill is more important than saving for ourselves hence we don’t save up any money.
I have a simple solution for this : I know that we can’t save up anything for ourselves by ourselves so better provide that job to someone else. How? Make sure you are forced to pay as a bill to your dad or mum or bank whichever you think is feasible and if you don’t give them that amount per month then you will be fined. If you think in these terms I am sure you will save up a descent amount of money at the end of the year which you can invest later.

How I Do?? Honestly I am pretty weak in this area and am still working hard. I want to save up as much as I can but I am not able to due to my stupid spending habits. I have started putting a check on my spending
habits and I have improved these days and I am giving money to my dad to save up for me (Not a big amount). I believe in “Small drops of water make a mighty Ocean”. Right??

If I get better idea I will keep you informed.

All of us have Credit Cards (generally more than 2), it is a must to have Credit Card these days (fashion statement).

These days when I go for shopping the first thing I get to hear at the billing counter is “How is the payment made? Through cash or credit card”. Most of the guys don’t understand how the credit card works. All that they do is just use the card for just shopping and don’t plan up things. Shopping is done at random, no plan is ever done and mostly we buy things we don’t really require. It might not be a necessity at all still we fancy buying them. (Anyways it is not my cup of tea 🙂 ).

What I want to convey is Using credit card is always a good option until unless you screw up your finances. This is how I use my credit card for my benefit. Whenever I want to buy something that costs more than 10k then I plan to buy it just immediately after my billing cycle ends. In this way I will have at least 2 months salary to pay back the amount without paying any interest. Confused???

Think that My billing cycle is from 20th of previous month to 19th of present month. Any purchase made on 20 or after that will be charged to me in the next billing cycle. Once the bill is generated the bill has to be paid with in a minimum of ten days to fifteen days. In my case I get a grace period of 52 days i.e. I can use the amount without any interest for 52 days.

(Does that make any sense to you??) So most of the time when I make a big purchase which costs more than 10k I make sure I do it with in 20 to 30 of the month on the card, so that I can have two months salary to repay back and I make sure that I do that. This is one of the most easiest way to tame your card.

Credit card’s Minimum Balance

Ever wondered how the Minimum Balance is calculated??

This is how it is done.

Interest = APR/100 x ADB/365 x number of days revolved
Total Amount = Outstanding balance + Interest
Minimum Payment Due = 5% of Total Amount

where APR stands for Annual percentage rate and ADB stands for Average Daily Balance.

For e.g.
I make a purchase of Rs. 1000 on 3rd of May and My bill is generated on 20th of May and my due date is 12th June. If I make a payment of Rs. 1000 on or before 12th June then no interest will be levied upon me for the transaction. Even if I make a payment of Rs. 999 it is considered to be a partial payment and interest will be calculated. Assume that my APR is 2.

My Minimum Payment due is 5% of the purchases that is made for the current month that amounts to 5/100 * 1000 = Rs. 50. Now I have an option to pay either Rs. 50 or Rs.1000 if I make any payment between this range is not worth for me since I need to pay the interest for the purchases.

Assuming I make a payment of Rs. 500 on 12th June. My balance is Rs.500 but the interest is calculated for Rs. 1000 and not for Rs. 500.

Average Daily balance is calculated in two ways :
1. Including new purchases.
2. Excluding new purchases.

Consider for Scenario Including new purchases :

I make a new purchase of Rs. 1000 again on 30th May.

Now my bill looks like this:

1. Purchase on 3rd of May = Rs. 1000
2. Paid on 12th of June = Rs. 500
3. New Purchase on 30th of May = Rs. 1000

When my bill will be generated on 20th of June:
Interest calculation :
Initial purchase * APR/100 * No. of days
1. 1000 * 2 /100 * (20th June – 3rd May) = 20 * 47 days = ADB
2. 500 * 2 /100 * (20th June – 12th June) = 10* 8 days = ADB
3. 1000 * 2 /100 * (20th June – 30th May) = 20 * 20 days = ADB

Average ADB = (20*47) + (10 * 8) + (20 * 20) / 30 = 47.33

So my total amount payable is : 1000 + 500 + 47.33 = Rs. 1547.33
Minimum Payment due is 5% of Rs. 1547.33 is Rs. 77.37

Consider for Scenario Excluding new purchases :

Calculations remain the same for this except we don’t include the new latest purchase we made and hence ADB = (20 * 47) + (10 *8) /30 = 34

So my total amount payable is : 1000 + 500 + 34 =Rs. 1534
Minimum Payment due is 5% of Rs. 1534 is Rs. 76.70

Conclusion:
We are ignorant about the calculations involved in the credit card’s interest calculation. Most of the financial institution include the new purchases as well and then calculate the interest. If you skip once paying the entire amount you will be charged interest. There are various methods of calculation that the financial institution use of derive money out of their customers. Better be careful. Whatever I have provided is just one of general methods. Please read your credit card documents carefully and analyze your position and try to pay back the balance in your credit card as soon as possible.

In Citibank silver credit card (the one that I have) for the amount Rs. 5000 if I pay only the minimum balance every month then I need to pay for 6 years to become debt free.

I am sure none of you bothered about these calculations.. Neither did I for sometime.. Once I did and it made a difference in my life.. Please be aware of this..

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