9 personal finance commandments that those in armed forces must follow

-Lack of clarity with respect to investment in house and property. Should a house be bought just to save tax on the house loan? Is it good to have a loan liability?

-Two major events warrant a change in financial planning for an officer. First is marriage, second is kids. “But we start with one plan as bachelors and mostly continue with it without much change.” He went on to say, “This is just my opinion, ma’am. However, most officers have very limited knowledge of basic financial planning. That’s the biggest challenge.”

Let’s tackle some of these most-frequent issues that plague our armed forces:

A fat DSOP is the healthiest; never go on a diet

As opposed to employed civilians who contribute to Employees Provident Fund (EPFO), defence personnel contribute to a common pool called the Defence Services Officers Provident or DSOP.

Now, how much DSOP do you get deducted—was one of the first money-related questions I had asked my husband. On listening to his answer (which was just the minimum subscription amount of around 6 per cent of basic pay), I pushed him to increase it. I’ll be honest that he did complain about setting aside a decent chunk of his salary each month. However, he got convinced over time, when the payslip started reflecting the magic of compounding.

Serving defence officers save a percentage of their basic salary in the DSOP fund while it goes to the Armed Forces Personnel Provident (AFPP) fund for other ranks. These funds are one of the best ways to creating a sizeable corpus for goals, such as buying a house, and have the requisite liquidity during retirement years. As a youngster in the armed forces, this should be one’s starting point. Get a decent sum deducted each month and increase the subscription during a field tenure or posting to a CI Ops, since there is an additional allowance that is given while expenses are lower (other than what is splurged during leave). Try to avoid withdrawing from it (unless essential) since that destroys compounding. Finally, since DSOP/AFPP subscription takes care of deduction u/s 80C, there is no need to invest in any instrument for tax-saving purposes.

Allocate to equities

Add some magic of equities, preferably not direct stocks. Create a portfolio of equity mutual funds for long-term goals, such as a child’s college education. While DSOP or AFPP adds the predictable compounding effect, equities play an important role as well! Education inflation in India is high, hovering around 10–12 per cent. This means that a college fee of ₹20 lakh today will be ₹53 lakh at 10 per cent inflation after ten years. Thus, it is crucial to invest a part of the savings in an asset class that can beat inflation and ensure that money will grow to match future money needs. Equity mutual funds are one of the best-suited products to invest regularly in for the long-term. Consider DSOP and equity mutual funds as the two wheels of a bike.

Given that the tax liability for officers is high, in addition to equity mutual funds, debt mutual funds can be considered after due diligence to meet goals that are three to four years away.

Spend carefully, save first

-Keep your portfolio compact and clean. There are too many things to handle already— constant moves, claims, and Part II orders—so portfolio-related work must not give a headache.

-Avoid vehicle loans and multiple credit cards. Getting a loan and a credit card are the easiest for persons in government jobs. Don't fall prey to them. While a home loan is fine, strive for a debt-free life.

-Don’t buy property to save tax or just for rental income. Rental income is taxable. Make sure you can manage the property when you are posted somewhere else.

-On climbing ranks, increase your DSOP first and then your equity allocation.

-The remote life and distant locations often keep men and women in uniform away from the mainstream. So, it’s important not to take decisions related to money matters in haste during short leaves. Do give any financial investment or property-related decision enough time and thought.

-Buy gold in electronic form (Sovereign Gold Bonds or gold mutual funds).

-Keep your spouse involved in money matters—this is important.

-Do ensure that the nominee names are correct in all bank and investment-related documents.

-Defence services offer a pension, which ensures a peaceful retired life (also takes care of inflation given the dearness allowance). However, many leave after five, 10, or 14 years of service. If you are someone who plans to leave after a short service, the planning process has to be different.

Armed forces offer an amazing life but call for a lot of sacrifice, not just from the men and women in uniform, but also from the ones standing behind them. Knowing that your finances are in order can give peace of mind, and make it more wonderful.

(The writer is founder, FinFix®)

(Disclaimer: The intent is to provide a broader guidance and not just  investment advice.)