Hitting your debts - DEBT to INCOME RATIO

DISCLAIMER: This blog does not hold any responsibility of any events in which individuals lose their returns or investments under any criteria. This blog is intended to educate the individuals and create awareness on investments. We provide noteworthy and promoting financial products. Stocks and Mutual fund investments are subject to market risks. Therefore, it is prime responsibility of the end user to read each detail of the financial product related scheme documents before investing into anything. 

If you are ready with your plans, we now need to finally fix and stick to a strategy. Life is all about strategies and the strategy we follow makes a change. Who knows if a small change can project a large difference?

Now it's time for you to revise your financial plan. Before this, I want to let you know a crucial point. Many of you might have a surprisingly high debt when compared to your assets. The fact is that, according to CNBC, In second quarter of 2018 global debt-to-GDP ratio is 316%. And when I participated in an online course, 75% of financial assets are debts and the remaining 25% are equities. Hence, it is not quite hysterical if you are carried in debt. And those who are not holding a column for it, I'd like to revise to know if you have any debts that can be inherited.
It is quite exasperating to clear debts, as the liability caused by them is always greater than risk free guaranteed returns (I mean to say returns on deposits). As we did take the example of Sambhrama, who acquires privileged whopping payslips but could not make an efficient financial strategy to her comforts. She can actually hit her expenses to 50% and make herself quite comfortable. But it is not quite advisable to make the debt at margin of 50% of her income making 50% DTI.

DEBT TO INCOME RATIO.

Every bank or financial body asks for income certificates for at least two years or income tax returns to lend huge amount of loans. It is evident that it estimates the credit performance of the customer but not assuming a secure payback. How does a banker can estimate the performance of an individual based on his payslips. These payslips determine something called DTI or Debt to Income ratio.
Debt to Income ratio is the ratio of your debt to your income. For example if sambhrama is receiving a monthly payslip of Rs. 50k INR, and she settles Rs.10K INR in her debts she is having 20 DTI. It is one of the most important factor that determines the quality of life. A person holding 40 DTI is predicted to have moderate quality of life.

In general, these DTI guidelines are close to what lenders will assume:

20% or less is generally considered excellent.
20% — 36% is a good ratio and will most likely not be a cause for concern.
36% — 40% starts to make you a questionable candidate and lenders may need an explanation of why your DTI is so high.
40% or higher is a huge “no-no.” This is usually a deal breaker for the majority of lenders.

It is also important to note that credit score is different from the DTI. Credit score defines the performance of an individual to clear his dues which is the function of his income and his past clearances. It has nothing to do with the current debts. However, one can always assess his performance through debt to credit ratio.

When you apply for a credit card, you’re given a certain amount of credit limit. This is the credit portion of this ratio. As you spend on this card, drawing out a balance, you go into debt to the credit card issuer. This balance is the “debt” portion of your debt-to-credit ratio. If you owe Rs.100 on a card with a Rs.1,000 limit, you have a 10% debt-to-credit ratio on that card.

It is time for readjusting the debt plan and roll the strategy. It is important to plan a strategy in which one should adjust his debt payments below 40%, whenever or wherever it's applicable.

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First innings of your investments

DISCLAIMER: This blog does not hold any responsibility of any events in which  individuals loose their returns or investments under any criteria. This blog is intended to educate the individuals and create awareness on investments. We provide noteworthy and promoting financial products. Stocks and Mutual fund investments are subject to market risks. Therefore it is prime responsibility of the end user to read each detail of the financial product related scheme documents before investing into anything. 

In the last friday, it was just a brief about this blog and an initial summary of how this blog operates. Before we start our first innings of investment, we should know what is an investment. Firstly we should know the basics of investment. Wikipedia says;

"to invest is to distribute money in the expectation of some benefit in the future"

Therefore it is important to note that investments are entities that has basic characteristic feature of benefit. Unfortunately, risk is also another characteristic feature of investments, which is an exact clash for benefit. These two define the most important aspect of the investment called Returns. Wikipedia states that;

"Investors generally expect higher returns from riskier investments. When we make a low risk investment, the return is also generally low"

Return is an outcome of investment characterized by benefit or risk. Therefore before investing it is important to estimate the benefit and risk of each investment and then take a leap. Investments with low risk and high returns are ideal investment options. However when compared with the returns of more riskier investments, these investments are low performing entities. 

The reason to expect some benefit out of this investments are to fight the inflation. As we discussed on the other day, a product worth 10 INR is a product worth 90 INR within a decade. Therefore the inflation is now  0.8. (However coming to the actual approach of calculating the inflation we come through a different process and lot of variables are involved. Since it is out of scope we are actually concentrating on the actual topic). Therefore one needs to plan accordingly his investments to meet the demands of inflation.

The best examples of low risk and moderate benefit investments are 

i) Fixed Deposits

ii) Provident funds

iii)  Recurring Deposits 

iv) Savings etc...

Most of the government led financial schemes are moderately returned investments with an annual rate of return of 7pc. An investor, therefore expects a minimum of 8pc return while he is investing upon something. The risk is approximately zero until unless one may get into something like Krushi Bank. Otherwise, it is the most affordable investing option as it requires no knowledge to very less knowledge on investing. However there are investing options with low risk and high returns. These investing options are expensive and not affordable to normal investor. The best examples of these investments would be;

i) Real estate

ii) Gold, Silver commodities

iii) Petrochemical commodities etc....

To start your innings into investment, it is therefore very important to organize your income. It is very essential to plan your needs and costs. Let me putforth through a story,

Sambhrama is an employee in excell investing solutions. She receives a pay check of 90k per month and she is entitled for 12lakh gross annual income. She needs to pay the loan for education which she did to study MS in United States which is now 20 lakhs. This loan incurs an annual interest of 10 pc. Therefore she created a 10 year plan in which she calculated amount as follows;

gross salary = 12 LPA

Gross salary for 10 years = 120Lakh INR

Needs - Car, Home, furniture, daily expenses, debt,

 With an annual interest of 10 pc the 40 lakhs will be compounded to  51 Lakhs in ten years. Therefore the amount residing with her will be 120-51 = 69 Lakhs INR. Out of 69 lakhs she may keep 50 percent to her expenses which would be 39.5 lakhs, 10 percent savings which would be 6.9 lakhs and the rest 22.6 laks are actually meant for her Car, Home and furniture. She might afford a car and some furniture but definitely not home. Which conveys that she is not really into proper planning. Another plan would be clearing the debt within five years which means, she should then control her expenses for first five years. 

Definitely you might not need this high profile salary payslip to plan your needs, but definitely something to plan the start. However we did not include hikes or demotion during this 10 year term. Therefore the risk on planning increases with duration. We need to invest appropriately over intelligent and affordable options available to keep check on our financial targets.

One of the most affordable and intelligent option available is investing on tobacco in countries like Australia, where there is an annual hike on tobacco products of about 12pc. Therefore does that mean to hold some Australian tobacco for an year and making profits out of it for the next year.  So this is called trading. 

Hello Investor

Hi investor,

We are group of voluntary people in India planned to reach to all those people like you who seek financial education. Our expertise includes investments, insurance, savings, financial planning strategies, Liquid asstes, fixed assets. There'll be a new post on every monday and this will be soon released as podcast in all of the freesourcing podcast networks. We'll be showing you a wide-range of financial product available outside, evolving market trends, tracking top listing fintech products and all the related topics.
India at GDP $ 2.6 lakh crore , is at very high potential 6.6 percent annual change while compared to USA with only 2.5% change in their GDP. However india is far behind US in total GDP which is $ 19.39 lakh crore USD. Besides with growing inflation which is 3.1 as of 2017.

NOTE:All the above figures are references from wikipedia

But why do people relate this to the economy of the country. And what role has it to play with each individual of the country. Fundementally we have to go the basics of the GDP. Gross Domestic product as defined by wiki is

"Gross domestic product (GDP) is a monetary measure of the market value of all the final goods and services produced in a period of time, often annually or quarterly."

So in a phrase GDP is net worth of all products and services in an economy which includes the total asset value of reliance, tata, adani, birla and every spick and span. It's no big deal for a country like india populated with 133.92 crores to have a net GDP of $ 2.6 lakh crore.  Which distributes approximately Rs.1940 to each individual. So let us say I kept the retained Rs.1940 now and I did check the same in 10 years from now. Now the sad news is the value of 1940 is changed. Which is called inflation rate.

Therefore being an investor, we need these both terms to invest in markets. On the go we will be getting through various topics and interesting facts and figures, also we'll be updating you the emerging market trends.