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Old 17th September 2010, 14:03   #241
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Originally Posted by f1fan View Post
I too have been following this black hole concept but had the following query:
What do you do with the money in the account. Do you make a FD/RD with it. For me, it is just lying in that account and as we all know interest rate for cash in SB account is very less, hence wanted ideas to maximize returns from that account.
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Originally Posted by ampere View Post
Any investment you can plan out of that account. FD, RD, LIC Premium etc.
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Originally Posted by TracerBullet View Post
f1fan, you can adopt what ampere has suggested except for LIC premium.

ampere, that is exactly what I call it too

I have always treated insurance premiums as part of my regular expenses. You can put the accumulated money in a FD. My benchmark is 50k. Once I have 50k in the black hole account, I put it in a 5 year FD or MF(long term).

The amount of FD should not be too big. In case of emergency, you should be able to encash them without disturbing the rest. For instance, let's say you have 10 FDs of 50k each and you need around 1.5 lakhs for some emergency. That way you will end up encashing only 3 FDs. If your benchmark (which can differ from person to person) is more - say 1 lakh, you might have to break 2 FDs of 1 lakh each. This was just an example. Hope you get the drift.
Same here too. I pay LIC premiums from my Salary account and not from my black hole account. I do make FD's from my black-hole account but wanted to know whether there is something better

BTW Canara Bank (dont know whether other backs have that) has the option in which you can break a piece of your FD and continue with the rest. For e.g. if you have a FD for 5L and need 1L then you can withdraw 1L from your FD and it will then continue for the remaining period with its existing interest rate with a principal amount of 4L

Last edited by f1fan : 17th September 2010 at 14:08.
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Old 17th September 2010, 14:12   #242
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Let me know if you need any help on calculations
Thanks mate. Will PM you soon. Will definitely need some help on this.

Me too having a Account with SBI plainly for saving purposes. I somehow have more confidence in SBI. The others are after all private players.
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Old 17th September 2010, 14:31   #243
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Originally Posted by ampere View Post
I never said dont hold another account in the same bank. You can do so. The idea is to make that money in-accessable for spending. I already explained earlier my reasons for not creating a Black-Hole account in a MNC bank, and why prefer SBI.
In a way I have this "Black hole" account as a result of Max gain home loan from SBI. This account is actually a current account and shows the principal balance of my home loan. Any additional income directly goes to this account and the account balance is used to calculate the monthly loan interest part of the EMI. Periodically, say once in 6 months, I write to SBI to use the amount as lumpsum pre payment towards Home loan principal for which I dont pay any pre-payment charges too. So this actually clears my Principal and interest faster that normal home loans. In two years I have already prepaid almost 40% of my loan.
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Old 17th September 2010, 14:39   #244
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@ghodlur - What are the advantages of pre-payment vis-a-vis keeping the money lying in the OD account? I too have Max gain but I don't see any advantage of pre-payment actually.
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Old 17th September 2010, 14:51   #245
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Originally Posted by kalpeshc View Post
@ghodlur - What are the advantages of pre-payment vis-a-vis keeping the money lying in the OD account? I too have Max gain but I don't see any advantage of pre-payment actually.
Your OD account is like a currect account, you can deposit and withdraw money from it as per needs. Now you deposit lets say 20K at the start of the month and withdraw 5K mid month. So In effect the interest is calculated on loan balance-15K additional available in your account. This in turn reduced the Interest computed for the month increasing the principal outgo of your EMI. Therefore loan amount reduces fast. Now say you accumulate around 1L over 5 months by regularly depositing 20K pm without any withdrawal. You can ask SBI to clear the principal by 1L and this will show in your OD account. You can start over again for the next six months. This way the interest outgo is reduced as well as the principal.

I hope I have been able to make it clear.
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Old 17th September 2010, 15:35   #246
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@RVMohankumar
Your long post will definitely be helpful to people who read it to realise the importance of a balanced outlook in life with regards to money and the necessity of saving money.

Like you I too have burnt my hands at the stock market. I started working in 2003 & in 2007 I had all my saving in stock market which included savings from 2 year onsite stint. In early 2008 the market crashed and I lost a huge huge huge amount of money (in 7 figures). I was shattered. My family, friends & colleagues were shocked to see my state. I used to sit like a zoombie in office just looking at my investments go south. My family helped me a lot to recover from that loss.

The good part was that a major portion of the money I lost was what I had earned as profits over the 4 years. So I consoled myself by thinking that the money was easy come and easy go. Though it was not easy to earn that money and my hardwork of 4 years had gone down the drain.

In late 2007 I was also looking to purchase a house and with the crash my budget also crashed. I was left with lesser money and had to now look at houses which were smaller than what I had initially planned. In mid 2008 I purchased a house in NCR with a Home loan & some monetary help from my parents. Home Loan is the only EMI pay. I have also LIC & have a PPF account since 2004. These are all the liabilities I have. Though I still play the stock market I dont invest more than 2L. After all that deductions I am not left with much to save but whatever is left I have been accumalating for some impending expenses.

I would admit here that I am scared of EMIs. My home loan takes a huge chunk out of my salary (almost 40%). I had a bad experience with Manhattan credit card in 2005 after which I don't use credit cards. I have only 1 credit card which I carry with me only when I tavel abroad. There too I try not to use it. Its more of a safety device to carry around. Rest of the times it lies at my home unused. Till date I've not bought a new car as I fear that the EMI will tighten the deduction noose on my neck.

Always keep some liquid cash with you for emergencies. God forbid, but if you need it for some health issues, casualty or any other kind of emergency then it would be helpful.

Coming from a very humble background I have always valued money in life. Looking back I think it was very naive of me to put all the eggs in one basket. With the crash in markets I also crashed. This is the single most important piece of advice I can give to you. Dont invest in only one domain. Be it Stock market, Real Estate, Mutual funds or anything else. Distribute your money. It is more headache but it will be beneficial in the long run.

@ampere
"Black-Hole account" - thats a good term. Instead of having this account in a nationalized back I would suggest we open a PPF account. It provides 8% compund interest which cannot be matched by any bank. And it is a real black hole account. Plus tax savings. What a coincidence, that just this noon I deposited 10K in my PPF account and I came across this thread.

I think it is a great way to save money with a minimum pay in Rs 500/- per year. Most of us are in private sector jobs. It makes sense to make investments in PF accounts cos when retirement comes there will be no steady source of income. However, don't put all your savings in a PPF account, as you cannot withdraw money from it freely until it is 15 years old. My plan is to invest a small amount of money every year in the PPF account and once it is 15 years old it is as good as a savings account, when I can move most of my money to this account.

I urge each and everyone to be careful with money. Not to the extent where it becomes the sole purpose of your life but be very careful with it. Most of us earn it the hard way and we should respect it. It is a means of living a good life, makes you able to help others, fulfill your dreams and aspirations and may bring hapiness and joy in your or someone else's life.

My dad often says one statement "Jo paise ki kadr nahi karta, paisa uski kadr nahi karta"
["If you do not value money, money will not value you"]
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Old 17th September 2010, 15:37   #247
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Quote:
Originally Posted by ghodlur View Post
In a way I have this "Black hole" account as a result of Max gain home loan from SBI. This account is actually a current account and shows the principal balance of my home loan. Any additional income directly goes to this account and the account balance is used to calculate the monthly loan interest part of the EMI. Periodically, say once in 6 months, I write to SBI to use the amount as lumpsum pre payment towards Home loan principal for which I dont pay any pre-payment charges too. So this actually clears my Principal and interest faster that normal home loans. In two years I have already prepaid almost 40% of my loan.
Yes I was aware of that. I know couple of folks who actually have such a mode of banking.

And yes SBI online has really become very good. You may get starting trouble sometimes (sometimes not), but then its real smooth sailing.

EDIT: @ISP, I just saw your post. I do have a PPF and contribute to it. A true Black-Hole Indeed!

Last edited by ampere : 17th September 2010 at 15:41.
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Old 17th September 2010, 15:51   #248
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My god, this thread is a real eyeopener.

Thanks for all your inputs guys, Started to think about planing my future
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Old 17th September 2010, 16:32   #249
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Originally Posted by lsp View Post
Instead of having this account in a nationalized back I would suggest we open a PPF account. It provides 8% compund interest which cannot be matched by any bank. And it is a real black hole account. Plus tax savings.
Tax savings is in 2 ways. One is the deduction you get for the amount in your returns.
2nd is that unlike any most other interests in India, PPF Interest is not taxable. The interest you get on your savings acct is taxable. The interest you get in FDs is taxable. Interest on Post Office Schemes, Corporate Bonds, practically everything else is taxable.

But PPF Interest is not taxable.


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However, don't put all your savings in a PPF account,
You can only put a maximum of 70000 Rs per year in a PPF account.
If you want to put more, you can open a PPF account in your spouse's name, I think. You can put 70000 more there.

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My plan is to invest a small amount of money every year in the PPF account and once it is 15 years old it is as good as a savings account, when I can move most of my money to this account.
I am not sure if this is fully true. Let's say you start in year 2000. In year 2015, the money you put in 2000 can be removed, but those put in in 2001-2014 cannot be. At least that's what I think, not sure about this.

Last edited by carboy : 17th September 2010 at 16:40.
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Old 17th September 2010, 16:43   #250
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Originally Posted by lsp View Post
I think it is a great way to save money with a minimum pay in Rs 500/- per year. Most of us are in private sector jobs. It makes sense to make investments in PF accounts cos when retirement comes there will be no steady source of income. However, don't put all your savings in a PPF account, as you cannot withdraw money from it freely until it is 15 years old. My plan is to invest a small amount of money every year in the PPF account and once it is 15 years old it is as good as a savings account, when I can move most of my money to this account.
That is not correct. After fifteen years, you can either close the account or extend it for five years. It can be extended thereafter every five years, but the rules of contribution will remain unchanged. No way you can treat it as a savings account.
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Old 17th September 2010, 16:43   #251
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Originally Posted by ghodlur View Post
Your OD account is like a currect account, you can deposit and withdraw money from it as per needs. Now you deposit lets say 20K at the start of the month and withdraw 5K mid month. So In effect the interest is calculated on loan balance-15K additional available in your account. This in turn reduced the Interest computed for the month increasing the principal outgo of your EMI. Therefore loan amount reduces fast. Now say you accumulate around 1L over 5 months by regularly depositing 20K pm without any withdrawal. You can ask SBI to clear the principal by 1L and this will show in your OD account. You can start over again for the next six months. This way the interest outgo is reduced as well as the principal.

I hope I have been able to make it clear.
Yes. I totally agree with you. My question was, why should I clear the principal by 1L by prepaying when I can get the same benefit (reduced interest) by just keeping the 1L in my OD account. If I have an emergency I can withdraw that amount. So you have liquidity.

What you are doing is prepaying 1L every 6 months (example) and what I am doing is to NOT prepay but keep 1L accumulated in the account. So after 3 year, you've reduced your principal by 6L and are NOT paying any interest on it. At the same time I've accumulated 6L and I too am not paying any interest on it. But I have an advantage of withdrawing that 6L if I need the same right?
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Old 17th September 2010, 17:44   #252
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If one has surplus cash, I feel it is better to invest in MFs instead of putting it in a FD.

Let me take an illustration to explain. Let's say the home loan is at an interest of 9%. If you have surplus cash, you can invest that in a MF (MF investments are subject to market risks ) which will give returns better than FD. Typically a MF might give you 15% return, then it is cheaper to have a home loan and invest in a MF. You will be able to repay your home loan faster than just pre-paying every 6 months.

Let me know if I have to elaborate. Also, can someone point out if my understanding is correct?
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Old 17th September 2010, 19:32   #253
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Let's say the home loan is at an interest of 9%. If you have surplus cash, you can invest that in a MF (MF investments are subject to market risks ) which will give returns better than FD. Typically a MF might give you 15% return, then it is cheaper to have a home loan and invest in a MF.
This is really bad advice, IMHO.

A home loan prepayment is a guaranteed 10% (+/-) return. No other investment will give you a guaranteed 10%.

If you had purchased Rs. 1000 worth of HDFC Top 200 Fund (G) - [A five star fund] on 1th Jan 2008, it would have been worth Rs. 1060 on 1st June 2010 (2.5 years).
If you had put that Rs.1000 in a FD on the same date, after 2.5 years, Rs 1191.

So to say a typiclly a MF might give you a 15% return is not correct.

I am not saying here that FDs are better than MFs. I am just refuting that the claim the MFs are guaranteed better than FDs or prepayment of loan.

At the same time, it's stupid not to invest in the stock market because typically the return you get in debt instruments barely outpaces the inflation (or not).
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Old 17th September 2010, 19:35   #254
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My replies in bold.

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Originally Posted by carboy View Post
Tax savings is in 2 ways. One is the deduction you get for the amount in your returns.
2nd is that unlike any most other interests in India, PPF Interest is not taxable. The interest you get on your savings acct is taxable. The interest you get in FDs is taxable. Interest on Post Office Schemes, Corporate Bonds, practically everything else is taxable.

But PPF Interest is not taxable.

Yes I forgot to mention that

You can only put a maximum of 70000 Rs per year in a PPF account.
If you want to put more, you can open a PPF account in your spouse's name, I think. You can put 70000 more there.

True. 70000 is the upper limit. What I meant to say was that dont put all your savings in the PPF account (in your name or family's name) as you cannot withdraw it if need be. Keep some liquid cash or in some form which is easily retrievable.

I am not sure if this is fully true. Let's say you start in year 2000. In year 2015, the money you put in 2000 can be removed, but those put in in 2001-2014 cannot be. At least that's what I think, not sure about this.
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That is not correct. After fifteen years, you can either close the account or extend it for five years. It can be extended thereafter every five years, but the rules of contribution will remain unchanged. No way you can treat it as a savings account.
It seems I am misinformed about the 15 year rule for the PPF. I will check it out.

One thing is that you are allowed to do a withdrawal in the 7th year the amount of which is based on some calculations. eg. If I have 1L in my PPF account I am allowed to withdraw approx 18000 from it. Not sure about the calculations.

Below image is from the post office passbook. It mentions about some other options apart from PPF.
Are most of us living on the edge? time to plan up things for the future.-ppf.jpg
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Old 17th September 2010, 19:45   #255
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I would admit here that I am scared of EMIs.
Count me in buddy; But trust me, I'm so sorry to hear your experiences Lalit. I never expected to hear this sorrow on your back when I read your travelogues!!! Sounds silly I know, but still...just wanted to convey.

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Instead of having this account in a nationalized back I would suggest we open a PPF account. It provides 8% compund interest which cannot be matched by any bank.
One small correction, I guess its 9% now

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That is not correct...No way you can treat it as a savings account.
Right & I don't even know how easy or difficult it is to obtain that money after 15 years & how many peoples need to be paid baksheesh!!!

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If one has surplus cash, I feel it is better to invest in MFs instead of putting it in a FD.
Well it depends; I can keep accumulating the money in form of FD's & make an investment at the end of the year too. So it depends on the purpose.

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Typically a MF might give you 15% return, then it is cheaper to have a home loan and invest in a MF. You will be able to repay your home loan faster than just pre-paying every 6 months.
Just would like to add a point here; a MF can be return 15% return, but there's no guarantee that it cannot go less than 6% right? Also is it possible to close an MF in 6 months like FD? I'm not defending FD's, but trying to say that it depends on how the money is to be used. Needs some thought that's all.
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