Financial Discipline for all.

Principle 16. Avoid financial litigations

FINANCIAL LITIGATIONS

Be it against banks and financial institutions or against individuals – litigation is a painful experience. The problem with these litigations is that in 99% of the cases, litigations between individuals may drag on for years and years. So it’s always wise to give a careful thought before embarking on any type of financial litigation. But the same cannot be said when a lending institution moves against you. Lending institutions secure their funds through solid agreement that runs into pages. The borrower, at the time of availing the loan, would have signed each page without even bothering to read what’s written.And, there is an ACT in India called the SARFAESI Act which helps lending institutions to act fast against you.

SARFAESI ACT- Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002,  popularly called The SARFAESI Act, grants  special powers to lenders  to take the assets pledged without first going to court. Once the provisions of the Act is applied , it gives juts 60 days for the borrower to repay his debts. If he doesn’t pay within that time, the bank will proceed to seize the asset pledged. Alternatively, the borrower can file an appeal in the court for extension of time. The court normally allows a time of 6 months in addition to 60 days.

So, what’s important is to find out who’s actually on the wrong side. Mere reasons are not enough; you should also have the documentary evidence to prove your point.

IF YOU ARE ON THE WRONG SIDE..

If you are on the wrong side, clear your debts the earliest. There is no point in starting a litigation since anyway, you’ll be finally asked to pay back the amount with all incidental expenses like legal fee, penalties, interest and fines. Finally it may add up to an unmanageable amount. The best option in such cases is to reach an out of court settlement. Such settlements may be advantageous to both the parties.

For example – you availed a loan, say a car loan, from a bank but unfortunately your business is in troubled waters and you have made some defaults in paying monthly installments. Now, in such cases, the bank has a separate recovery team who would liaise with you for pending payments including penalties. The best way to come out of such troubles is to ask for a ‘full and final settlement’. Ie, the agent handling the recoverywould give you a flat discount on the capital outstanding (and not on the total dues including bank charges and penalties). You can either sell off your car and pay it off, or find some alternative sources and finish off the debt.

The advantage is –

  • You get a ‘one time settlement’ offer which includes a welcome discount.
  • Your asset is free of debt.
  • Your name is removed from the credit defaulters list.
  • The bank will not take any legal action against you.
  • Saves a lot of time.
  • Save a lot of other expenses like attorney’s fee.
  • Preserves your reputation and goodwill.
  • Finally … Peace of mind – not only for you , but for your entire family.

ON THE OTHER SIDE…

Now let’s think about the opposite situation.  You have to get money from somebody. In most cases that would be an individual or firm to whom you’ve given credit. You may have some form of written agreement with you to prove your point. The best option is to try for an out of court settlement since, if you go for a litigation against the party, it’s going to take years and years to get a decree. The court generally doesn’t consider the economic effect of delay in justice. Hence, they do not consider the effect of inflation or interest rates.

For example, if you sue a person to get back 2 lakhs, it may take 4 or 5 years for the court procedures to settle and get back those 2 lakhs. Isn’t it better to try for a settlement of 1.75 lakhs immediately? The effect would almost be the same.

You can also try to bring in a mediator like a politician or a bureaucrat and find a solution to the matter.

That’s our 16th principle.  Financial litigations may take a lot of time to settle. If you are on the wrong side, today or tomorrow, you will have to pay back the amount or your assets will be lost. If you’re right, still it’s better to reach an out of court settlement or else your funds will be stuck for a long time.  The Hence always try to avoid such situations.

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Principle 15. Do not spend recklessly

MIKE TYSON.

Tyson, the legendary boxer, is believed to have amassed a wealth that exceeds 400 million dollars in his 20 year career. I have watched him on televisions. His fights were furious and fast. Yet at the age of 39, he had 38 million in debt and was declared bankrupt. If you see the list of how he spend his money, you will realise what overspending is all bout.

He spend –

  • $4.5 million to buy cars and motorcycles
  • $3.4 million to buy clothes and accessories
  • $ 1,40,000 was spend to buy two white Bengal tigers
  • $ 1,25,000 for it’s trainer
  • $ 2 million for a bath tub for his wife , Robin givens
  • $ 4,10,000 on a birthday party
  • $ 2,30,000 on cell phones and electronic gadgets
  • $7m8 million on unidentified personal expenses.
  • Employed more than 200 people including bodyguards, chefs, gardeners etc.

Tyson, I admit, knew how to knock down his opponents. When the basics are right, you perform. He knew the basics of boxing. Unfortunately, he has never learned the basics of finance. When someone who doesn’t know the basics of finance trys to manage money, such profligate spending stories are written. Money came in fast in and it went out even faster. With a negative net worth that large, Mike Tyson is easily one of the poorest man alive in this world. The purpose of this is story is not to degrade Mike Tyson in anyway, but to alert you about the dangers of spending more.

WHY SPENDING FEELS SO GOOD?

Why do some people feel good when they spend more or why do some people spend so much when they get money? We have asked few people regarding this and the five common reasons we found are –

  • Instant gratification: They spend because, that gives them an instant pleasure that they were able to buy something expensive. It satisfies their desire to buy.  So, even if they are aware that it’s quite expensive and beyond their budget, still they go out and buy it to get that instant empowerment. Nobody is wiling to wait because they feel that they deserve it, now.
  • Status quo: They want to keep up with their friends and neighbors who live flamboyantly. When you spend to impress others, it naturally goes out of your control.
  • Past life: some spend to compensate the entire struggle they suffered in their past. They might have had a time when they were surrounded by things that they wished to buy, but couldn’t afford. So when they start earning, they try to compensate all that.
  • Easy availability of credit: When credit is available on the spot (like credit card offers) it tempts them to spend.
  • Lack of basics: Lack of understanding about the basics of finance-specially basic concepts such as time value of money, compounding, present value and inflation.

Psychologists say that depression and low self esteem also results in spending more. They say that some people shop more to compensate their feeling of low self esteem and to boost their confidence. Stress relief and trying to overcome the feeling of inadequacy are also cited as reasons for overspending.

That’s our 15th principle in managing money. Spend only half of what you have! If you are spending in order to get that instant pleasure or to compensate for a tough past or to boost your confidence, you certainly need to correct yourself. You might require a personality trainer. If it’s due to lack of basics, these basics lessons are  just meant for you!

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Principle 14: Multiple streams of income.


WHY IS IT NECESSARY?

No job is hundred percent secured these days. A lay off or cut down in employee strength can be expect anytime. Hence, if you rely on one income source alone, what would you do if there is a temporary stoppage of work?  When you have different sources to earn money at the same time, you have multiple sources if income. By doing that you are making your financial future more secure.

We need multiple sources of income because, if you look around you’ll see that the cost of living keeps increasing every year. Prices the grocery stores, fuel costs, cost of medical treatments, everything is becoming costly and hence, you have to think of adding new ways to earn money. Should one source dry, the other one will save you.

But not all of us need to think on these lines. People who belong to high income class need not think seriously about having a second source of income. So, basically, whether you need to try a different source of income depends on your financial position.

WHAT COULD BE THAT SECOND SOURCE OF INCOME?

Anything! You can start a small business or open a shop. It depends on what type of skills you have.

For example – If you have excellent command over language, why not try content writing? That something you can do from the comfort of your home. How about starting a blog and share some ideas? Know to play a musical instrument? Why not start a music class at home?

HOW TO GET STARTED

First, look at where the opportunities are. The opportunities are going to be different for everyone, depending on your skills, network of friends, business connections and most importantly, what you find interesting to do.

For example, if you can cook well, you have the following options-

  • Write a book
  • Open a coffee shop
  • Take classes
  • Do television shows
  • Write about recipes in magazines
  • Compete in shows like ‘master chef’
  • Open up a large catering unit
  • Arrange small birthday  parties
  • Open a web site and sell recipes
  • Write a blog on food and nutrition..
  • Specialize on one item like cakes or oil less cooking.
  • Make a collection of traditional recipes country wise or culture wise.
  • Sell home made sweets.
  • Bid for contracts to run eating joints in big malls
  • Be a food and nutrition consultant.. ..

So, basically you have to sit and think ways to build a source of income. The options are many. It’s for each one of you to decide.

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Principle 13. Signing surety for friends.

This is even more dangerous than what we discussed in principle 11 – Lending money to friends. On the face of it, you might think its ok to stand as a personal guarantor.

WHO IS A SURETY?

When you stand surety for someone, you are promising the lender that in case of a default from the borrower, you will take up the responsibility to pay off his debts. Sureties are also known by other names such as ‘co-applicants’ ‘co-signer’ ‘co-borrower’ ‘guarantor’ etc. What ever be the name, the effect is the same.

Whether to sign a surety or not is not a simple decision to take. Because once you sign it –

  • You completely become responsible for your friend’s debt.
  • Your credit records are immediately updated with this information.
  • In case your friend defaults, you will also be liable for other expenses like legal expenses, recovery expenses, court fees etc..
  • Your name will be added to the list of liability holders for credit score purposes. Hence you credit score will be low and when you need a loan for your purpose, it might be difficult to get one since the bank will count the first loan as your liability.

WHY DO WE END UP SIGNING CO-GUARANTOR AGREEMENT?

  • The act of signing a surety is taken very casually by youngsters without thinking about the consequences. They think that it’s ‘just a signature’ help for a friend.
  • It could be your dearest friend who’d be asking for this help and it would be difficult for you to say no.
  • You might have previously made him guarantor for your loan. Hence, now it’s time to reciprocate.
  • May be your friends are taking advantage of your friendly character.

The only two questions that needs to be answered before signing a surety are -

  • Do you know the borrower very well? Can he /she be trusted? do you know their financial background – if the answer is yes and if they are from financially sound background, go to the second question or else stop here.
  • Can you pay off the loan In case the borrower defaults in his payments? If the answer is ‘yes’ go ahead. Or else stay away.

CONCLUSION

That’s our 12th principle – Try your best to avoid signing sureties.

  • If it’s your family members (your brother or sister) consider taking the risk.
  • If it’s for your friends and cousins – think twice.
  • If it’s for business partners – consult a financial expert like a chartered accountant. And ,
  • If it’s for your boyfriend or girlfriend or girlfriend’s best friend – well, you are inviting trouble!!

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