Opinion on a few Personal Finance practices
3rdMarch'25
1. Unnecessary obsession with Credit Scores
Everyone seems to be talking about credit scores these days, thanks to a few fin-techs who I believe are exaggerating the importance of these scores. Personal credit is means to an end. Life’s goal is not to get a high credit score but rather to stop relying on credit altogether! Most firms which talk about credit scores are trying to sell you unsecured credit. Question: What are the use cases of unsecured credit? Unless it is a life emergency, you should never ever borrow (especially at 20% + APR!). It is likely that you are borrowing to get that iPhone or indulging yourself in something that you cannot afford today. Here is a tip: If you cannot afford it today, do not buy it! (I am only talking about unsecured credit in particular, it is quite impossible for many to own homes without credit, in which case it makes sense)
Getting back to credit scores, these are the components that go into calculating your score:
a. Repayment History
b. Credit Utilization
c. Credit Mix, Age & Open Tradelines
d. Inquiries
Quite basic: If you have credit cards, pay them back on time. And try not to use too much of your credit limit - don’t go beyond 30% on average. That’s it. You do not need to play simulation games to see your credit score drops if you perform action X or Y. Every bank/NBFC/Fin-tech in this world will claim that they have the best ML models to predict risk. I will not be too impressed with that statement. I have some experience working in this field and having good underwriting backed by data is becoming quite ubiquitous in this game. It is not really a competitive advantage as financial services cos are making it out to be.
2. Underestimating the importance of Cash
What is our goal? Become and remain financially independent.
What does that mean?
That you have enough money accessible to you such that you do not have to borrow money from anyone ever!
You grow this money over time - by increasing your income + investing such that you keep increasing your level of financial freedom.
Step 1 comes first. Always. My friends who have just started their careers are obsessed with the idea of investing. Yes sure, everybody loves the idea of money growing with time. But you need to have enough money in the bank which is accessible at any time such that you are prepared for emergencies. Good thumb rule is that you have cash worth 6 months of expenses. 12 months of expenses is great! Tip - You can invest this amount in a SBI FD which is redeemable instantly. They provide up to 6-7% interest annually which is just enough to beat inflation.
When I share that tip I get instantly taunted because I am not optimising for returns. I am optimising for returns (by investing in equity) for any incremental savings I do make. Delta of 3-4% annually on my emergency fund but at the cost of instant redemption is not worth it for me. And I am now observing quite a few people struggling to pull money back from the market because of the downturn.
Please keep some in your account to be prepared for emergencies. It usually takes 2-3 days to redeem mutual funds. You cannot redeem stocks on weekends. Do not underestimate the importance of liquidity. Life is a very long term game, do not mess this up for the short term. Cash is still king baby.