On Homes and Home Loans

Yesterday evening I had gone to meet a cousin who lives in the Western suburbs of Mumbai. All along the way, there were billboards of Kotak Mahindra Bank advertising its home loans, which are available at an interest rate of 6.65%.

While the interest rate of 6.65% comes with terms and conditions, such low interest rates have rarely been seen before. It is possible to get a home loan these days at an interest rate of 7%.

A few things have happened because of these low rates. There have been scores of stories in the media citing surveys where everyone from women to HNIs to NRIs to millennials seem to want to buy a house and they want to do it right here and right now. 

Of course, these surveys have been carried out by real estate consultants, whose very survival depends on the real estate sector doing well. Incentives as they say.

Low interest rates on home loans also have led to stories in the media suggesting that this is best time to buy a house. The other thing that has happened is that analysts have been recommending stocks of home finance companies (HFCs).

The logic being that at lower interest rates people will take on more home loans. This will help the loan book of HFCs grow, making them good investment bets. How easy all this sounds? But is it?

All this stems from the flawed assumption that people borrow more at lower interest rates and live happily ever after. Let’s see if that is true or not.

Take a look at the following graph. It plots the increase in home loans outstanding during the period April to January, over the years.

 Source: Author calculations on data from Centre for Monitoring Indian Economy.

What does the above graph tell us? It tells us that despite very low home loan interest rates, the increase in home loans given by banks between April 2020 to January 2021, stood at Rs 78,577 crore. This was around half of the increase of Rs 1,56,362 crore between April 2019 to January 2020.

Even between April 2018 and January 2019, the increase stood at Rs 1,46,227 crore. Clearly, people borrowed much more when interest rates were higher. Hence, the logic that people borrow more when interest rates are lower, basically goes for a toss.

In fact, the increase between April 2020 to January 2021, was the second lowest in six years in absolute terms. The lowest increase of Rs 74,837 crore was between April 2016 to January 2017. This period included demonetisation when banks had more or less stopped doing everything else and concentrated on taking back the demonetised notes from the public.

If we look at the period between April 2016 to October 2016, before demonetisation happened, the increase in home loans had stood at Rs 64,501 crore. Clearly the disbursal of home loans slowed down in the post demonetisation months.

There is another point that needs to be made here. Other than banks, HFCs or home finance companies, also give out home loans. Typically, banks give out two-thirds of the home loans and HFCs, the remaining third. Nevertheless, the last couple of years haven’t been good for a few HFCs. This has meant that some of the business of home loans has moved from HFCs to banks.

Once we take these factors into account then we can conclude that the increase in home loans during this financial year, has been the worst in six years. And this despite the extremely low interest rates. In percentage terms, the increase in outstanding home loans during this financial year has stood at 5.97%, the lowest in six years, and the only time the increase has been less than 10%. 

Why is that the case? For economists and analysts, the interest rate is the most important parameter that people look at while taking a home loan, nevertheless, a little bit of common sense tells us that this isn’t the case.

Let’s try and understand this through an example. As per HDFC, India’s largest HFC, their average home loan size is Rs 28.5 lakh. Their average loan to value ratio at the time of giving the loan is 70%. This basically means that HDFC on an average gives up to 70% of the price of the home as a home loan.

This basically means that the average price of a home in the books of HDFC against which they give a home loan, stands at Rs 40.7 lakh (Rs 28.5 lakh divided by 70%). Let’s round this to Rs 41 lakh, for the sake of convenience.

What does this mean? It means that in order to buy a home, other than taking on a loan of the buyer first needs to make sure that he has savings of around Rs 12.5 lakh (Rs 41 lakh minus Rs 28.5 lakh) to make the downpayment on the home loan. Even if the money is available, he or she needs to make sure that they are in a position to spend that money.

This is not where it ends. In many parts of the country a portion of the real estate transaction is still carried out in black. Money needs to be available for that. Further, a stamp duty needs to be paid to the state government. Then there is the cost of moving into a new house (everything from transport to perhaps new furniture).

Once we factor these things into account, we can conclude that the home loan forms around 50-60% of the overall cost of buying a house. Further, in a time like present, any individual thinking of buying a house will have to weigh the decision against the possibility of losing their job or facing a drop in income in their line of work.

Now let’s consider the average home loan of Rs 28.5 lakh. At 7% interest and a tenure of 20 years, the EMI on this amounts to Rs 22,096. At 9%, the EMI would have worked out to Rs 25,642. Hence, the EMI is Rs 3,546 lower.

So, yes, the EMI is lower. But what will the buyer first look at? The lower EMI or the ability to be able to pay the lower EMI and be able to continue paying it in the days to come. Of course, the buyer will look at his ability to pay the EMI and be able to continue paying it. Also, it needs to be remembered that the interest rate on the home loan is a floating one, and can rise in the years to come.

Hence, this decision will be based on the confidence that the buyer has in his or her own economic future. This is not something that can be measured at an aggregate system level and varies from buyer to buyer. The point being that everything that is important cannot necessarily be measured in numerical terms.

Having said that, the confidence in the economic future will be currently low, with many individuals losing their jobs or seeing their friends, relatives and acquaintances lose jobs. Hence, other than losing a job, there is also the fear of losing the job. There has also been a drop in their income or in some cases small businesses have been shutdown. 

Also, whether it is the best time to buy a house or not, like most things in personal finance, it depends on your finances and more importantly your mental makeup of what you want from life. If you want to settle in life and make your parents and relatives happy, and have the money to do so, then now is as good a time as any to buy a home.

Please keep this in mind at every point of time in life when some expert tells you that this is the best time to do this or the best time to do that.

So, right now if you think you have enough money and enough confidence to keep paying the EMI, and want a home to live in, then please go ahead and buy one. Also, make sure that you have enough savings to pay the EMI for at least six months to a year, even without your main source of income.

To conclude, buying a home is not just about low interest rates. There are several other factors, which people who are in the business of selling real estate, seem to conveniently forget about.

Then there are surveys in which a high proportion of people end up saying they want to buy a home to live in. Of course, they do. But just wanting to do something doesn’t add to demand. I mean, I want to buy a house in central Mumbai, but I also know that ain’t going to happen. My finances don’t allow it.

How Trustworthy are the Bad Loans Numbers of Banks?

The Reserve Bank of India (RBI) in the Financial Stability Report (FSR) released in January had said that by September, the bad loans of banks, under a baseline scenario, could shoot up to 13.5% of their total loans. In September 2020, the bad loans rate of banks had stood at 7.5%. Bad loans are largely loans, which haven’t been repaid for a period of 90 days or more.

If the economic scenario were to worsen into a severe stress scenario, the bad loans could shoot up to 14.8% of the loans. For public sector banks, the rate could go up to 16.2% under a baseline scenario and 17.8% in a severe stress one.

What this meant was that the RBI expected the overall bad loans of banks to shoot up massively in the post-covid world, even more or less doubling from 7.5% to 14.8%, under a severe stress scenario.

A past reading of the RBI forecasts suggests that in an environment where bad loans are going up, they typically end up at levels which are higher than the severe stress level predicted by the RBI.

Given all this, there should be enough reason for worry on the banking front. But as things are turning out the dire predictions of the RBI are still not visible in the numbers. The quarterly results of a bunch of banks for the period October to December 2020 have been declared and it must be said that the banks look to be doing decently well.

In a research note, CARE Ratings points out that the bad loans rate of 30 banks which form the bulk of the Indian banking system (including the 12 public sector banks, IDBI Bank and the big private banks), stood at 7.01% as of December 2020. The rate had stood at 8.72% as of December 2019 and 7.72% as of September 2020.

In fact, when it comes to public sector banks, the bad loans rate has improved from 11.22% as of December 2019 to 9.01% as of December 2020 (This calculation includes IDBI Bank as well, which is now majorly owned by the Life Insurance Corporation of India and not the union government, and hence is categorised as a private bank).

When it comes to private banks ( a sample of 17 banks), the bad loans rate has improved from 4.87% as of December 2019 to 3.49% as of December 2020.

On the whole, these thirty banks had bad loans amounting to Rs 7.38 lakh crore on loans of Rs 105.37 lakh crore, leading to a bad loans rate of a little over 7%. Do remember, the RBI’s baseline forecast for September 2021 is 13.5%. Hence, things should have been getting worse on this front, but they seem to be getting better.

What’s happening here? The Supreme Court in an interim order dated September 3, 2020, had directed the banks that loan accounts which hadn’t been declared as a bad loan as of August 31, shall not be declared as one, until further orders.

This has essentially led to banks not declaring bad loans as bad loans. Nevertheless, the banks are declaring what they are calling proforma slippages or loans which would have been declared as bad loans but for the Supreme Court’s interim order.

A look at the results of banks tells us that even these slippages aren’t big. The proforma slippages of the State Bank of India between April and December 2020, stood at Rs 16,461 crore, which is small change, given that the bank’s total advances stand at Rs 24.6 lakh crore. When it comes to the Punjab National Bank, the total proforma slippages were at Rs 12,919 crore between April to December 2020.

Similarly, when we look at other banks, the proforma slippages are present but they are not a big number. An estimate made by the Mint newspaper suggests that India’s ten biggest private banks have proforma slippages amounting to around Rs 42,000 crore.

The 30 banks in the CARE Ratings note had total bad loans of Rs 7.38 lakh crore or a rate of 7.01 %. If this has to reach anywhere near, 13.5-14.8% as forecast by the RBI, the overall bad loans need to nearly double or touch around Rs 14 lakh crore.

The initial data doesn’t bear this out. As the RBI said in the FSR, “[With] the standstill on asset classification… the data on fresh loan impairments reported by banks may not be reflective of the true underlying state of banks’ portfolios.”

Hence, the situation will only get clearer once the Supreme Court decision comes in and the banks need to mark bad loans as bad loans. While banks are declaring proforma slippages, it could very well be that the Supreme Court interim order along with restructuring schemes announced by the RBI and the fact the Insolvency and the Bankruptcy Code remains suspended, have led to a situation where they are under-declaring these numbers.

This is not the first time something like this will happen. Around a decade back in 2011, Indian banks had started accumulating bad loans on the lending binge carried out by them between 2004 and 2010, but they didn’t declare these bad loans as bad loans immediately.

Only after a RBI crackdown and an asset quality review in mid 2015, did the banks start declaring bad loans as bad loans. There is no reason to suggest that banks are behaving differently this time around.

It is important that the same mistake isn’t made all over again. Hence, the RBI should carry out an asset quality review of banks(and non-banking finance companies) and force them to come clean on their bad loans.

A problem can only be solved once it has been identified as one.

The article originally appeared in the Deccan Herald on February 14, 2021.

Indian Banks Will Have Rs 17-18 Lakh Crore Bad Loans By September

The Reserve Bank of India (RBI) publishes the Financial Stability Report (FSR) twice a year, in June and in December. This year the report wasn’t published in December but only yesterday (January 11, 2021).

Media reports suggest that the report was delayed because the government wanted to consult the RBI on the stance of the report. For a government so obsessed with controlling the narrative this doesn’t sound surprising at all.

Let’s take a look at the important points that the FSR makes on the bad loans of banks and what does that really mean. Bad loans are largely loans which haven’t been repaid for a period of 90 days or more.

1) The bad loans of banks are expected to touch 13.5% of the total advances in a baseline scenario. Under a severe stress scenario they are expected to touch 14.8%. These are big numbers given that the total bad loans as of September 2020 stood at 7.5% of the total advances. Hence, the RBI is talking of a scenario where bad loans are expected to more or less double from where they are currently.

2) Under the severe stress scenario, the bad loans of public sector banks and private banks are expected to touch 17.6% and 8.8%, respectively. This means that public sector banks are in major trouble again.

3) In the past, the RBI has done a very bad job of predicting the bad loans rate under the baseline scenario, when the bad loans of the banking system were going up.

Source: Financial Stability Reports of the RBI.
*The actual forecast of the baseline scenario was between 4-4.1%

If we look at the above chart, between March 2014 and March 2018, the actual bad loans rate turned out to be much higher than the one predicted by the RBI under the baseline scenario. This was an era when the bad loans of the banking system were going up year on year and the RBI constantly underestimated them.

4) How has the actual bad loans rate turned out in comparison to the bad loans under severe stress scenario predicted by the RBI?

Source: Financial Stability Reports of the RBI.
*The actual forecast of the baseline scenario was between 4-4.1%

In four out of the five cases between March 31, 2014 and March 31, 2018, the actual bad loans rate turned out higher than the one predicted by the RBI under a severe stress scenario. As Arvind Subramanian, the former chief economic advisor to the ministry of finance, writes in Of Counsel:

“In March 2015, the RBI was forecasting that even under a “severe stress” scenario— where to put it colourfully, all hell breaks loose, with growth collapsing and interest rates shooting up—NPAs [bad loans] would at most reach about Rs 4.5 lakh crore.”

By March 2018, the total NPAs of banks had stood at Rs 10.36 lakh crore.

One possible reason can be offered in the RBI’s defence. Let’s assume that the central bank in March 2015 had some inkling of the bad loans of banks ending up at around Rs 10 lakh crore. Would it have made sense for it, as the country’s banking regulator, to put out such a huge number? Putting out numbers like that could have spooked the banking system in the country. It could even have possibly led to bank runs, something that the RBI wouldn’t want.

In this scenario, it perhaps made sense for the regulator to gradually up the bad loans rate prediction as the situation worsened, than predict it in just one go. Of course, I have no insider information on this and am offering this logic just to give the country’s banking regulator the benefit of doubt.

5) So, if the past is anything to go by, the actual bad loans of banks when they are going up, turn out to be much more than that forecast by the RBI even under a severe stress scenario. Hence, it is safe to say that by September 2021, the bad loans of banks will be close to 15% of advances, a little more than actually estimated under a severe stress scenario.

This will be double from 7.5% as of September 2020. Let’s try and quantify this number for the simple reason that a 15% figure doesn’t tell us about the gravity of the problem. The total advances of Indian banks as of March 2020 had stood at around Rs 109.2 lakh crore.

If this grows by 10% over a period of 18 months up to September 2021, the total advances of Indian banks will stand at around Rs 120 lakh crore. If bad loans amount to 15% of this we are looking at bad loans of Rs 18 lakh crore. The total bad loans as of March 2020 stood at around Rs 9 lakh crore, so, the chances are that bad loans will double even in absolute terms. If the total advances grow by 5% to around Rs 114.7 lakh crore, then we are looking at bad loans of around Rs 17.2 lakh crore.

6) The question is if this is the level of pain that lies up ahead for the banking system, why hasn’t it started to show as yet in the balance sheet of banks. As of March 2021, the RBI expects the bad loans of banks to touch 12.5% under a baseline scenario and 14.2% under a severe stress scenario. But this stress is yet to show up in the banking system.

This is primarily because the bad loans of banks are currently frozen as of August 31, 2020. The Supreme Court, in an interim order dated September 3, 2020, had directed the banks that loan accounts which hadn’t been declared as a bad loan as of August 31, shall not be declared as one, until further orders.

As the FSR points out:

“In view of the regulatory forbearances such as the moratorium, the standstill on asset classification and restructuring allowed in the context of the COVID-19 pandemic, the data on fresh loan impairments reported by banks may not be reflective of the true underlying state of banks’ portfolios.”

The Supreme Court clearly needs to hurry up on this and not keep this hanging.

7) Delayed recognition of bad loans is a problem that the country has been dealing with over the last decade. The bad loans which banks accumulated due to the frenzied lending between 2004 and 2011, were not recognised as bad loans quickly enough and the recognition started only in mid 2015, when the RBI launched an asset quality review.

This led to a slowdown in lending in particular by public sector banks and negatively impacted the economy. Hence, it is important that the problem be handled quickly this time around to limit the negative impact on the economy.

8) Public sector banks are again at the heart of the problem. Under the severe stress scenario their bad loans are expected to touch 17.6% of their advances. The sooner these bad loans are recognised as bad loans, accompanied with an adequate recapitalisation of these banks and adequate loan recovery efforts, the better it will be for an Indian economy.

9) At an individual level, it makes sense to have accounts in three to four banks to diversify savings, so that even if there is trouble at one bank, a bulk of the savings remain accessible. Of course, at the risk of repetition, please stay away from banks with a bad loans rate of 10% or more.

To conclude, from the looks of it, the process of kicking the bad loans can down the road seems to have started. There is already a lot of talk about the definition of bad loans being changed and loans which have been in default for 120 days or more, being categorised as bad loans, against the current 90 days.

And nothing works better in the Indian system like a bad idea whose time has come. This is bad idea whose time has come.

 

The Rs 20 Lakh Crore Bad Loans Problem of Indian Banks Hasn’t Gone Away

On December 29, 2020, the Reserve Bank of India (RBI) released the Report on Trend and Progress of Banking in India.

Like every year, the report is a treasure trove of information, especially for people like me who like to closely track the aggregate banking scene in India.

Sadly, most of this important information barely made it to the mainstream media, this, despite the fact that the health of the country’s banking sector impacts almost all of us. (This is one reason why I need your continued support).

Among other things, the report discusses the issue of the bad loans of banks in great detail. Bad loans are largely loans which haven’t been repaid for a period of 90 days or more. They are also referred to as non-performing assets or NPAs.

Let’s take a look at this issue pointwise.

1) The total bad loans of banks (public sector banks, private banks, foreign banks and small finance banks) as of March 31, 2020 stood at around Rs 8,99,802 crore. This is the lowest since 2017-18. The following chart plots the bad loans of banks over the years.

Source: Reserve Bank of India.

Despite this fall, the Indian banking sector on a whole continues to remain in a mess. We shall look at the reasons in this piece.

2) The total amount of loans written off by banks has steadily been going up over the years. In 2019-20 it peaked at Rs 2,37,876 crore. The following chart lists out the loans written off by banks over the years.

Source: Reserve Bank of India.

Basically, loans which have been bad loans for four years (that is, for one year as a ‘substandard asset’ and for three years as a ‘doubtful asset’) can be dropped from the balance sheet of banks by way of a write-off. In that sense, a write-off is an accounting practise.

Of course, before doing this, a 100 per cent provision needs to be made for a bad loan which is being written-off. This means a bank needs to set aside enough money over four years in order to meet the losses on account of a bad loan.

Also, this does not mean that a bank has to wait for four years before it can write-off a loan. If it feels that a particular loan is unrecoverable, it can be written off before four years.

So, does that mean that once a loan is written off it’s gone forever and is no longer recoverable? In India things work a little differently. In fact, almost all the bad loans written off are technical write-offs.

The RBI defines technical write-offs as bad loans which have been written off at the head office level of the bank, but remain as bad loans on the books of branches and, hence, recovery efforts continue at the branch level. If a bad loan which was technically written off is partly or fully recovered, the amount is declared as the other income of the bank. Having said that, the rate of recovery of loans written-off over the years, has been abysmal at best.

Now getting back to the issue at hand. The bad loans of banks as of March 31, 2020, have come down to some extent due to write-offs. As the Report on Trend and Progress of Banking in India points out: “The reduction in NPAs during the year was largely driven by write-offs.” Interestingly, the RBI offers the same reason for bad loans coming down in the years before 2019-20 as well.

Let’s try examining the above logic in a little more detail. The bad loans or NPAs of banks as of April 1, 2019, stood at Rs 9,15,355 crore. During the course of 2019-20, banks wrote off loans worth Rs 2,37,876 crore. Nevertheless, as of March 31, 2020, the bad loans of banks had come down to Rs 8,99,803 crore.

If we subtract the loans written off during 2019-20 from the overall bad loans of banks as of April 1, 2019, the bad loans as of March 31, 2020, should have stood at Rs 6,77,479 crore (Rs 9,15,355 crore minus Rs 2,37,876 crore). But as we see they are actually at Rs 8,99,802 crore.

What has happened here? What accounts for the significant difference? Banks have accumulated fresh bad loans during the course of the year. The net fresh bad loans (fresh bad loans accumulated during the year minus reduction in bad loans) during 2019-20 stood at Rs 2,22,323 crore. Once this added to Rs 6,77,479 crore, we get Rs 8,99,802 crore, or the bad loans as of March 31, 2020.

The point to be noted here is that banks on the whole have accumulated fresh bad loans of more than Rs 2 lakh crore during 2019-20. This is a reason to worry. It tells us that the bad loans problem of Indian banks hasn’t really gone anywhere. It is alive and kicking, unlike what many bankers, economists, India equity strategists and journalists, have been trying to tell us. Many borrowers continue to default on their loans.

The net fresh bad loans accumulated in 2018-19 had stood at Rs 1,34,738 crore. This tells us that there was a huge jump in the accumulation of fresh bad loans in 2019-20. The current financial year will see a further accumulation of bad loans due to the covid-pandemic.

3) In a February 2017 interview to Dinesh Unnikrishnan of Firstpost, Dr KC Chakrabarty, a former deputy governor of the RBI and a veteran public sector banker, had put the bad loans number of Indian banks at Rs 20 lakh crore.

As he had said:

“I’ll put the figure around Rs 20 lakh crore…One should include all troubled loans including reported bad loans, restructured assets, written off loans and bad loans that are not yet recognised.”

The trouble was not many people took Chakrabarty seriously at that point of time. Nevertheless, the Rs 20 lakh crore number doesn’t seem far-fetched at all. As mentioned earlier, the bad loans number as of March 31, 2020, stood at Rs 8,99,802 crore.

Between 2014-15 and 2019-20, the total bad loans written off by banks was Rs 8,77,856 crore. We are taking this particular time period simply because in mid 2015 the RBI launched an asset quality review and forced banks to recognise bad loans as bad loans. Up until then the banks had been using various tricks to kick the bad loans can down the road.

If we add, the bad loans as of March 2020 to bad loans written off between 2014-15 and 2019-20, we get Rs 17,77,658 crore. What does this number represent? It represents the total bad loans, the Indian banks have managed to accumulate between 2014-15 and 2019-20. And it is very close to the Rs 20 lakh crore number suggested by Chakrabarty.

Of course, this calculation does not take into account the loans which are bad loans but have not yet been recognised as bad loans. Former RBI Governor Urjit Patel in his book Overdraft—Saving the Indian Saver writes:

“In February 2020, ‘living dead’ borrowers in the commercial real-estate sector – under a familiar guise (‘a ghost from the past’, if you will) viz., ad hoc ‘restructuring’ – have been given a lifeline. It is estimated that over one-third of loans to builders are under moratorium.”

Professor Ananth Narayan of the S. P. Jain Institute of Management and Research, writing in the Mint in June 2020, said: “Banking NPA recognition remains incomplete… For a while now, RBI has allowed banks to postpone NPA recognition for some of the over Rs 8 lakh crore of MSME, MUDRA and commercial real estate loans.” The situation could only have worsened post the spread of the covid-pandemic.

If we take this into account, the bad loans of Indian banks over the last five years have amounted to much more than Rs 20 lakh crore. In that sense, Dr Chakrabarty has had the last laugh. As Chakrabarty had said in the Firstpost interview: “Unless this portion is recognised first, there will be no solution to the bad loan problem.”

Or to put it simply, how do you solve a problem without recognising that it exists.

10 Things Women Can Do to Manage Personal Finances Better in 2021

Aage aage wo chale peeche saari duniya
din na dekhe raat na dekhe peeche padi hai duniya
aur nahi koi aur nahi wo to hai rupaiya
gol gol chaand sa rupaiya
kaisa hai ye khwab sa rupaiya

— Visheshwar Sharma, Kalyanji Anandji, Kishore Kumar and Surendra Mohan, in Hiraasat.

Okay, the headline was clickbait.

But now that I have your attention I have a few important things to share. I make a living by writing regularly on economics and finance. But this isn’t how it always was.

For my first couple of years in journalism, I largely wrote on personal finance topics. It took me a couple of years to figure out that between the product sellers and the personal finance writers, the subject was made needlessly complicated.

The trick wasn’t to try and understand every new product/idea that hit the market, which is what personal finance pages in newspapers and personal finance websites and magazines cater to, because they need to fill up space, so that they can gather advertisements against that space. Of course, personal finance writers need to keep writing about newer things and same things in newer ways, to keep their jobs.

When it comes to companies selling personal finance products, they are largely in the business of raising money and not necessarily managing it well

Hence, what is more important is to understand the broader principles of the subject and then stick to them over a period of time.

In the last fifteen years I have ended up advising more women on personal finance issues than men. In my limited experience, women seem to be more interested in understanding the nuances, the men typically play know it all when it comes to personal finance.

In this piece, I will elaborate on principles I think every woman should follow when it comes to managing her money and personal finances. (In fact, most of these principles can be followed by men as well, but then they know it already).

If you aren’t following these principles, 2021 is just about here and now is as good a time to start as any.

Here we go:

1) Save for the sake of saving. This is a very simple principle but many women I have come across, just don’t get it. They want to save for their next holiday, the next diamond ring, the next home, the next car, the children who aren’t there yet, the next whatever

In fact, Morgan Housel makes this point beautifully in his recent book The Psychology of Money: “Only saving for a specific goal makes sense in a predictable world. But ours isn’t. Saving is a hedge against life’s inevitable ability to surprise the hell out of you at the worst possible moment.”

Like when the covid pandemic hit India in late March, people who had saved money for the sake of saving and had money in the bank account, were able to handle the situation in a much better way. If you lost your job and had money in the bank account you didn’t have to take on the first new job that came along. You could wait for something better.

As Housel puts it: “Savings without a spending goal gives you options and flexibility, the ability to wait and the opportunity to pounce. It gives you time to think. It lets you change course on your own terms.”

Further, if you save for the sake of saving and have money in the bank, you will be able to make the decisions, right or wrong, you want to make in life, and which might even mean not being pressurised by your family to get married to the next guy they discover on Shaadi.com.

If this isn’t important I don’t know what is. Hence, being financially independent is very very important and that can only happen if you save for the sake of saving.

In fact, as Housel puts it:

“We can leave aside rich, but independence has always been my personal financial goal. Chasing the highest returns or leveraging my assets to live the most luxurious life has little interest to me. Both look like games people do to impress their friends, and both have hidden risks. I mostly just want to wake up every day knowing my family and I can do whatever we want to do on our own terms. Every financial decision we make revolves around that goal.”

 

This should be the ultimate goal of saving and money in the bank account should not be a signalling effect for the society at large.

2) If you work for a company, be aware of how your salary is structured. Too many companies use the cost to company (CTC) approach to take their employees for a ride. If you don’t understand the items that make up your salary, ask around, Google, do whatever is needed to understand them. I come across way too many women who work very hard on their job, but have no idea of their salary structure (This is not to even remotely suggest that men have it all figured out). If you have ESOPs as a part of your CTC, know when they will vest and when you can sell them. The same when it comes to the soft loans that you can take from the company. It’s slightly difficult to understand this, but it’s not rocket science.

3)  I think this is the most important point that I will make in this piece. Way too many women I know, leave the managing of their finances to their fathers (a horrible horrible idea because they will make you buy LIC policies), spouses (might end up taking too much risk than you prefer) or boyfriends (you might just breakup, who knows).

I mean if you work so hard to earn the money that you do, why not spend some time to figure out how to manage it well. As I said earlier, money in the bank, helps us make the decisions that we want to. If you can spend a week planning a ten-day holiday that you take during the course of a year, I am sure you can spend a few days understanding how to manage the money you work so hard to earn through the year.

4) This is a tricky point and hasn’t gone down too well with most women I have shared it with. Don’t have all your money in joint bank accounts with your spouse (works for the husbands as well). I am not remotely trying to suggest that if things don’t work out between you guys, he will cheat you on the money front (he may, but then who am I to suggest that). But untangling these things can be quite a pain.

So, it makes sense to have one joint account for the shared expenses, but beyond that have your money in your bank account. (Believe me, if things don’t work out, you are going to thank me forever for this).

5) This is another tricky point. If your father/husband/boyfriend/brother manages your money, be aware of where that money is parked. Be aware of the loans your husband has taken on. Again, I am saying this from experience. Many women just tend to be totally unaware on this front and then one day when the father dies, the husband leaves or the boyfriend breaks up, the reality of the situation suddenly hits them. Just getting a bank account shut after someone’s death can be a huge pain, if you are unaware of the details.

6) Many women don’t like the idea of managing their money because they think there is a lot of maths involved in it (Again, this is not to suggest that men understand the maths). It’s just basic fifth standard maths, which is not difficult to understand at all.

7) Make sure that you are making full use of the tax deductions available to you as a married couple. (Again, the husband may have no idea, doesn’t mean you also don’t).

8) Diamond jewellery looks great on you and please wear it by all means but don’t go about buying diamonds all the time. It’s a bad idea. Selling diamonds can be a difficult business in case of an emergency. (Don’t believe me, just Google).

9) If you are starting out and don’t know how to go about managing your money, just do a recurring deposit with a bank to start with. It won’t give you a great return but some money will start accumulating and some money is better than no money. Also, don’t buy an insurance policy unless your family is dependent on you or you have outstanding liabilities.

10) And finally, since we are about 2021, do remember that sometimes return of capital is more important than return on capital. 2021 will be that kind of year. Manage your money accordingly.

To conclude, these points go beyond doing the basic things, like investing regularly over a long period of time to ensure that you end up making decent returns and not necessarily the highest returns, not having all your investments in one asset class (diversification), buying a house to live in and thinking very carefully about buying another house, not over-leveraging yourself and not making any investment decisions which will keep you awake at night. Nothing is worth ruining a good night’s sleep.