Saturday, June 23, 2012

Wealth= Income or Savings?

 It is more likely that a person earning more is looked upon as being wealthy. It is assumed that a person who earns more also saves more. But, you know nothing can be more far from truth than this.

Say Ajay earns a salary of Rs. 1 lac per month, while his friend Ayaaz earns a monthly salary of Rs. 40000. Ajay would in all likelihood be perceived to be wealthier.

So what makes you wealthy—income or savings?

In absence of their monthly expenses, it would be difficult to arrive at any definite answer. If Ajay were to spend say Rs. 80000 and thus save Rs. 20000. Ayaz was also able to save an equivalent amount.

The real factor to determine wealth is savings and not income. How much you save(and invest) before you spend rather that saving what is left after you spend will be the single most important factor that will determine whether you will be able to create wealth in the long term or not!

It’s time we ask ourselves: - are we rich just by high income (or salary) level or are we really rich by savings (and therefore judicious investing)? If you are able to answer this then you stand a pretty good chance of enjoying your retirement, else you would be scratching your head during your retirement trying to figure out what went wrong?

A high level of income during the working life usually gives us a false sense of security into thinking that current situation will be constant forever. Home loans, more home loans, personal loans, vehicle loans, credit card dues are forms of classic wealth destroyers, which is pushed down your throats by your banker—with your consent of course.
For example, people are tempted to take a second home loan thinking that since they are creating an asset, it is prudent to take a 2nd.  Home loan. While the argument may be true for the home loan for your first dream home, using the same argument second time may not hold true. Indian Income Tax Act, levy a tax on Income from House property for your 2nd. home. Home loans deprive you of creating your retirement nest. Real estate is not the only asset class that delivers returns—in a tax efficient manner.
Asset classes like equities have delivered far greater returns over long term—and that too in a tax friendly manner. (Read--Discipline--Key to equity investing).

Do ask yourself once in a while: - Am I living off my current cash flows? If the answer from within comes as a yes, then it is time to tweak your actions. Rather than buy that home theatre system that you’ve wanted to buy for a long time, better subscribe to a long term SIP.

After all, financial security is one thing you owe it to you and your family.

Saturday, June 2, 2012

5 things to do with your money

There are individuals who have so much money that they don’t really know what to do with it. While these individuals may attract the envy of many, we believe owning money and not knowing what to do can be quite an unenviable situation. On the other hand, there are small time investors, who don’t own a great deal of surplus money, but are in complete control of their finances. These individuals seem to be in the driver’s seat where finances are concerned and should in fact be envied.
While most would find it a little to digest that there are investors out there who have the money but don’t know what to do with it that is the truth. Don’t believe us, look around and see the number of people with the latest gizmos, mobiles, cars, clothes and consumer goods. What’s wrong with that? Nothing at all! It’s a free world and you can own anything and everything that your finances permit you. Do this small test – when you see someone flashing his latest mobile or some gizmo, ask him if he has planned for his retirement, or whether he has a financial plan in place to pay for his child’s college fees 10 years down the line. Chances are that person will be more keen on discussing ‘relevant’ points like the features of his latest mobile rather than dwell on the ‘irrelevant’ issues raised by you.
To be sure, these issues are anything but irrelevant. But money has that effect on people, it makes them want to rush towards the immediate and ignore the future. So you have more mobiles being bought than financial plans being prepared. So while it’s a good thing to have money, it’s equally important to know what to do with it. We list 5 most critical tasks individuals must accomplish with their money.

1.       Do your Tax Planning

If you are liable to pay tax, tie up your tax planning exercise. As a law-abiding citizen paying taxes is most important so investing promptly in the right avenues to save tax assumes importance. An individual can save tax up to Rs 100,000 (Rs 1 lac) by investing in tax-saving investment avenues. These avenues range from the traditional Public Provident Fund (PPF), National Saving Certificate (NSC) and life insurance to the more dynamic (read market-linked) tax saving mutual funds (Equity Linked Saving Schemes - (ELSS)). These avenues not only help in tax planning but if selected well can also help individuals achieve their long-term financial goals.

2.       Plan for your retirement NOW

A common regret for most of us in our twilight years (apart from not having exercised enough) is our poor savings and investment track record. Most individuals wish they had saved either better or more. Planning for retirement is one thing that individuals across age groups must take up on priority. Of course, if you start at an early stage it’s even better, but the fact is it’s never too late to set aside some money for retirement.What makes retirement planning so important for us to list it second in our ‘to do’ list? To answer that question in a single word – inflation. Inflation is what usually leads to a rise in prices of goods and services. If you are wondering why oil, the gas cylinder, toothpaste, eggs and even idly sambhaar costs a lot more today, than what it used to even 5 years ago, blame it on inflation. So planning earlier on in your life is a solution. Calculations show that even a 5-year delay in investing (Rs 10,000 annually at 10%) can make a substantial difference (as high as 60%) to your retirement corpus.

3.       Get yourself insured

Life today has become a lot more uncertain than ever before. Therefore, taking life insurance is another objective that should rank high in the priority list of all individuals. Simply put, the purpose of life insurance is to indemnify the nominees/dependents of the insured against an eventuality. So life insurance must form an integral part of the individual’s financial planning exercise. In addition to life insurance, individuals should also be equipped with adequate medical insurance. Note that we haven’t mentioned life insurance while discussing tax planning in an earlier point. This is because it’s time insurance got its due as an independent entity unlinked to anything but your life. Our advice is don’t mix the two; don’t chase tax benefits while taking a life cover, let alone returns.

4.       Prepare yourself for contingencies

Contingencies/emergencies never announce their arrival. But that does not mean we close our minds to the possibility of their intrusion in our lives. As always, the best way to deal with such a situation is to provide for it well in advance. Such situations could possibly arise out of an accident/operation that is either not covered by mediclaim or exceeds the mediclaim limit or it could be another expense that you have provided for (like a buying a house) which actually falls short at the time of purchase. At times like these, having a contingency fund can prove to be a boon. How do you know how much to save for contingencies? While there is no formula for the same, having 10%-15% of your entire portfolio in low risk investments should arm you adequately during a contingency.

5.       Get Professional help

We go to a doctor when we fall sick. We go to a Chartered Accountant for tax advisory services. Why? Simply because they are experts in their respective fields. Similarly, we should seek out the services of a Financial Planner to help us realize our long term financial goals. We may be prone to bias if we try to do it ourselves. Your children’s’ education/marriage or for that matter your retirement corpus is too important to be left to chance, or government.