3 Apr 2016

The Biggest Money Mistake I Made

This is the biggest money mistake I made. Thankfully, I made it in college, when the impact was less and I could recover quickly.

When I joined IIT, I got a stipend of 5K a month, which is the first time in my life that I had so much money, that too money of my own I could spend as I see fit without accounting to anybody. I spent most of it, living a comfortable and happy student life. Nothing glamorous, but a comfortable and happy life.

Towards the end of my time in college, I was told that the stipend for the last 4 months or so will be delayed, until long after graduation. Thankfully, I had two credit cards, so I lived off them, not even paying the minimum balance. When I left college and moved to Bangalore, I had tons of expenses with setting up a house and so on, which I had to borrow from relatives since I’d long maxed out my cards.

I realised, for example, that I get paid for the first month of work only after the month is up, which created a problem: How do you survive for 4-5 weeks? Anyway, once I earned my salary, I dutifully repayed both credit cards and my relatives, and things have been good since.

Thinking about it, there are many lessons to learn:
– You need a buffer of a few months income. If you make 5K a month, you need 20K in a bank account.
– Your expenses should be less than your income.
– Don’t assume your income will continue to come in every month. It may stop for a while.
– Don’t assume your expenses will stay what they are. They may increase.
– You need an income significantly higher than your needs, to have a happy life. If your needs are 3K a month, you need an income of 4-5K. Otherwise you have to budget for every rupee and it becomes stressful and no fun.
– It’s good to have multiple options, like a credit card to draw on when needed. If Citibank and ICICI hadn’t approached me, I wouldn’t have signed up for a credit card. I didn’t even know that students are eligible for credit cards. I thought you have to work to have one. Thanks to them for offering me the cards, because it saved me financially.
– You shouldn’t use your credit card :) I’ve switched to using my debit card to avoid even the slight chance of over-spending. I switched one of my credit cards to avoid an annual fee. No need to pay others when I can use my debit card.
– The financial services industry will help out in some situations of need, but for a high price, not disclosed up front. For example, I didn’t know that if you have multiple outstanding debts on your credit card at different interest rates, your payments first go to the ones with least interest rate. Another lesson is that a 2% monthly interest rate on a credit card compounds to much more than 24% p.a. Citibank and ICICI were dishonest with me.
– Banks are inefficient. Citibank offered me a personal loan, which I took, but the money didn’t arrive in the promised time. After I borrowed from a relative, I told them to cancel it, but the cheque came after that. I ended up feeling that Citibank is incompetent. Little did I know that that’s just the start.

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