How to Solve Your Potential Financial Problems by being Proactive?

Most people face financial problems at some point of time or the other, but not many know how to solve financial problems without getting into a vicious cycle of worry. Most people in the middle class segment are aware of day to day challenges with respect to the price increase in essential commodities such as fuel (petrol), vegetables, cooking oil, milk, rice, etc., but do not know how to solve financial problems by early planning.

In addition to these there are challenges with respect to savings and investments, choice of products, lack of insurance, high debts, etc. The most challenging are those related to loans or debt which becomes difficult to repay at some point.

But the whole idea of talking about financial problems is to implement and follow the good old saying – “Prevention is better than cure”. So solve financial problems by being proactive. We will see how to solve current issues and also learn how to prevent recurrence of the same issues in future.

No “One Size Fit All” Solutions

There is no “one size fit all” solutions to solve financial problems. I’m just providing some broad guidelines based on what I have learnt and experienced over the years. However, you can have several alternate solutions that can be equally or more effective to solve financial problems in your life.

We are talking about real life problem so there is no single formula that can apply to all. We will focus our attention on loans or debts or credit facilities, where most people face issues.

Inability to pay Credit Card Dues

Lets say you spent more on your credit card and was unable to pay it on time. The balance due is not paid and instead postponed by just paying the minimum due every month.

Lets say you have a bill for Rs.1.2 lakhs (which is above your credit limit of Rs.1 lakh). Assume the minimum balance to be paid is Rs.10,000.

Solution

The best solution is to pay off all your dues as soon as you can because credit cards charge 3.5% to 4.0% every month (annually above 40%), which is unaffordable by any standard.
Gradual Payments: If you are not able to pay a lakh or more in lumpsum, probably you can pay Rs.15,000 –Rs.20,000 every month. This means you need to cut down all your discretionary expenses like movies, eating out, gadgets, entertainment, etc.
Stop Gap Solution: If your situation is extreme you can pay the minimum due (Rs.10,000) and sort of escape from the issue this month for the time being. When you receive your salary or sell some assets in next one month you can start making gradual payments as mentioned above.
Converting card dues in to personal loan: You can visit the bank or the bank’s contact person and explain your crisis situation and show the willingness to pay. In this case the bank will try to covert the card dues in to a personal loan for which the interest rate and EMIs would be more affordable. But remember, you still need to pay back and maintain some financial discipline.

Proactive Approach

Don’t buy something you can’t afford even if you are paying by card. Ofcourse there are few exceptions, where you need to ensure that you don’t exceed your credit limit.
Pay your credit card fully and avoid rolling over your dues.
Never cross your credit limit. Infact be a little cautious if your total spending is more than 50% of your credit limit. Although using more credit might be nice it can be a slow poison.

Personal Loan: Inability to pay the installments

Solution

In this case you don’t have much room for a remedy unless you have some assets or cash or income to rely on

Sale of Other Assets: You can sell some asset such as gold, stocks, redeem deposits, a vehicle, gadgets, furniture, etc to pay off debts
You can borrow from family folks or friends
Bad situation or Unable to pay: In this case you can approach a counselor. For instance organizations such as Disha Financial Counselling (Disha Financial) provide help in this matter.
The last resort if you are in crisis is to visit the bank manager and explain your situation. Probably, they might work out smaller payments or provide additional time. In fact the counselling organization also can help you on how to approach the bank/financier.

Proactive Approach

Avoid taking personal loans in the first place, unless its an unavoidable emergency
Its expensive and the bank/financier can haunt you badly because they don’t have a security or collateral to cover their losses.

Home Loan: Inability to pay the equated monthly installments

Solution(s)

In case of a home loan you don’t have to worry because unlike personal loans or credit cards the bank still has access to property which can be invoked for non-payment.

But this can be an emotionally tough phase because you lose your dream home if you don’t pay up. There are a few ways to save your home if you are willing to take initiative to increase your income and reduce expenses. Some of them are below:-

Asset Sale: People who have other assets such as stocks, gold, furniture, vehicles can think of selling some of those to meet the home loan payments. If you have debentures, deposits or money tied up in some sources you can redeem those funds now.
You can rent a portion of your property to generate some income. For instance if you are owning a house with two units – one unit on the ground floor and one (small) unit on the first floor, then you can rent out the first floor unit to generate income.
For people who don’t have a bigger home, the best option is to have a paying guest facility to generate some income. This is quite common in most metro cities in India where students and young professionals avail this facility.
Try to reduce your monthly expenses so that your home can save your home. You can communicate this to all family folks so they pitch in with their ideas, source of funds/income, etc.
Borrow from a friend or close family member and ensure that you repay them after a few months.
Inspite of all efforts if you are not able to pay off the loan, you should take some time to consult with the bank manager about it. In this case you can put an advertisement for sale and do the necessary foreclosure procedures. Remember, since this is a secured loan your property will be sold and the proceeds will be adjusted against the loan outstanding.
If there is any amount remaining after settling the loan dues, the bank will pay you the sum. So there is nothing much to worry since the property will protect you from extreme crisis.
In some cases banks provide additional time or easier repayments. For instance this will be at the discretion of the Manger who might consider cases like loss of employment, health emergencies, etc., where they see that the borrower can pay once he is back to work and normalcy. If this doesn’t work, the last resort is to sell property and foreclose the loan.

Proactive Approach

Avoid taking home loan when you can’t afford the EMIs. Sometimes scaling down your budget can be helpful. For instance, say you have a choice between a flat worth Rs.30 lakhs in the city and Rs.20 lakhs a few kilometers away, and all other factors are more or less equal. But the real issue is the EMI which is Rs.30.000 in the first case, while its just Rs.20,000 in the second case. In this case the second flat is better assuming you are okay with the distance.
Its expensive and the bank/financier can haunt you badly because they don’t have a security or collateral to cover their losses.
Don’t stretch too much on lavish furnishing, bath fittings, etc. – instead focus on what is functionally useful in terms of utility, durability and costs.
Ensure that your bank account has atleast two months’ EMI equivalent at all times. This will ensure that your EMI cheque or ECS payment will not face an issue if your salary payment gets delayed.
In good times when you may have surplus funds – for example when you get access to PF funds or when you get a bonus or additional earnings abroad. During these times when you have no other investment option, try to pre-pay a part of your loan to reduce your loan term or the EMI. Today this might seem less important, but this step can help you a great deal in future if you face a crisis.

In many cases I mentioned ‘sale of other assets’ as a solution/remedy. This is not recommended but it’s the only option for you to solve the problem in hand. If you are selling all your assets your situation can be bad. However, if you are selling only a small portion – say just 10% of your stock portfolio – this may affect your portfolio dramatically, but this can be rebuilt gradually overtime.

Conclusion – Solve Financial Problems

Preparation is the Key! Being aware of financial problems and prepared for those situations will help you minimize or eliminate crisis situations involving tremendous consumption of your time, energy and money.

This whole cycle of worry, losses, etc. can be eliminated if you are able to prevent the problem from expanding and eating in to your resources. Some of the ideas and suggestions indicated above will help you solve financial problems and achieve a stress-free life.

Feel free to add your comments or ideas in the comments section below, which will be helpful for several readers. I look forward to hearing your thoughts and unique ideas.