There are individuals who have huge surplus money but they really don‘t know what to do with it or how to put it to better use.
There are individuals who have huge surplus money but they really don’t know what to do with it or how to put it to better use. While these individuals may attract the envy of many, we believe owning money and not knowing what to do with it can be quite an unenviable situation. On the other hand, there are some investors, who don’t have a great deal of surplus money at their disposal, yet are in complete control of their finances. These individuals seem to be in the driver’s seat as far as their finances are concerned and should in fact be envied instead.
While most of you would find it a little difficult to digest that there are investors who have the money but don’t know what to do with it, but that’s the truth. Don’t believe us, just look around and see the number of people with the latest gizmos, iphones, 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 to. Do this small test, when you see someone flashing his latest iphone 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 iphone rather than dwell on the ‘irrelevant’ issues raised by you.
To be sure, these issues (like the features of a latest iphone) 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 iphones being bought than financial plans being prepared.
So, although it’s good 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 and so investing promptly in the right avenue to save tax assumes importance too. An individual can save tax upto Rs 100,000 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 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 now for your retirement
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? The answer to that question is the 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 ‘idli sambhaar’ costs a lot more 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 40%) 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.
There are broadly three types of life insurance plans; term plan, endowment plan and ULIPs (Unit- Linked Insurance Plans), available at investor’s disposal. While ULIPs are not an ideal avenue to take life cover, term plans, the cheapest and most effective form of life insurance are best suited for this purpose.
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. Don’t forget charity
Even before Bill Gates and Warren Buffet began doing it, charity was always necessary. If you have the money, it’s only fitting that you share some of it with the less or under privileged. Although some charities qualify for tax benefits, our advice is you ignore them and just focus on giving some money away without worrying about how you can benefit from it one way or another.
PersonalFN is a Mumbai based Financial Planning and Mutual Fund Research Firm.