The management of personal finances can seem like a daunting task especially when you have to meet the monthly expenses obligation and build long term financial stability at the same time. In such scenarios, understanding how to balance Equated Monthly Installment (EMI full form) payments with investments like Fixed Deposits (FDs) can be extremely helpful in achieving short term stability and long term wealth creation. This article will explore the strategies for balancing your EMI payments while investing in FDs.
Table of Contents
Understanding EMIs and FDs
Before diving into the strategies, let’s understand the basics of EMIs and FDs.
What is an EMI?
EMI is the fixed amount paid by the borrower to the lender at a specified date to pay off the loan amount. The principal amount and the interest components are included in each payment with the interest component reducing with each EMI.
What is an FD?
An FD is a financial instrument that is offered by banks and non-banking financial companies (NBFCs) that allows individuals to invest their money for a fixed time at a pre-decided interest rate. The key advantage that makes FDs a popular choice of investment is their offerings of safety and fixed low-risk returns.
Why Should You Balance Your EMIs with FDs?
Now that we have understood the basics of EMI and know FD meaning, let us look into some of the reasons why balancing EMIs with your FD investment is important.
- Financial Security: By regularly paying your loan EMIs, you are not only meeting your loan obligations but also maintaining a good credit score and financial reputation.
- Wealth Creation: While the mode of investment can differ, investing allows you to grow your wealth and contribute towards your long term financial goals.
- Managing Risk: Diversification of your investment into low-risk instruments like FDs may help you to reduce the risk of your portfolio.
Strategies For Balancing EMIs and Investments
There are various strategies that you can use to balance your EMI payments with your FD investments. Some of them are listed below.
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Setting a Budget According To Your Financial Situation
Having a budget is the core of managing personal finances. Before making investment decisions, you must evaluate your income to acquire the amount that can be allocated to EMIs and FDs. Additionally, tracking your daily expenses by using budgeting tools will help you arrive at a fixed monthly expense amount. Based on this amount, you can set limits on your spending, adjust the interest rates and tenure of the loan, and set capital aside for investing.
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Prioritising High-Interest Loans and Utilising Bonuses
If you have multiple loans, consider allocating more funds to loans that have the highest interest rate. This strategy could help you save and invest funds in FDs. If you receive workplace bonuses, utilise part of them to pay off a lump sum amount to loans that have high interest rates, instead of spending the entire amount. Another part could be allocated towards FDs.
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Using Interest Payouts
Some high-interest FDs provide monthly or quarterly interest payout. Thus you can invest in high-interest FDs and use the interest received to make additional loan payments and significantly reduce the principal amount.
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Building an Emergency Fund
You must build an emergency fund before committing yourself to high EMI payments or long term investments. The fund should cover expenses for up to 6-12 months and will help during emergencies to prevent disruptions in EMI payments.
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Staying Disciplined in EMI and Investment Payments
Set up auto-debits to make sure that your EMI and FD payments are made on time. This will help you avoid unnecessary penalties and stay financially disciplined.
Common Mistakes That Must be Avoided
While planning to balance your EMI payments with your FD investments, you must avoid some of the common pitfalls such as:
- Not Paying Attention to Loan Tenures and FD rates: If you choose short loan tenures, you may have to increase your monthly EMI payment. This might affect your ability to save the capital that you had planned to invest. Similarly, all FD rates might not offer the same interest payouts. Therefore, you must compare the rates offered by various banks and NBFCs.
- Overlooking Tax Implications: The interest earned via FDs is subjected to tax. Thus, you must consider tax payments while calculating overall returns.
Conclusion
Balancing your EMI payments with long term investments can help you reach closer to your financial goals. However, you must understand the basics of EMIs and FDs, take into account the financial responsibility and apply strategies like setting a budget, prioritising high-interest debts and using interest payouts to pay off loan amounts. Additionally, avoiding common mistakes will also assist you in achieving short term financial stability while meeting your long term wealth creation goals.