Tuesday, February 24, 2015

How to avoid paying interest


A lot has been written on this topic already and different people, based on their experiences, knowledge and observations, have suggested different ways to avoid interest. I will also try and explain this with an effort to make it more understandable for a common reader.

Before I start enlisting ways of how a regular person can try and avoid interest, let’s first talk a little about why we need to avoid interest and what implications this has on our daily and financial lives.

As per the definition of Interest from different sources and combining it into one, easily understandable one, “it is a claim on your money from someone else who you had borrowed a certain amount from, had a mortgage from, bought a car etc.”. So when we, let’s say, buy a car from a dealer and get it financed from a bank or a car financing company, we agree that we will pay over and above the stated value of that car if we had bought this on cash. What it means is that we are paying extra for that car, and similarly, we pay extra for our house that we bought on mortgage, we pay extra for goods we purchase on credit card and then don’t pay them within the time period to avoid interest.

So technically, in order to buy stuff that we can’t actually afford right now, we agree to pay interest. Thus we add a certain amount to our monthly expenses in terms of interest. If a normal person’s salary, for example, is $100 and he pays 5-10% interest, the net salary becomes $90-$95. That person has to then manage his/her expenses from a lowered salary. If someone is only making a minimum payment (that has a huge portion of interest and a very small portion of principal amount) this keeps piling up. Longer you are into paying interest, more you are affecting your actual net worth.

Of course, being in debt is never a good feeling and you are under continuous burden of paying it back. Plus, the same money that you can use somewhere else, you are giving it to another party just because you could not control your expenses in the past.

Let’s now look at ways of how we can avoid paying interest:

How to avoid interest on Credit Cards

Credits Cards are one of the biggest inventions of the modern finance world that have generated these big institutions huge sums of money. Buy Now-Pay Later has cursed so many families and individuals. I have seen individuals with a salary of not more than $1000 and they are spending double of their income almost every month, just because ‘they think’ they can afford it. NO!!! It’s not your money, it’s someone else’s money you are using and those people would not give it to you for free. It’s a consumerism trap. How comfortable would someone feel if they have to go through the shame of borrowing money from other people directly and use the same money to buy new cars, purchase new models of phones etc.!!! So yes, that’s not your money. It’s a ‘CREDIT’ card.

What you should do is never apply for a credit card. This will teach you how you can live within your means. This will make your future more secure and tension free. If, for any reason, you have to have a Credit Card, do the following to avoid paying interest or any other charges on that:

-          Apply for a credit card that does not require annual fee

-          Find out what your statement generation date is. All the purchases made after the statement generation date will give you a certain time period i.e. normally 21 days, to make payment and you won’t be charged interest. But you need to make sure you have cleared your last month’s balances.

If you have a credit card debt already:

-          Start with paying the higher interest credit cards.

-          Always pay more than minimum.

-          Make timely payments.

-          Borrow from someone who won’t charge you interest and pay off your credit cards.

-          Make a payment plan for yourself to clear off all your credit card loans. You can create an excel sheet for this.

-          Minimize the number of credit cards you hold by paying off the rest i.e. start paying off the ones with lower balances first

Since most of the credit cards charge very high interest, so paying off credit card loans is the first thing you should take care of.

Start Saving and Investing for your house

I know it seems to be an easy solution to apply for a mortgage, get the house you want and then pay for that for the rest of your life. I am sure not many think that how much we are losing in terms of interest we pay for the mortgage. Let’s say you have agreed to pay 3% annual interest on your mortgage (It’s usually more), if you are to pay this for 25 years the total interest you will be paying is 75%. This means if the value of your house becomes double in 20-25 years, you have only gained 25%. When you compare this the increase in inflation over that period of time, you have gained nothing.

My recommended solution to this is, rent low for a period of time, invest your money into stocks, commodities and even if you are earning 4-5% annually, you will be in a position to buy yourself a house sooner than mortgage (yes, unless you fully pay off, the house is only partially yours and you lose it if you can’t make mortgage payments for any reason).

Don’t lease/finance your car, buy used

It’s intimidating to buy a new car, especially when you can buy it so ‘easily’ by someone else’s money. Only if that someone else does not charge you interest! But this does not happen in real world. It’s better to save some money and buy yourself a used car that is good enough for you. I look at this from another angle. You can buy a reasonable used car with $ 10,000 but for that you will have to wait a while to save some money. Tough to wait, but worth it. On the other hand, you can buy a new car right away, easy? Yes! But how much it costs? Let’s say it costs you $30,000 in total. Which means it will eat away $20,000 extra from your next few year’s earnings, the money you could have spent on something more important you or invested somewhere and earn something out of it. So make the right choice and save your future earnings.

Budget your expenses and income

There are many online applications available that you can download to your mobile and keep a record of all your expenses and income. You can even use Excel sheets. This will ensure you are keeping a track of what you are spending more and can cut on those expenses. This will also give you a realization that credit card is not part of your income. It’s a credit that will be a source of future cash outlays.

Emergency fund

Every month save some money towards emergency fund. Build it up as much as you can. Most of the time people use credit cards or other credit lines is because of a situation they had not thought about. Add a reasonable portion to your emergency fund every month.

Savings = Income – Expenses, Right?

Yes, there are times when your expenses increase momentarily, or even permanently for different reasons. From the above equation, if your expenses have increased you should not look at using credit cards or other credit options because that will ultimately cause a further increase in expenses in the form of interest. Increase your income by working part time.

In the end, if you have realized that you need to get rid of interest, that’s the first biggest step towards the betterment of your financial situation. You will be able to spend a more relaxed life and will have more control on it.

Sunday, February 15, 2015

How to Invest in Stocks - Best Approaches

There is so much material available online and offline on how to invest in stock. Mostly, this is too technical for a normal reader to understand. I've done a research on and found some very useful resources that can help you understand stock investments; including some of the best strategies to perform well in the stock market.
 
 

There is an excellent course available online which, I believe, is one of the best in the market i.e. HOW TO BEAT WALL STREET. The course includes some of the best strategies to perform well in the stock market. It explains, in detail, the technical analysis systems, how you can optimize your risk levels and so much more. One of the things I love most about this course is, it takes you from the very scratch of understanding technical concepts of trading to becoming an expert and forming a strategy of your own for trading. Thus, the course is good for both, beginners and experts. Before you start this course, I recommend to understand basic concepts of Savings and Investments from my previous blog.
 
If you are busy enough and don't have time to go through the course, or find it hard to understand trading terminologies, it's best to go to an relationship manager from your bank or find a broker i.e. people who invest in the stock market on your behalf,  that you can rely on. A good bit of research is recommended before you select a broker or want to reach out to your relationship manager from the bank.
 
There is a wise saying "Don't put all your eggs in one basket" very routinely used in the investment world. When you are investing in stock yourself or someone else is doing this for you, make sure you have diversified the risk properly. Always look for a good combination of stocks or Mutual funds that meet your risk taking capacity. Moreover, make sure what your goal is from investing i.e. Are you looking for capital gains? Do you need a second income stream? Or you are saving for a long term future cash outlay e.g. paying for your kid's university, planning to buy a house etc. Make sure you thoroughly talk about these requirements to your investment manager/broker.
 
Happy Investing!