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Sunday, July 22, 2018

Financial planning: Three new year resolutions for a secured future

Saving can be difficult, but becomes a habit if done over a period of time. Here are some key things to watch out for in the new year.

Updated: December 23, 2016 1:03:20 pm
saving, financial planning, morning star, investments, tax saving, business news Learning to save can be difficult. But, the most difficult aspect of it is getting started.

You don’t need to get ultra-frugal to save money. The general impression is that to pump up one’s savings, people have to forgo all the fun stuff. Not at all. You just have to play it smart.

Prioritise debt

Not all debt is bad. Not all debt is equal.

Credit card debt is a killer. It may seem harmless at a mere 2.5 per cent, but do note that is a monthly calculation. The interest rate you pay on your credit card outstanding could vary from 30 per cent to 42 per cent a year. And when you carry forward the outstanding dues, the interest rate is applicable on the carried forward amount and to fresh billings. So, all new transactions will also attract an interest rate payment till the outstanding amount is repaid in full. This is a sure-fire way to create a debt trap.

So, while you do get the convenience of repaying your balance over a period of time, this ease of payment comes at a hefty cost. You ultimately pay back more than you borrowed and you have less money to save and reach your financial goals. So, if you are in credit card debt, make that a priority to clear and avoid using your card for further payments till the debt is cleared.

On the other hand, if you are servicing a home or education loan, you do get tax benefits. Not so in the case of a personal or auto loan. So get rid of credit card debt first followed by loans which gives you no tax benefit.

Prioritise savings

Learning to save can be difficult. But, the most difficult aspect of it is getting started. If you periodically save at least 10-15 per cent of your income, it will become a habit. And over time, it will accumulate substantially.

Let’s say, you invest Rs 1 lakh to withdraw when you are 70. While invested, it earns a rate of 12 per cent a year.

If you are 30 years old when you make the investment, you will be sitting on Rs 1.18 crore by the time you are 70. Wait for just 5 years, which really does not seem long when you take decades into account, and that money will be worth just Rs 65.30 lakh when you get to 70. By delaying your investment by just a few years, you pay a heavy cost.

So start saving now.

But of course, it does not mean that you just leave your savings in a bank account. That will defeat the very purpose. You need to put that money to work if you want to create wealth. Equity offers great potential to convert your savings into wealth. And you can start with very small amounts too. Cut down on your spending by just Rs 1,000 a month and invest that amount in an equity mutual fund. Within the next 10 years, you would be patting yourself on the back.

Let’s say you invest Rs 1,000 a month over 10 years in a systematic investment plan, or SIP, that returns 12 per cent a year. You would have invested Rs 1.20 lakh over 10 years and your corpus would be worth Rs 2.30 lakh within a decade.

Now let’s say you go one step further and increase the SIP amount every year by a very affordable Rs 500. You would have ended up investing Rs 3.90 lakh and your corpus would be worth Rs 6.36 lakh over the same time frame.

Start saving and investing now.

Prioritise tax planning

Tax planning is more than Section 80C. It is more than fixed income instruments such as the Public Provident Fund, or PPF, and the National Savings Certificate, or NSC.

Good tax management can go a long way toward enhancing your return. But, the decision needs to be made in conjunction with your overall portfolio and not in an ad-hoc fashion. For instance, if you have no equity exposure in your portfolio, you should consider an equity linked savings scheme, or ELSS, which is an equity mutual fund that offers benefits under Section 80C. Most investors, in a crazy dash to meet their Section 80C requirement, will opt for unit linked insurance plans, or ULIPs, and endowment plans and often end up with a portfolio heavy with insurance products that do not suit their need.

Most individuals rarely think about tax planning from an investment point of view. Hence one finds that they do not approach an investment with a perspective of whether or not it fits in with their overall portfolio. The approach is often just grabbing up investments that will give them the tax break, irrespective of whether or not it will help them reach their determined financial goals or fit into an overall investment strategy.

Tax planning investments are no different from conventional investments. Hence, it is imperative to obtain an in-depth understanding of all investment avenues available which offer tax benefits and choose suitable ones that will help save tax and achieve goals.


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