When you have purchased a new house and settling down with the EMI or say spent a lot of money recently in your marriage, you may face a severe liquidity crisis, unless planned well. This means expenses shooting far higher than your income. Once you start using expensive credit card, home top-up or personal loans, you start getting stuck in a debt trap. So if you are in such a crunch, consider below suggestions.
Obtain Low or No Cost Loans
1. Request an interest free loan from your or your spouse’s employer.
2. Take loan against your Gold
3. Use the home loan porting facility & reduce the EMI. You will have to pay a one-time charge of around 0.5% of the outstanding loan to the new bank. Your existing bank may as well allow you to switch to a cheaper rate loan with a similar one-time charge.
4. Withdraw or take a loan from your insurance policies
5. Get a loan from your parents or your spouse’s parents.
6. Borrow money from a close relative or a good old friend at say 10% p.a. This is far cheaper if you are using the credit card to fund your deficit.
Reduce the Outflow
1. Extend the home loan from say 20 years to 25 years.
2. Target say 10% cut in your household spend. Announce this in your house. Lead by example.
3. Look at your Top 5 spends. If the discounts are not possible, ask them to give more quantity and or value at the same price. If not, hunt for bargains. Use internet.
4. Defer expenses to next week, next month, next quarter or next year. In a liquidity war, say no to every rupee that wants to go out of your pocket.
5. Stop all financial investments till the time you reach a surplus situation.
1. Sell non-performing investments & pay-off most expensive liabilities.
2. Surrender insurance policies not earning good returns & reduce liabilities. Use the surplus by not paying premium to service the remaining loans.
3. Withdraw from Provident Fund. This can take 2-6 months. Use RTI if you get stuck.
4. Withdraw from your Public Provident Fund (PPF). Use internet calculators to know the eligibility.
5. Check for hidden assets. Any inheritance that you can leverage right away? Any NSC certificate or Fixed Deposit forgotten in your wife’s cupboard? Any Gold that you purchased for investment purpose? Any pending refund from Income tax? Old physical shares? Any loan you gave to a friend?
Increase your income
1. Are you taking all tax benefits? Can you restructure your package with your employer? Any claims pending for reimbursements? Can you stop your Voluntary PF contribution, if any?
2. Is there a way you can increase your income? Can you take part time tuitions or write on blogs? Check out freelancer websites for opportunities.
3. Can you change your profile and earn more, say by joining sales team? Time to change your job? Working abroad is generally very lucrative. But you will first have to create an emergency corpus.
4. Can your spouse earn more by changing the job? If she is not working, can she work part time and earn? Check out freelancer websites for opportunities
While you make these efforts, below best practices are worth keeping in mind.
1. Take a few days leave from work & focus fully to achieve your liquidity goals.
2. If you have multiple loans and multiple sources of funds, make a mapping table. Take the most expensive loans and map them to the cheapest source of funds.
3. Take one step at a time. First, get from deficit to neutral situation. Then move from neutral to surplus situation.
4. Have Plan A & Plan B & Plan C. One of them has to work in your favor.
5. Use Personal Finance Ratios. As an example, as you progress, your debt repayment as a % of monthly income has to come down. Your savings ratio has to go up. Your solvency ratio has to improve.
We wish you a best of luck, on your way to prosperity.
Rohit Shah, CFPCMFounder & CEO at GettingYouRich.com
The Author is a member of The Financial Planners Guild India ( www.fpgindia.org ), a non-profit organization, whose members are Practicing Financial Planners.