Earning money is a great and ecstatic experience. Especially, for people who have just started on a new job, receiving their monthly salaries can be exciting. However, a lot of youngsters today are more interested in spending that money instead of investing it. It is important to inculcate setting financial goals early in life and reap the benefits of financial planning. There is a common misconception that financial planning and investing money is only for older people. On the contrary, it is very beneficial to set up financial goals at an early stage.
Setting goals the right way
People invest money so that they can have enough money to meet their financial goals in the future.
Here is some goal setting tips using an example. Let’s see how to set financial goals and some common financial goals of Mohan, a government employee.
A lot of people in the country have various types of financial goals and the above-mentioned are some such examples of goals on their wish list. However, from a financial and investment standpoint, these goals are vague.
For instance, let’s take the first goal: Buy a car.
Invariably, there are a lot of follow-up questions that arise when Mohan says that he wants to buy a car.
What type of car does he want to buy?
How much does the car cost?
When does he want to buy it: Next month, next year or two years later?
Goal setting tips
It is very important to ask the aforementioned questions because only then can you set a goal that is clear and definite.
There are two very important factors to consider whenever you set a goal:
a) Time estimate
b) Cost estimate
When you know these two components, it becomes easier to take the right course of action in order to achieve the goal.
In this example, Mohan can say: “I would like to buy a car that costs Rs 8 lakh in the next twelve months.”
Benefits of financial planning
1) Achieving your milestones
It is crucial to meet financial goals at the right time. Imagine if you have reached your retirement age but your retirement fund is not as large as you expected! Proper financial planning can help you meet your goals successfully.
2) Beating inflation
As the years pass, inflation reduces the purchasing power of an individual. For example, imagine you have Rs 100. With this amount, you can buy 10 glasses of milk today. But after ten years, you may be able to buy only 5 glasses (or less) with the same amount. As a result, it is important to actively plan and monitor your financial situation regularly.
3) Back-up in case of emergencies
Nobody knows when an emergency situation can rise up. Situations such as accidents, loss of job, or other unforeseen events do happen. But when they occur, it is always better to be prepared financially. By creating an emergency fund, you can take care of yourself and your family during such events.
Setting goals is necessary. But for these goals to fructify, it is necessary to do it the right way. Identify your financial needs and requirements as precisely as possible. And once you do that, you can make better investment decisions.
Everyone has goals. But they keep changing at different stages of life due to evolving circumstances. At an early age, new career beginners are eager to save or spend on a new vehicle or lifestyle appearances. However, as they grow older, priorities shift and goals such as family and retirement come into play.
Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
Mutual fund ELSS vs PPF: Which is the better tax saving investment?
How do you choose an investment that helps you save tax? When you research, you should ideally look at an investment that will help you build a corpus over time. Some of you may take a conservative route by investing money in a Public Provident Fund (PPF), while others may opt for an instrument such as Equity Linked Savings Scheme that may be subject to market risks but aid you in growing your corpus at a quicker rate. Both PPFs and ELSS offer tax benefits to the investor. Let us find out the best tax saving investment options between the two. But before we begin the comparative study, let us understand PPF and ELSS briefly. ELSS mutual funds and PPFELSS offers tax exemption under Section 80C of the Income Tax Act. In ELSS, a major portion of the fund is invested in equities and the fund’s performance depends upon the stock market since returns accrued from ELSS funds are market-linked. PPF, on the other hand, is a more traditional investment instrument that the Government of India introduced to encourage people to inculcate the discipline of saving money, especially for their old age. Now that we know the definitions of ELSS and PPF, let us compare the two tax-saving investment instruments to find out which is a better investment option. There are seven factors to help us make the differentiation. ELSS vs PPFRisk factorPPF is backed by the government of India which makes it a safe investment, whereas ELSS funds are equity linked, which means that they are subject to market risks. Tax benefitsPPF investments qualify for EEE (Exempt Exempt Exempt) i.e. the investor is exempt from taxes while investing, accumulating and withdrawing his investment, whereas you have to pay a 10% long-term capital gains tax on profits of over Rs 1 lakh for ELSS investments. Returns accruedThe rate of interest on PPF investments is declared by the government of India every year. This is typically between 7% and 8% per annum. ELSS, on the other hand, is market-linked which is why the returns may vary depending upon the scheme chosen by the investor. However, ELSS investments can offer returns ranging from 12% to 14% per annum. Lock-in periodPPF investments come with a minimum lock-in period of 15 years, with partial withdrawals permitted after the completion of six financial years. ELSS mutual funds on the other hand, have a mandatory lock-in period of 3 years with no room for premature withdrawals. Investment amountYou may invest a minimum of ₹500 and a maximum of ₹1.5 lakh in PPF per annum. This investment can be made in lump sum or in instalments so long as it doesn’t exceed the maximum amount. With ELSS, there is no limit to how much you can invest however you are eligible for tax deduction on investments not exceeding ₹1.5 lakh per financial year. Maximum investment tenureYou can continue to invest in PPF funds for a maximum tenure of 5 years, after which you can extend it for 5 years at a time. However, there is no maximum tenure with ELSS investments. The verdict – ELSS vs PPFAs is evident, PPF investments are safer but they offer lower returns in the long-term as compared to ELSS. While the tax benefits are better for PPF investments, investors can probably earn higher returns with ELSS investments, so long as the investor is willing to risk market volatility. The final verdict is that although ELSS can create wealth faster for the investor in the long-term, the investment should be made as per your financial goals and personal preferences. DisclaimerInvestment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
Effective financial planning includes managing debt
IntroductionMany smart individuals resort to financial planning to handle their finances better. They make a budget, invest towards their goals, and plan their taxes. Yet, despite everything their financial plan could fall short. The reason is not hard to understand. While all other activities of financial planning are undertaken, managing debt burden is often ignored. This ignorance unbalances even a good financial plan, and makes it go awry. This is why it is crucial to have effective financial management. To enjoy the effective financial planning, managing your debt is important. Do you know how you can do so? If you don’t here are some tips for you - How to manage your debt• Identify your liabilitiesThe first and the foremost task is to know how much you owe and to whom. Until and unless you know your actual liabilities you cannot make a plan to repay them. So, work out the details of your debts, their interest rate, the outstanding amount and the outstanding tenure. Once you know how much you owe at any given time, you can proceed to service your debt.• Repay on time One of the most important ways to manage your loans is to repay them on time. Every loan has a monthly repayment date. Stick by this date to avoid late payment fees and charges. Paying on time is also good for your credit score which is negatively impacted in case of a default. To ensure timely repayments you can opt for direct ECS with your bank. Your bank account would be automatically debited at a particular date for every instalment due. Your repayment would be done and you would be spared the burden of remembering the date.• Avoid bad loans Personal loans and credit card loans, though easily available, are not a very good choice. It is because of two reasons. Firstly, they have very high interest rates. Secondly, they are unsecured loans which put a negative impact on your credit score. Try and avoid these unsecured loans. Instead, opt for secured loans like loan against property or loan against your investments. These loans are secured against your assets. They have a lower interest outgo and are also good for your credit score.• Prepayment is not always goodThough prepayment reduces your loan liability, it is not always a good choice. In many cases prepayment involves a charge. Even in those instances where prepayments are free, you incur an opportunity cost. The money you spend on prepaying your debt if invested elsewhere might yield you higher returns than the interest you are paying. Let’s understand it with an example – Suppose you have Rs.50, 000 in surplus funds. You can either prepay your home loan or invest this money in a good scheme. Your home loan’s interest rate is, say, 9% per annum while the investment avenue promises you 12% returns. If you prepay the loan you would be saving the 9% interest outgo on Rs.50, 000. However, you would be losing the 12% return which you can earn if the money is invested. Since the investment return is better than the debt interest rate, prepayment is not a good option.So, always weigh the scales before prepaying your debt. Try and direct your additional funds to lucrative investment avenues instead to earn higher returns.• EMI v/s monthly income ratioIdeally, your debt EMIs should not exceed 15% to 20% of your monthly income. You should have at least 80% to 90% of your earned income in hand (after paying off the debt instalment) to meet your lifestyle costs and for saving. If EMIs are more than 20% of your income, it might create a cashflow problem. So, when you are choosing loans, ensure that the EMIs don’t put a strain on your income. • Use your loans for tax planning Home loans and education loans give you tax benefits. The interest you pay on home loans is exempted under Section 24 while the interest paid on education loan is exempted under Section 80EE. Since your loans give you tax relief, use the benefits if you have these loans.Conclusion Managing your debt is an important aspect of the financial planning process. For an effective financial management and to reap the benefits of financial planning in business, don’t forget to include debt management into the planning process. DisclaimerInvestment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
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