EOQ and ATM withdrawl

Ever tried applying MBA to your daily life? I tried to apply theory of Economic Order Quantity on the amount of cash I should withdraw and I am inclined to not follow its results.

  1. D:  monthly consumption of cash = 15,000/- (to cover for maid salary, newspaper/milk/grocery bills, fuel/auto/transport costs, cafeteria & petty cash)
  2. K: cost to order: 50/- to cover bank fees, fuel (to drive to ATM), cost of time (it takes me 15-20 to retrieve cash)
  3. H: holding cost = foregone interest “4%/12”

When I tie all this together I get a value of Q = INR 21,213/-
However I have rarely seen anybody carrying that kind of cash around in their wallets. Most people tend to withdraw cash between 1-5k during the middle of the middle and 5-10k immediately after salary is credited. (but that is spend immediately to pay monthly bills)
Also a lot of ATMs limit the cash dispensed of 10,000/- forcing me to withdraw a sub-optimal amount. Is it because I have under-estimated the inventory holding cost (increased propensity to spend when you have cash in hand & risk of theft/mugging)
Please share other examples where popular wisdom over-rides the well researched theory.


Credit Cards

A friend of mine asked me if Credit Card is any good. He had heard so much about people falling into plastic debt and paying a steep 2% p.m. Interest that he was scared.

My advice:
1) Define why do you want it?
2) Keep a record of all your expenses and never purchase anything just because you have an unlimited credit limit.
3) Most credit cards have a reward system. But you should never spend just to get benefit out of it.
4) Don’t start an automated payment system, where in your telephone/mobile etc. bills are automatically deducted from your credit card. These payments are hard to stop, and often you end up paying even if the bill was wrongly generated.

Let me tell about myself:
1)I bought credit card because of convenience. I do not own a vehicle and it is a pain to travel every now to an ATM every now and then.
2)I do a lot of purchases online (e-bay, airline tickets, movies, magazine subscription fees) for which credit card is kind of must.
3)While traveling, esp to a distant land, a card is a sense of security. It allows you to handle the unexpected.
4)Rolling cash: Most people need a contingency fund to take care of short term cash crunch. A credit repayment cycle of 50 days give you an additional 6 weeks of rolling cash without any extra burden.
5)Forex transactions: In the global economy you often have to pay in USD. If I go for a bank cheque, I need to go to the bank with my passport. With a credit card, I just need to give my cvv number.
6)The advertisement department makes a lot of noise about all the member benefits and uses… but trust me in 2 years I have always found that for all practical purposes credit card is almost similar to a debit card.
7)Insurance: Actually it is a crap. If anything happens to you your family is not liable for any unsecured loans you have taken. So the insurance is only to minimize bank’s risks.. not urs. Plus the insurance they offer is not even worth the Paper it is written on.

Always take care of reading the fine print. Credit card wait and pray for you to falter and they make tons of money.

Remember owning a card is not the same as using it. There are lots of free cards in the market and you could simply own one and put in your stash… just for those bad days. I just carry a debit card in my wallet.