Got a question about your money? What you should or should not do with it? Our expert Devang Shah has the answers.

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I request you to help me out with the situation explained below.

Earnings

My take home is Rs 25,000. Every year I get an incentive of not less than Rs 45,000. But I have a lot of debt.         

Loans

Rs 23,000 - credit card
Rs 20,000 - cash loan to be repaid
Rs 1,00,000 - Took this loan in September 2005 and since then am repaying it with an EMI of Rs 4,700.

Expenditure

Rs 10,000 - given to my parents every month
Rs 4,700 - EMI on the loan
Rs 8,000 - Living expenses

With whatever is left, I want to clear my debts. Would you please suggest some investment plans to help me repay my debt by the end of this year?

- Raghu

Hi Raghu,

Really sorry about this but no investment plan will ensure that you clear your debts. Rather, a savings plan of your own would be able to help you.

Let me put figures on what you wish to achieve.

Repay cash and credit card debt = Rs 43,000
Balance principal of the Rs 100,000 loan at the end of the year (after paying 16 installments) = Rs 41,000 
I am assuming the interest on your loan is 18% per annum

Total debt you wish to repay = Rs 84,000

This is in addition to your monthly EMIs.

Your expenses are Rs 22,700.

Rs 10,000 -- Given to your parents every month.
Rs 4,700 -- EMI on the loan
Rs 8,000 -- Living expenses

In other words, you would like to invest Rs 2,300 (25,000 - above expenses) every month and have 84,000 at the end of the year.

It would be difficult for anybody to expect something like this. The investment you are looking for needs an annual return of 195%.

In fact, even credit card debt is fairly expensive and if you are trying to get returns that beat the interest cost of a credit card loan, you would be taking substantial risk of losing your money. Never forget, the higher the return, the greater the risk.

On the face of it, it appears that your best bet might be to pay off all the debts as and when you have money and then start investing. It might be more effective to find out ways of squeezing out more savings every month and curbing on your expenses.

Illustration: Dominic Xavier

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