POSTED BY December 21, 2009 COMMENTS (118)ON
Personal finance is not only about your saving and investment, it includes tax planning, savings, expenses, debts, retirement plans, investment products and all the insurance and other policies. It is an understanding of how these tools works together and also affects each other.
In this article I will tell some tips which will be helpful for your personal finance.
You should split your Term Insurance for two reason:
1) Top most reason is flexibility in Decreasing the cover later. So in case you need cover of 60 lacs now, you can divide the cover into 30:30 or 20:40 and then in future whenever you need that your insurance requirement has gone down you can just stop one of the policy.
2) The second reason is that your risk of claim decline from insurance company goes down, but this is a secondary reason.
Most of the people still invest in Tax saving funds for their shot term financial Goals. The fact that the money invested will get locked for long term should be taken in positive way and hence you should invest in these for your Long term goal, so that you don’t feel bad about the lock in period because you anyways need money after many years.
For example – Child Education, Retirement, Holidays abroad after many years. For short term goals like Buying car, paying fees, saving for some short term commitment should not be taken care by Tax saving Instruments.
You should use Fixed Deposits, Fixed Maturity Plans, Debt Funds, Balanced funds and Non Tax saving Equity Funds (Risky) for Short term goals. Once you think like this the lock in period will not matter to you at all 🙂
Watch this video given below to know about the tax saving investment tools in detail.
For investors who are going to buy ULIP’s or using ULIP’s for their long term goals, they should use Top up facility in ULIP to minimize the cost. The Allocation charges are generally linked to the regular premium you pay and not the Top up’s. So if you are investing 60,000 per year as premium, you should rather take a 20,000 policy and top up your policy with 40,000.
This way your will save charges on top up money. You can decrease your cost (charges) by anywhere from 50% – 75% using Top ups.
Why do you want to invest in Physical Gold? The biggest reason is for Daughter’s Marriage and Jewellery required for the same. But the underlying reason always is capital appreciation.
So why not always invest in Gold ETF’s [ Understand what is ETF ] and whenever you need Physical gold, sell the ETF’s, take the money and Buy the Physical Gold at that time. Most of the people invest in Gold physically for Daughters marriage, but the better way would be to invest in ETF’s and when time comes you buy the physical gold by selling the ETF’s.
That is a better way because its more flexible, safe and easy route.
I am amazed to see that many Salaried Employees especially youngsters do not care to take the benefit of LTA, Medical reimbursements and HRA just because of their laziness.
So make sure you take advantages of these even if you partly use these things you will save couple of thousands in Tax. All you have to do is save the bills, take the xerox and walk couple of steps to your Finance department and submit them, don’t you think its worth if its can save you couple of thousands in tax saving?
Most of the people take Debt more than they can afford or deserve. Criteria for giving credit is mainly how much you earn. The company never knows your expenses and your future goals, your risk appetite, your future plans etc.
People earning 5 lacs per annam take debt of 30 lacs for Home, unnecessary personal loans for buying LCD’s, going for vacation and other non-priorities in life. This can have ill-effects later on.
Also companies are now keeping an eye on your credit taking behavior and it affects your credit score through which companies in India have started using as a decision making variable. So watch out your credit taking behavior. Don’t over-do it.
Keeping an eye over your portfolio is great. You should look at your shares, mutual funds, ULIP’s etc. but overdoing it can be fatal sometimes. Some of us have this obsession of watching shares, mutual funds NAV and ULIP’s NAV on daily or may be weekly basis. See How much time you should invest in Personal Finance.
This is not a good sign for long term investing especially for people like us who are into regular jobs and have no much time to contribute in your Finances.
When you are a long term investor, why keep track of short term movements, these moves will have not much value in your all growth and short term movements will affect you mentally and tempt you take take decisions in short term because your money is either going up or down fast.
More of anything is bad and same things is true for your over involvement. Couple of hours per month or every quarter is good enough. Don’t get a feeling that successful financial life means more action.
If you are dead in another 1 hour, do you think your Family will be able to find out all your investments and Insurance documents and successfully claim them?
Are they unaware of the fact that you took a huge Insurance cover for them or you invested 50,000 in a ULIP last month?
Most of us graduate from novice investors to a good investor but still are left behind in taking care of this extremely critical point of sharing each and every details of our finances and making sure that the documents are within reach.
Let your wife, children have a good idea of where the documents are and where your investments are, have xerox copies of every document and have them at 2-3 different places and make sure people know about them. Emotional pain of losing some one and no idea of the finances which will take care of them is a kind of situation you never want you loved ones to be into 🙂
You are different, be proud of this fact. If your returns are less than your friend’s mutual funds that’s fine. Don’t compare your self with others, there are many things which determines what you get in life like knowledge, luck, skills, timing etc.
So just make sure that you are getting what you try for. Don’t lose focus from your goals, your main aim in life is to achieve your financial goals easily and smoothly. Financial Planning is a race where everyone who reaches their personal target is a winner.
Make sure you don’t hurt yourself by competing with others.
When you buy something, make sure you try to get information on Internet, ask on forums at different websites and make sure you find out maximum about thing product you are buying. Spending 30 minutes investigating your product can save you from lot of trouble.
One person I know recently took a home loan from HDFC and went for additional Life over from same bank for 30 lacs. He didn’t investigate much about the cost. It was around 8k per year for the term Insurance. When some days back we saw quotes from other company, the cheapest quote was around 6,000 from ICICI Prudential.
He was paying 2,000 more for the same thing because he didn’t spend 5 min extra investigating about the product. Just think what is the loss of spending some time investigating your product. How many of you took an ULIP after agent explained it to you and didn’t inspect much about it.
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You receive your salary -> then you spend all your money -> then save or invest if you are left with something. This is not a right attitude.
You should change it to Get Salary -> Invest your money as per your future goals -> Spend the rest.
Once you are saving some part of your salary, somehow you will find ways to spend on things which are of first priority and would refrain from spending on things which can be avoided but if you spend first and try to save later, you will end up spending on unnecessary things.
So better change the order of spending and saving. You can definitely live with your 90% salary , so at least save 10%. There is no harm in trying out this. If it does not work, you can go back to spend and save.
Make sure you have emergency fund. If you are listening about this from long time and haven’t done it yet, the best thing would be to take a pen and paper right now and plan for it.
This is the money with the aim to provide you immediate access, not growth of money. Don’t concentrate on getting great returns from this part of your portfolio. The aim of this part is just to give you high liquidity in case of emergency. That’s all.
So simple rule is 2 months of expenses in Cash which you can access in minutes from ATM and 3-4 months of expenses in Liquid funds, which you can get back in 3-4 days.
This is preparation for a situation like if you lose your job and need time to search for something you really like, or get a long term illness and cannot earn money in short term or special emergencies. You can always reach out to close friends and Family for money, but why to depend when you can be self-dependent.
Its’ all about strong planning.
I say this again and again, this is the golden rule, one of the fundamentals of Strong financial planning. Long term goals whose target date is more than 7-8 yrs like Child Education and Retirement should always be linked with Equity products like Equity Mutual funds, Direct Stocks, ULIP’s, Index ETF’s, Index Funds.
That’s because you can get great returns in long run from these things with lesser risk. On the other hand short term goals should be achieved by debt products like FD’s, Debt Funds, Recurring Deposit, Short term bonds. You can also use Balanced funds if you have moderate risk appetite and time horizon is 3-4 yrs.
How many investors understand how their ULIP works and what are different costs and how to use it efficiently? Not more than 3-4 % I believe.
How many people know why they have invested in Mutual funds which had a fancy name and which makes you feel like you have invested in something great and how many Endowment Policy holders know the overall final return they would get from their Policies?
Investors get into products which they do not understand well and then they can’t make best use of it which defeats the purpose. In reality the best products are least complicated one’s like Mutual funds, FD’s, Term Insurance, ETF’s, Gold ETF’s etc.
So if you don’t invest in something which looks fancy, you are privileged and should be thankful to god. Companies come up with complicated things which makes general investors feel that they are dumb and these companies are some big shot high class super knowledgeable in field of finance.
Just ask yourself if you want to eat the best, tasty and healthy food in this world then where will you go? 5 star hotels? I don’t think so 😉
There was a time when LIC policies, FD’s, NSC and PPF were the only thing in one’s portfolio. There was not much choice and people were risk averse. That was a different time.
Things have changed today and Finance world is different now and it’s more complicated now compared to olden days because of lots of choices in Financial products for us today. Don’t hesitate by trying out new stuff.
There are different products these days like Index ETF’s, Index Funds, GOLD ETF’s, SIP in Mutual funds, Reverse Mortgage etc. Don’t be stuck in same products like our Fathers and grand fathers have done.
In case you have any Credit card debt and you have converted it to EMI, it would be a better option to take a personal loan and pay off your Credit card debt as soon as possible.
Credit card interest charges are anywhere from 36% to 48% per annum which you don’t realise because it sucks your money slowly and it’s not significant per month so you don’t feel it. So taking a personal loan is a better choice and pay 15-20% interest on that.
You should always try to stay away from Credit card debt at the first place anyways.
At the end, you have to learn stuff. No need to become a pro ,but you should keep updating yourself every month with basic things. Read Personal Finance Magazines like Outlook Money (Link to online issue) and Money Today (Link to online issue) and other blogs on Financial Planning .
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18. If appears to good to be true then probably it is not: So better if something looks great, then make sure you investigate well because there are more chances that it’s not that good as it sounds .There is no free lunch 🙂 – Amit Kumar
20. Find a right Financial Advisor : Find some one whom you trustand he is within your budget and you are comfortable with . – Guru
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