In this post, I’d like to focus on the financial instruments available for working towards my short-term financial goals (i.e. goals which are ≤ 6-months away). My short-term goals generally comprise a set of purchases that I plan to make over the next six months (for example, a household electronic good such as a washing machine, a refrigerator, etc.). I realize that your short-term goals could be entirely different from mine. If such is the case, simply drop a comment to this post or email me with your specific situation and I will follow-up with a post dedicated to each of your queries.

Coming back to my situation, to plan for and meet such purchases, the best financial instrument available to me is a fixed-deposit linked savings account (commonly known as a money multiplier account). I create a simple cash flow matrix using Microsoft Excel, identify how much I need to put aside each month, and transfer this amount each month into a fixed-deposit linked savings account. The prime concerns in this situation are safety and liquidity of funds — a savings account that auto-sweeps extra balance into a fixed deposit is the perfect choice. Just ensure that such an account does not charge any form of penalty for reverse-sweeps. When it’s time to make the actual purchase, I simply withdraw the required funds and pay for the purchase with cash.

With this approach, not only do you not have to use your credit card, you are also rewarded by the higher interest rate applicable on the auto-swept funds. Done regularly, you also get into the very good habit of saving up cash for any purchase.

Tax implications: The interest amount earned with this financial instrument directly adds to your taxable income. You will also need to check with your bank for any tax deducted at source (TDS) applicable. (This section was requested by reader Sreenidhi.)

Again, if you’d like me to comment on your specific situation, do drop a comment (if you’re comfortable) or email me.

Note:

If you’re a new reader, you can find a backgrounder to this series at:

Part #1: How to classify your financial goals?

1. There is a flat-fee of Rs 199 for every Rs 10,000 withdrawn.
2. There is a service tax @ 12.36% on this flat-fee.

So, you’re being charged approximately Rs 223.60 for every Rs 10,000 that you withdraw! And where exactly were these details provided? In the fine print (printed in microscopic fonts)! How often do you stop to read the fine print?

Such practices are what I hope to expose through The Hidden Rupee series.

On a different note, this credit card is aptly named — just that you are not the one who’s making the fortune. How can you? Especially when this credit card encourages you to use it for

• Personal emergencies, and
• Business emergencies.

If that’s what you actually use your credit card for, you seriously need to rethink your finances.

The big issue today is inflation. In my view, frugality can beat all inflation. I still don’t own a car, I don’t have a mobile. Ours is now an economy based on waste. If you change that, other factors will correct themselves.

Source: A senior citizen’s quote in the latest issue of Outlook Money when asked about his life experiences.

Wonderful statements!

1. Frugality can beat all inflation, and
2. Ours is now an economy based on waste.

How many times have you heard dumb advise on the lines of “In the long run, equity is your only hedge against inflation?” But, no one really wants to admit what “the long run” is. Is “your long run” different from “my long run?” Frugality, on the other hand, has an immediate impact. You and I can feel it’s good effects today, right now. Brilliant thought.

And when I look at my own spending patterns, about 15 to 20 percent of my expenses each month easily classifies as “waste.” In the past, I have bought expensive stuff that I really did not need, kept them for a long time falsely convincing myself that I will use them one day, and then finally selling them at a deep discount to their purchase price. My 80GB iPod with video is a great example. When I recently sold it, I had used it for a grand total of 54 hours in just under two years!

How about you? How much do you waste each month?

Source: Google Analytics.

1. Short-term goals which are ≤ 6-months away.
2. Medium-term goals which are > 6-months but ≤ 24-months away.
3. Long-term goals which are > 24-months away.

I have also identified a set of financial instruments which fall into each of these three categories. Achieving a financial goal is now simply a matter of disciplined investing in the corresponding financial instrument(s).

Your goals and their classification should of course be realistic. For example, if your goal is to buy your first car within the next 6 months (a short-term goal), by fully paying for it in cash, but you have no savings and you spend more than you earn, there’s no way you’re going to achieve this goal no matter what the financial instrument you choose (apart from getting into debt — yes, I do consider debt to be a financial instrument; a dangerous one though).

Stay tuned for Part #2 where I discuss short-term financial instruments for meeting your short-term goals.

I should look at every other option before opting to purchase with a credit card.

For reasons that still remain a mystery to me, I recently used my credit card to pay for goods and services when there were a whole set of other options readily available to me. I did so twice.

To begin with, I used my credit card to pay for generating my tax returns electronically. How dumb is that? Especially, when the income tax website offers the tax return preparation software as a free download. I could have also sat down with a pen in hand and filled up the forms manually (like I have done in the past five years).

Second, I used my credit card to purchase cinema tickets online. I have always purchased cinema tickets by paying cash at the booking counter. Worse, we couldn’t catch the movie and all the tickets went waste! Worst, each ticket booked online attracts a service charge. Hard earned money racing down the drain.

I still feel lousy for unnecessarily using my credit card. It’s, however, a good lesson learned. What strikes me as dangerous though, is the lure of credit cards — how easy it is to fall into debt from the comfort of your chair.

Last week, I opted to open a savings account with ICICI Bank. I am given a welcome kit with an Internet banking password mailer dated April, 2007. I try to login but receive a “User ID has expired” error message. I call customer care who gleefully inform me that the system generated passwords automatically expire if unused for a year. So my password gleefully expired in April, 2008.

Then, WTF was I given a welcome kit with a pre-expired password? What a brilliant way to welcome a customer!

1. Download the plugin.
2. Unzip the downloaded file.
3. Upload the “slideshare” folder to the plugins directory of your WordPress blog.
4. Activate the plugin in the WordPress admin panel.
5. Start embedding SlideShare presentations!

You simply have to copy-paste the code (for example: [slideshare id=415548&doc=brainrulespzreview-1211213300619507-9&w=425]) provided in the “Embed (wordpress.com)” section of the SlideShare presentation page into your blog post. The plugin does the rest.

Drop a comment if you’re facing any difficulty.