I spoke to a client a few days ago. She told me that she ended up spending over 5 lacs in the recent Diwali season towards all kinds of purchases including gifts. A few insurance premium payments also came due in the month of November. While she had an idea that she will run a big credit card bill for the month, she didn’t realize that the statement amount would be so big. That’s when she realized she had overspent and should have exercised some restraint. The credit card bill couldn’t be paid off through her regular income. Fortunately, she had kept some money aside for certain annual expenses in liquid funds and she could use the amounts to pay off the credit card bill in full.
Not everybody may be as well prepared. What can such people do?
#1 Credit Cards and Loans
Credit cards or loans grant you an ability to spend money that you don’t have. However, this game cannot go on forever. Eventually, you must face the reality. You can’t spend more than you earn. The expenses on a credit card must be paid in full within 5-7 weeks. So, the window of bridging this deficit (spending-earning) is rather short. There is an option to pay just the minimum amount due but that is not a good idea.
On the other hand, a loan spreads out your repayment burden over a much longer period. And therein lies your cue. If you are running a huge credit card bill and do not have resources to pay back the amount in full by the next due date, ask your bank to convert your bill (expenses) into loan. While you will have to bear the interest cost on such a loan, it is still better than making only the minimum payments. The interest rate on credit card debt is much higher than the interest rate on a personal loan.
#2 Spend Less in the Coming Months
This is a no-brainer. You spent (borrowed) more than you earned (can repay). To balance the equation, you must spend less than you earn. You must control your discretionary expenses in the coming months. Whether you achieve through mental fortitude or by hiding your credit cards at the back of your almirah is your choice, but this must be done.
#3 Be Responsible with Your Credit Cards
This is not about what has already happened but how to avoid such situations in the future. In case of credit cards, since the money does not get debited from your loan account, there is no implicit check. With debit cards or UPI, you can’t spend more than you have in your bank account. Moreover, with credit cards, it is easy to lose track of how much you have spent. Most of us can’t keep track of how much we spent across 10 different credit card transactions in the month. And this limitation of our brain can result in overspending. This has happened to me too. There have been times when the actual bill amount has been 40-50% higher than what I expected. If this happens with you on a regular basis, you must consider moderating credit card usage. A debit card or UPI payment will be a better option. This can help keep your expenses under control.
#4 Plan Better
Our expenses are not the same each month. There are many non-monthly but recurring expenses. Common examples include kids’ school fee, insurance premiums, vacation, unplanned gadget purchases, gifts and festive spends.
While not everything can be planned, we do know when some of these expenses are coming due. For instance, you know that school fee is due in April and the insurance payments are due in November. You are planning a vacation in June and your cousin’s wedding is in a couple of months. Rather than spending and then figuring out how to pay the credit card bill, plan ahead. When you know the timing of your expenses, you must plan for such expenses. If you need to spend Rs 60,000 after six months, you just need to set aside Rs 10,000 per month in a liquid fund or a recurring deposit in the prior six months. Once you have incurred the expense on your credit card, you can take out money from your investments and pay off the bill. Such automated savings could be a part of your financial plan too.