I was recently quoted in Economic Times WEALTH (18-24 December 2023) in the Q&A section where a panel of experts answers readers’ questions related to various aspects of their personal finances.
The exact question is given below –
Here is the article page where the query is answered:
Here is the text version of the query and the reply –
Q – I am 24 years old with a monthly salary of Rs 40,000. I have a car loan of Rs 9 lakh. The EMI is Rs 14,232 for 7 years. I have savings of Rs 50,000 and a monthly SIP of Rs 3,000 in SBI small-cap fund. I also have a monthly RD of Rs 1,500. I want to start an investment of Rs 3,000 from December. Should I prepay my car loan with the extra Rs 3,000 every month or should I make another investment and let the EMI be as it is?
A – From the loan details provided, your car loan rate would be approx. 8.5% or nearabout. Over the 7 year period, in addition to Rs 9 lakh principal repayment, you will also pay about Rs 3 lakh in additional interest. You also have a savings of Rs 50,000, an on-going RD of Rs 1500 and SIP of Rs 3000 in smallcap fund. The details of your other savings as well as expenses aren’t available.
But given the limited asset base, it is at the moment, more important to scale up your savings first. You should look at having an emergency fund which is sufficient for at least 3-6 months’ worth of expenses. Using just the RD of 1500, it might take some time to reach the required amount. Now ideally you would want to earn maximum returns on the additional Rs 3000 that you have from December. But first, it is better to increase your savings base and then look at trying to prepay the car loan. You can increase your RD or SIP amount to do this. If your job provides you with annual bonus (or periodic incentives), then once in a while, you can consider making some loan prepayments using the same.
Since cutting down expenses isn’t easy, I would suggest (and I am sure you too will agree) that you should look for higher-paying opportunities. Currently on a Rs 40,000 monthly income, you are paying almost 30% on EMI for a depreciating asset and this isn’t an ideal scenario.
Also, if you have dependents and you don’t have a term life insurance, consider purchasing one immediately first. Being young, you can get one for a very small premium. So don’t delay on that front. Also, if you only have your employer provided health insurance, then try and get yourself a health insurance of your own as well.