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Rising prices and reduced incomes take a toll on your finances. Here’s how to tackle it

Until last year, Bangalore-based Rochel Robert and her husband were staying in a three-bedroom house. With a baby on the way, the couple decided it was best to start cutting expenses. "We had taken a three-bedroom since the rent was not that much higher than for a two-bedroom house. But we knew that expenses would increase once we had our baby," says Robert, who works in the software industry. So, they’ve shifted to a two-bedroom unit. Apart from daily household expenses, the couple knew they’d have to spend a lot for daycare, since both were working. With expenses rising rapidly but salaries not keeping up, the couple have also put on hold their plans to buy a house.

However, Rochel has invested in an insurance policy in her son’s name and begun keeping aside a small amount every month for emergency purposes. "When I started working, I had bought one insurance policy. Now, I have started another one. This forced saving will help me in the long run," she reasons. Hit by costs Households across India are being forced to cut living expenses, in like situations. Over recent years, the prices of goods have risen across the board, with annual consumer price inflation close to 10 per cent. On the other hand, incomes are moving slowly.

Base salaries in the information technology sector have barely risen by four per cent yearly; it’s the same for most sectors. Says Suresh Sadagopan of Ladder7 Financial Advisory Services, "It is a fact that prices have gone up and are putting a burden on families. This is a big stress for households." Another sign of the tightening in personal budgets is rising spending through credit cards. Overall spending through cards have increased; also, 17 per cent of individuals are preferring to roll over their loans as they don’t have the money to make full payment. Credit card rollovers cost 42 per cent in a year.

All this squeeze means a lower investible surplus each month. Sudden expenses like your child needing a new tablet phone or your car needing a cooling system can further derail your savings plan. What to do In this situation, balancing the reality of rising expenses and a limited income with the need to have a sound savings plan for your goal requires some tough choices. The starting point is to assess expenses and cut unnecessary ones. Some of the things that rob you of the propensity to save are entertainment and leisure expenses; one tends to ignore these, for being small sums. Yet, on a monthly basis, these could add up to a lot. Paul D’Souza of Cuzinns Investment Services says the trick is to reduce expenses and not stop spending all together.

For instance, if you are used to eating out every weekend, reduce it to two weekends in the month. And, assuming you save Rs 2,000 by doing this, you can even increase your weekend dinner’s budget by Rs 1,000 (Rs 500 per day) and yet save Rs 1,000. "Families need to first list expenses and differentiate between the necessary one and what they can curtail. Once they do that, cutting on expenses will be easier," D’Souza says. For other regular expenses, there’s not much you can do. Says Sadagopan: "There is nothing much a family can do about essential expenses like monthly groceries or children’s school fees. People are shopping more during weekly bazaars for vegetables where the prices are at wholesale rates." The next thing is to cut back on credit card loans. If you have dues of Rs 1 lakh on your credit card and you roll this over, a back-of-the envelope calculation suggests you could be paying nearly Rs 40,000 as interest.

And, Rs 1 lakh invested in a fixed deposit (FD) would earn just Rs 10,000. In other words, you have a net interest outflow of Rs 30,000 annually. In this case, break your FD and first pay off the credit card dues. Another way is by financial adjustments to regular expenses. For instance, if making higher interest payments on your home loan, you could shift to a cheaper financier. Even a one per cent cut in your home loan could save you Rs 8.26 lakh in interest on a 20-year loan of Rs 50 lakh. The next thing is to cut on the number of savings accounts. Says Rashmi Roddam, director, Wealth Rays Group, "You can also save on the quarterly penalty charges for not maintaining the minimum balance in your account. Closing inactive savings accounts in various banks and investing all the money in one place will give better returns."

In case of an emergency, take a loan on your insurance policy, which comes at a lower interest rate, instead of personal loans which cost a lot. The extra savings on the interest you would have paid can be invested in a Systematic Investment Plan or recurring deposit, handy in times of need. Another way to save money is to pay insurance premium through your credit card, rather than through your bank account directly. However, ensure you pay the credit card dues fully, to avoid the high interest on any dues. This will give you 30 to 45 days of extra grace period, based on your credit card statement. One can also plan recurring expenses such as school fees so as to coincide with a maturing FD.

This way, your savings will earn you a higher return. "If you are earning seven per cent return on your investment but paying 10 per cent on your home loan, it makes sense to partly prepay your home loan," adds Roddam. Even small steps to cut expenses and stretch your finances can add a sizable sum to your savings. For instance, every extra Rs 1,000 saved per month adds to a tidy sum of Rs 34.94 lakh over 30 years.