Ensure EMI is below 40% of monthly income

More than half of my salary goes towards paying my monthly EMIs. This is something we hear quite often. Young professionals are finding it tough to handle the pressure of EMIs and credit card payments with high interest rates.

Raghavendra V (28) pays Rs 22,250 towards his housing loan and Rs 8,000 towards his personal loan every month. He works with a cruise liner and earns about Rs 65,000-Rs 70,000 a month.

“My dream was to own a house at an early age. In 2007, I had sufficient funds from my investments in the share market to buy a house. The house was for Rs 32 lakh and I was fortunate to get a home loan of Rs 20 lakh and separately opted for Rs 4 lakh as personal loan. The remaining was from my investment and savings,” he says.

But now, with the economic meltdown, Raghavendra is finding it difficult to manage the loan amount. “I plan to clear the personal loan first and then completely concentrate on the housing loan, since the interest rate on the personal loan is too high,” he says.

When it comes to monthly expenses, the basic rule should be to live within one’s means. “The total of all expenses and loan repayments must not exceed the income,” says Mahadevan, CEO of Wealth Advisors India.

“The amount of loans should be such that the total repayment amount (EMI) is no more than 35%- 40% of the monthly income after tax,” he says.

Anything in excess of this could mean that one may need to borrow funds for normal, everyday expenses, which must be avoided. “Create a reserve fund of liquid investments amounting to about 6 EMIs. This could provide the necessary protection in cases of loss of job or sudden mishaps,” Mahadevan says. Shreyas (26), a PR professional, has taken a car loan of Rs 4.48 lakh for 5 years from HDFC Bank. In the current scenario it has become difficult for her to handle her EMI and other monthly expenses. “I pay a monthly EMI of Rs 10,000 for the car loan. My husband uses his credit card more often than me. On an average, the credit card bill comes to Rs 5,000 a month. At the moment it is tough, as we had to use all our savings for the down payment of the car but is not an extreme situation yet as both of us are working,” says Shreyas, whose yearly package is Rs 4.6 lakh.

Each month the couple keeps a chunk of their salaries aside for clearing loans and other payments. “We are aware of the monthly petrol bills and other expenses like groceries and ensure that we only buy what is required. It helps in cutting down on unnecessary expenditure,” Shreyas says.

Maintain a budget sheet every month and break up your expenses into different categories like committed expenses, personal expenses, luxury spending and savings. “You will know exactly where your money is going and how much money you need if you have a budget. Accordingly, calculate the EMI you can afford. When it comes to credit card spending, it should not go beyond your one-month salary,” says a wealth manager.

If you have already gone overboard and are in a debt trap, it would be most important to find ways and means of getting out of it. Spending will have to be brought down to bare essentials, with a strong focus of repaying as much of the loans as possible. You could search for alternative cheaper sources of finance to pay off more expensive loans. “Sale of some assets may also need to be considered if the situation warrants it. It would be the attitude, the mindset and the willpower that will be severely tested at such times,” says Mahadevan acharya.