Five questions to test how money smart you are

Adhil ShettyBankbazaar.comFor every action, there is an equal and opposite reaction. You may be worldly wise enough to know who made this statement. But are you money smart too? Take the following money management skill test to find out.Here are five questions to assess your money management skills. Formulate your responses first before reading on to find out how money savvy you are.1) You have a credit card loan and gold loan. Which one would you close first?Now, the natural thing to do here would be to close the lesser loan first, as that is easier to do. However, that may not be the right choice. A smart borrower would close the costlier loan first. Let’s see why.Suppose you have a gold loan outstanding of 50,000 at 11% interest, and a credit card loan of Rs. 1 lakh with 2.5% interest per month. You may find it difficult to close the higher loan amount. But a credit card loan with 2.5% interest a month would mean 30% interest a year—more than double the interest flow as in case of the gold loan.Closing the gold loan of Rs. 50,000 would save you Rs. 5,500 in interest over the next one year, whereas if you use the same Rs. 50,000 to close half of the credit card loan, you stand to save Rs. 15,000.2) Suppose you are planning to buy a house—would you take all your savings out or go for a loan?There are many people who are skeptical of getting into debt. Especially in case of a home loan, which is a long term commitment, they believe that they are getting into an unwanted commitment and would depend on their savings instead.If you are thinking on these lines, you may find yourself detached from reality. Taking a loan is not bad per se. A home loan is a “good” loan, and it helps you to plan your finances well. You can keep your savings safe for a rainy day.A home loan brings in tax savings. Up to Rs.2 lakh on the interest portion is tax exempted under Section 24, and up to Rs 1.5 lakh of principal repayment is exempt under Section 80C against a home loan. If your savings are parked in high yielding investment instruments, this, along with the tax benefits a home loan brings in, could compensate you for the interest you are paying on the home loan.3) Your expenses are likely to overshoot your income. Will you depend on the liquid money in your savings account or make a budget plan?There are people who break their savings, or their liquid funds, when faced with a financial crunch. This is obviously a wrong step. Money smart people would draw a budget plan to see where they can save. If you dig deep into any expenditure, there will be some heads where you can save. But if you are not money smart, you would think that you are spending only what’s required.The money parked in your savings accounts is meant to meet possible emergencies. Overshooting monthly budget cannot be treated as a financial emergency.4) Will you buy mortgage insurance along with your loan or not?If you think that mortgage insurance is a waste of money, you couldn’t be further from the truth. Have you ever thought how dire the situation would be if something happened to you or if you lost your job due to economic instability?You might believe that your life insurance would take care of it, and of course it will. But the compensation amount that your family receives from life insurance is not for closing liabilities. It is their replacement income in your absence. If they use that money to close loans, they would be left with no income or financial corpus for maintaining their lifestyle.So taking mortgage insurance is a smart move so that your family would not end up struggling financially in your absence.5) Suppose you are short of money on a particular month to pay your card bill. Will you pay the minimum amount or opt for balance transfer from other card?Paying only the minimum amount on card is a convenient option many take. The reasoning is that balance transfer does not reduce their debts, but only increases it. In fact, paying just minimum amount on the card is a bad decision. It not only makes you pay high interest, but it also dents your credit score.Instead, you can check for balance transfer option if you have other cards. Many cards offer balance transfer option with up to 60-90 days interest free period. So why not make use of available options?Remember, there is an equal and opposite reaction to every money management decision you take too, based on the financial emergency you may find yourself in. Knowing the smart thing to do in such situations may swing that reaction in your favour.