This story is from May 15, 2017

Don't go for too many EMIs

Don't go for too many EMIs
People take loans to buy their dream houses and cars, but the dream soon sours when the loans start straining their budget and impacting other goals.High insurance premiums and expensive personal loans also contribute to the increasingly stressed finances. Here's how to figure out what percentage of your income should go into these expenses.
INSURANCE PREMIUMS
Most people make the mistake of mixing insurance with investment.
So, instead of opting for low-cost pure life protection, they pack their portfolios with traditional plans, which yield low returns of 5-6% and come with a huge premium.Add to these other insurance plans like health, critical illness, car and home cover, and the premium outgo swells up considerably. The pure life cover, or term plan, should be about 8-10 times your annual income, and should take into account all dependants and loans. If you also have traditional plans and Ulips, the premium should not exceed 6-7% of your total income.
According to Harshavardhan Bhusari, Certified Financial Planner, FinPals, "The premium on any kind of insurance policy should not be more than 8% of your income."
Mumbai-based sales professional Satish Shenoy, 50, didn't know about this figure. A few years ago, when he earned `60,000 a month, he paid `21,000 for three Ulips and two endowment plans. This translated to about 35% of his income."I bought these to save on tax, get good returns and for safety," says Shenoy . After four years, he realised that the money wasn't growing fast enough to meet the goal of his son's education.

If you have too many policies as investment, get rid of the ones that don't give you returns high enough to combat inflation. "Calculate the surrender and paid-up value of all your policies and take a decision," says financial planner Dilshad Billimoria, Director, Dilzer Consultants. If you incur a small loss and the maturity date is years away, surrender it. If not, convert it into a paid-up plan.
HOME LOAN EMI
House-related expenses, be it loan EMIs or rent, can also make your cashflow go haywire. While the combined EMIs of all your loans should not be more than 4550% of your total income, home liabilities should not exceed 35-40% of it.
Aashish Wadhwa, a 26-year-old home owner from Chennai, was clearly unaware of this thumb rule when he bought a house recently. While he earns Rs53,000 a month, he is paying an EMI of Rs31,000, nearly 60% of his income. "I bought the house to save on taxes and rent," he says.
A good option is to prepay the home loan instead of investing in other avenues. "A 9-9.5% loan versus an expected return of 12-15% on investments may feel like a no-brainer, but the psychology of a liability hanging over their head makes the borrower uncomfortable. Prepaying is a better option," says N. Vishwanath, Founder and CEO, Blue Ocean Financial Services. "In the initial years, the interest component is higher and provides tax benefits, so prepaying after 5-7 years works well," says Amol Joshi, Founder, PlanRupee Investment Services. It makes even more sense to prepay if the house is for self-use, not investment.
PERSONAL LOAN & OTHER LOANS
Bengaluru-based Balaji K., 30, is starting to find it hard to keep up with his expensive personal loans and high rent. These eat up nearly 80% of his income. "I had to take loans for a medical emergency and my wedding," he says. To lower the expenses, he must find a house with low rent and repay the loans at the earliest.
While it is not advisable to take expensive personal loans at all, if one is forced to, the amount should not exceed 10% of one's income. "If the total monthly loan servicing amount is over 50% of the net income, it is a red flag," says Suresh Sadagopan, Founder, Ladder7 Financial Advisories.
Pune-based Nirdesh Jain, 28, a chartered accountant, knows it well. He is repaying various loans, with the EMIs of Rs28,000 adding up to 45% of his monthly income. While he seems confident about his earning capacity , it is important to focus on investing. Jain currently invests only Rs16,000 annually in mutual funds.
This is why it is best to pay yourself first. "It may be daunting initially , but you pick up the habit gradually ," says Ramesh Bukka, Co-Founder and Director at Entrust Family Office Investment Advisors.
It is equally important to remember the ceilings for loans and insurance premiums, and try not to exceed them at any cost.
End of Article
FOLLOW US ON SOCIAL MEDIA