How To Be Debt Free!

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Please ask your questions HERE and rediffGURU Janak Patel, a certified financial planner accredited by the Financial Planning Standards Board, India, and CEO and founder of InfiniumWealth, will answer them.

Anonymous: Hi Sir, I have home loan of 76 lakh, EMI is 58340, tenure remaining 270 months. I have Personal Loan of 7 lakh, 6 lakh remaining. I have a PPF 1 lakh, MF 1 lakh and NPS. Monthly salary is 2 lakh. Please advise what to do for financial freedom?

Financial freedom has different meaning for different individuals and in your case I am not sure what you would consider it.

You have a home loan which is for a long term and that is fine, so continue paying your EMIs.

Income minus EMI = 1.40 lakh per month. From this amount after monthly expenses, whatever amount remains should be utilised well towards your goals.

Top priority should be two things, so split your surplus amount after monthly expenses into 2 parts:

1. An emergency fund: This is an amount which can be utilised for any unforeseen events and you can start with 3 months and increase it to 6 months of your total outflows (EMIs + monthly expenses), do not consider any investments as part of this. So if 1.25 lakh is your EMI + monthly expenses, then your emergency fund should be between 3.75 lakh to 7.5 lakh. Aim to create this over the next 6-12 months.

2. Payment towards the Personal loan: PL is typically very high interest loan and should be paid off ASAP. Check prepayment terms and try to clear out this at the earliest. Even if you can keep aside 25k each month, you can pay off the PL in the next 2 years.

Once your PL is paid up, and you have accumulated your emergency fund, then all surplus amount each month should be invested towards creating a corpus. This can be utilised for all future goals including retirement.

I would recommend continue contributing towards PPF and NPS but increase/maximise your contribution towards mutual funds. Also PPF and NPS have lock-in periods and hence the contributions will not be accessible for all goals, they can be considered for retirement.

MFs, especially equity MF schemes have the potential of creating wealth over a long period of time.

Typically 100 minus your age = % allocation in Equity Mutual funds will help create a good corpus in the long term. So if you age is 30 years, plan to contribute 70% towards equity mutual funds.

A well-diversified portfolio of MF schemes will help you achieve this goal. Portfolio should be kept simple and not get into too many schemes. A well-diversified portfolio can have schemes like a flexi-cap, multi-cap and hybrid funds that will create a balance and provide growth. Consult an advisor to help you create this portfolio and review it every year to see that it stays aligned to your goals.

Anonymous: Sir, I am 32, male. I stay with my mother and I have an elder sister (married) who visits us quite often as her in-laws' stay nearby. My mother and I are self-employed having a collective income of around 1.2 lakh per month. We (me, maa and didi) have an OD (overdraft) loan from an FD of 30 lakh whose EMI is around 18,500/- per month. I have a car loan of around 11,500/- and a two-wheeler loan of 3,300/- per month for the next 3 years. We have a deposit of 50 lakh divided into 2 FDs and a collective MF having around 3.5 lakh. How can we manage and grow our money more efficiently in the long run?

• Total Income = 1.2 lakh
• FD = 50 Lakh
• OD loan on FD = 30 lakh with EMI of 18500

I think the main point of analysis is the FDs and the EMI payments for the OD loan on FDs.

Outside of this the money in hand can be utilised for long term investment (note at the end).

I am not sure what is the period for this EMI. Please check what rate is applied to this OD loan. I am sure you had a good reason to withdraw the 30 lakh.

Basically it's your 30 lakh in FD and you have borrowed it and you are trying to put it back using the EMI way.

Typically FDs provide let's say 7% interest, so you need to decide if your EMI to fulfill the 30 lakh is worth the future value of your FDs. So ask this question, after X years of paying EMI what amount are you getting in hand?

Usually in such situation, the bank may make money or net effect is you will get less than 7% interest on your own money.

Now let's see FD value of 50 lakh at 7%:

• Over the next 10 years it will be = 98 lakh
• Over the next 15 years it will be = 1.37 crore
• Over the next 20 years it will be = 1.93 crore

And you need to reduce the amounts with the EMIs you are paying against the OD loan on FDs. Thus your returns will be much less in hand.

Alternate scenario:

I would suggest you close the OD loan using your own FD amount of 30 lakh.

You would have 20 lakh remaining -- of this keep 7 lakh in FD as emergency fund for any situation you do not anticipate.

Invest the remaining 13 lakh in mutual funds -- this will have a potential of earning returns of 12% annually over the long term.

Add to this the 18500 as MF SIP amount (same as you planned for EMI). Hence nothing changes in hand for you (outgoing EMI or SIP).

The wealth accumulated (approximately):

• Over the next 10 years will be = 86 lakh,
• Over the next 15 years will be = 1.71 crore
• Over the next 20 years will be = 3.26 crore

Now you can compare if this with your FD of 50 lakh at 7% less the EMI payments and clearly the alternate scenario will work out better.

And additional money in hand from your income less expenses, you can utilise that too and invest in MFs and increase the wealth you will create in the long term.

An addition of 10,000 to your SIP will generate approximately 1 crore, 2.22 crore and 4.26 crore respectively.

As your EMI for car/two-wheeler close, invest same into MF and over the long term, your wealth creation will only increase.

Important is to stay committed over the long period of time and take wise decisions. Review the MF portfolio every year to check if the performance is as expected.

You can consult a fee-based CFP/Advisor who can guide you towards this and also add value to holistic planning for insurance, tax and retirement. Better pay a fee and get unbiased advice, instead of individuals selling you products not in your best interest.

Anonymous: Dear Sir, I have 18 lakh home loan for rest 27 years to pay the emi of 14.5k and the ROI is 8.8%, also I have personal overdraft loan 22 lakh where I am paying only interest of rupees 23k per month and the ROI is 12.5%. I have taken these loans for 4 storeyed home construction where my family is residing and using rent money for their monthly expenditure. My monthly take home salary is 1.4 lakh per month, 2 lakh in mutual, reduced now sip amount to 1k per month because focusing on monthly free money to pay overdraft principal amount to pay early. Also I have taken health insurance for my family and term insurance too. I am also taking care of my single mother, sister and her son, next year we will have the engineering college admission for him. Please guide me to come out of this debt burden early and manage my situation wisely for financial freedom.

Please continue the home loan EMI payments without any default.

As your monthly expenses are managed by the rent received, you should focus on saving maximum from your salary to pay off the personal overdraft. If you can pay 1 lakh per month towards this, then in approximately 2 year or so, you can close this.

Also if your mutual fund investment is not giving you over 12.5% returns then use it to pay off the personal overdraft.

SIP reduced to 1k -- again this you can use towards personal overdraft.

Having health and term life insurance is a good decision.

Once you close the personal overdraft, then focus on investment for the future. Mutual funds are a very good option to create wealth over a long period of time.

• You can ask rediffGURU Janak Patel your questions HERE.

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Any use of the information/any investment and investment related decisions of the investors/recipients are at their sole discretion and risk. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Opinions expressed herein are subject to change without notice.