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Tips for financial planning

You might not be born rich but you can grow into wealth. After all, becoming rich is not luck. It is effective financial planning. And to make an effective financial plan, you need to employ a few basic financial planning tips and avoid mistakes that can jeopardise your entire financial plan.

There are some best financial planning tips which, when followed, lead to effective financial planning. Do you know these financial planning tips India? They are simple to follow and can easily manage your debt. Here are some:

• Save first, spend later

This is the first tip for you to follow in your financial planning process. Whenever your income is credited, save a portion of it first. At least 30% of your income should be directed towards savings for your financial goals. Of this 30%, hold 10% in an emergency fund for unforeseen expenses. (Link to thumb rule article). Also, another 10% should go towards a retirement corpus. This way, you start retirement planning early and retire rich.

• Plan your taxes and tax saving

Tax is an integral part of your income. Breaking it into relevant sections like medical, travel, etc. can be a nice trick. It can help you make the most of all possible tax exemptions and deductions. Here are some tips to maximise tax benefits:

Section 80C lets you save up to Rs.2 lakh of your taxable income from tax. Use the investment avenues of this section to maximize tax-saving. You can choose from PPF, ELSS, 5-year Fixed Deposits, National Savings Certificates, etc. This includes the additional Rs.50,000 deduction that you can get through National Pension Scheme (NPS).

Section 80D lists tax-saving options on health insurance for self, spouse children and dependent parents. You can save up to Rs.60, 000 of your taxable income if you pay premiums for health insurance policies of your family and your parents. Also make use of the tax deductions on medical expenses.

Home loans can save tax in two ways. You may know about the deduction on principal repayment as a part of 80C. But do you know that the interest component also gets a tax deduction, over and above the limit of Section 80C? This is as per Section 24 that allows interest on home loan to get you a tax deduction. This section’s provisions can be utilised for maximum tax-saving.

• Manage your debts: Control bad loans, optimise good loans

The next important tip is managing your debt. Repay your loan instalments on time to avoid damaging your credit score and high interest payments. Stay away from or get rid of bad loans and optimise good loans. Here are some ways how:

Bad Loans:
1. Credit card loans involve very high interest. Also, the interest is charged on a per day basis until you pay off the debt. Thus, the interest compounds and your net cost rises too high. So, pay off your credit card loans first. Never revolve credit card outstandings.
2. Personal loans also have high rate of interest and little tax efficiency. After you pay your costly credit card debt, prepay or pay off your personal loan debt next. Refinance loans to lower interest rates if possible too.
3. Car loans being secured loans have a lower rate of interest. But they can be paid off at the earliest too. After all, they provide no tax relief, unless you are classified as a ‘professional’ in the tax system.

Good Loans:
1. Home loans are good loans as they help you save tax. We read earlier about the tax deductions on your home loan principal and interest repayments. So, if you have a home loan, don’t rush to prepay it.
2. Similarly, zero-interest finance options need not be prepaid. Instead, use your excess funds for investment to generate good returns.
3. Education loans too provide tax benefits. So, think twice before prepaying these too.

• Don’t put all eggs in one basket: Diversify your investments

Don’t favour one investment avenue. Diversify. Have a good equity-debt mix in your portfolio. The proportion of debt investment in your portfolio should be equal to your age. As you grow older, your debt investments can increase as your risk-taking ability reduces with age. Of course, don’t confuse this with loans and other debt liabilities. Equity allocation should depend on your risk appetite.

• Pen your goals

Goals are best understood and remembered only when they are penned down. Analyse whether your goals are short-term or long-term ones. At least 10% of your investments should be directed towards long-term goals, while the rest can be directed for short-term investments. Pick the right investment avenues based on the horizon of your goals. Don’t invest in long-term investments for your short-term goals.