How many times have you heard your parents and relatives say: “It is very important to save money. Don’t spend all of it.”
That’s a very sage advice. But guess what? Simply saving money in a bank account is not enough. You need to go one step ahead. And that means to invest. Employing smart investment tips through a smart investment plan can make the difference between creating wealth and merely saving.
Why simply saving is not enough
Savings can help you meet a few financial goals. But in order to truly build your wealth over the long-term, it is important to invest utilise smart investment ideas to make money. Of course, there is a risk of losing money in investments, such as a smart investment in share market. But as an astute investor, it is possible to manage the risks and enjoy high returns.
How to make smart investment choices
Here are some tips you could follow to shift from saving to building wealth.
When you save your money in a bank account, the returns you earn can be very limited. For instance, most banks offer around 6-7% on fixed deposits. The interest rate on savings accounts is much lower at 3-4%.
And with inflation usually hovering between 4 and 5%, it is highly possible that your buying power reduces over time. In other words, your returns are eaten away by inflation.
Potential growth from investing
On the other hand, there are many investment avenues that offer greater returns to investors. Mutual funds offer returns anywhere between 10-15% per year. You can invest in debt funds, equity funds, Exchange traded Funds (ETFs), balanced funds and so on. Investing directly in the stock markets can help you earn much higher returns annually. So, based on your risk appetite and financial goals, you can choose to invest in any of these options to start building wealth.
Goal planning and investments
As you grow older, your financial responsibilities are bound to increase. Getting married and having kids can be emotionally wonderful. But it also means that your expenses start growing. Buying a new car, a new house, putting your kids in good schools and colleges are some of the major expenses that occur down the line.
With a fixed income and limited savings, it may not be possible to do justice to all these milestones. However, by creating a proper financial plan and investing for the long-term, you can slowly but steadily create a large corpus of wealth. And one by one, you can meet all your financial goals on time.
Start investing now
Many people wrongly assume that investments are only possible after you have saved a large amount of money. Yes, it is important to save first and then invest. But that doesn’t mean you need a huge amount to invest. You can start investing even with small sums of money
Many mutual funds allow investors to investors to invest as little as Rs 500 each month through SIPs. Here, the important thing is consistency. By investing month after month, you can really see the difference over a period of time. As your income and confidence grows, you can increase your SIP. And as your knowledge of the market grows, you can branch out and invest in other avenues too. Stocks, futures, options and gold are a few possible avenues.
As a young person, setting financial goals may be the last thing on your mind. However, that shouldn’t stop you from investing for long-term wealth creation. Remember, savings are good but investments are better.
Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
The importance of building an emergency fund
There is a popular fable about the ant and the grasshopper. While the ant toiled hard during the summer, the grasshopper would sing and dance and mock the ant by asking: “Why do you work so hard?” But when winter came along, the tables changed. The grasshopper became miserable, it no longer sang and danced and mocked. How could it? It had no food, no shelter during the damp, cold nights. The ant, on the other hand, remained well-stocked. This story conveys that one should work hard when times are good because no-one knows what the future holds. This is precisely the reason you should create an emergency fund. The kitty you build can be a life saviour in tough times. It can help you tide over family or financial emergencies, loss of job and other such personal hardships. This is why saving for the future should be the first step of financial planning. Building an emergency fund is not tough as you’ll realise when you give the article a read.How to create an emergency fund?Like the ant, you have to be zealous enough to set aside a part of your income every month, without fail. The amount you save will comprise your emergency fund. As we mentioned in the previous chapter, it is advisable to save first and then spend on your monthly expenses. This way, the creation of your emergency fund will not be risked by your bout of overspending. At least 10% of your gross monthly income should be saved in order to build an emergency fund.Where do you park your money?Stashing money in your house is not a good idea. You may be compelled to use that money for every inconvenience you face. Now the question arises: where do you keep your money for financial emergencies? The options • Life insurance You can choose to buy a life insurance cover. A life insurance can safeguard your family in case you are not around. The value of your term insurance plan should ideally be eight to 10 times your gross annual income. This will ensure your family doesn’t face financial upheavals in your absence. • Health insurance A medical emergency can drain out your wallet. To worsen matters, healthcare costs are rising sharply in the country. A nationwide survey found that the costs are growing at over 10%, both in rural and urban medical facilities. Hence, a medical cover is of vital importance. You may have to pay a small premium every year. But, the larger picture suggests that’s a small price to pay. Also ensure you opt for a critical illness cover. This can protect your finances in case you are diagnosed with cancer, have a heart attack or are suffering a life-threatening illness. In short, do not look at the money you are spending on a medical cover. You should, instead, look to get the optimal coverage in your medical cover.• Liquid mutual fundLife often throws different curveballs at you. For example, you may lose your job. In such cases, you need money at hand. This is where a liquid mutual fund can help you. You will get two benefits. One, the fund can give you decent returns at minimal risk while you are invested. Two, you can withdraw your investment as and when required. • Bank balance Your savings account can be of help too. Try and keep aside at least two months’ worth of your income in your bank account. The biggest advantage of having cash in your bank account is that you can withdraw any time, thanks to ATMs and debit cards. To sum up Planning an emergency fund is essential if you want to sail through life without any financial difficulties. So, create a contingency fund and invest it in suitable avenues.
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 laterThis 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 savingTax 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 loansThe 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 investmentsDon’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 goalsGoals 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.
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