Your salary provides you the mechanism to meet your everyday needs, and any surplus is your saving which provide a means to meet your future needs.
It is a general opinion that people who earn more are rich today and will have a richer and brighter tomorrow. Not necessary. Because if that was the case, Vijay Mallya wouldn't be where he is today. There are cases of so many rich people in India and around the globe, who eventually filed for insolvency in the past. All thanks to mismanagement of money. Many people are making enormous money, but how many of them die a multimillionaire. Not many. Because they might be getting a lavish paycheck, but matched by an equally lavish lifestyle, and before realizing that entire money is gone in a flash. A salary with a large number of zeros at the end won't make you wealthy, how well you treat your salary certainly does.
• You don't have to spend all your salary: After ploughing through for a full month 10-7 each day, you get your salary, you feel you slogged for it and you deserve to spend it the way you want to. You do deserve the money, no second thoughts, but spending do need some serious consideration. You have to save a fraction of your income to ensure that you don't run out of money when there is none coming. This fraction determines your spending and not the other way round, meaning, if you get a salary of Rs 40,000, you spend Rs 35,000, Rs 5,000 is your saving, next month you spend Rs 39,000, your saving is Rs 1,000, some month you'll spend the entire 40, another month you'll spend 44, the extra 4 is on your credit card. Can you feel the clutter? It is because this is not how it works. So let's unclutter it a bit, your salary is fixed, Rs 40,000, let's fix your savings too at Rs 15,000. So each month salary 40,000, saving 15,000, spending you have to manage within 25,000. This Rs 15,000 each month, put in the right direction will make you wealthy in the long run.
• The salary shouldn't be lying in your salary account: Dear Customer, your account is credited with Rs XXXXX on 1-Jul-17, salary for the month of June 2017. You spend from this account over the month, there is some surplus in the account, then again next month you get the same message, and this continues, month over month and year over year. Many salaried people have lakhs of rupees resting @ 4% in their saving accounts from the money thus accumulated. Your savings are dying a slow death this way, when they have the potential to grow at double or triple this number, so why are they not exploring better options, why are they not living to the fullest?
• Save Tax: Paying tax pinches, because a substantial chunk of your salary, you have to give to the government. And the irony is, taxes are directly proportional to your income, the higher the salary, the higher the tax. You are earning to live your dreams and not to pay 30% as tax. If you can alleviate your tax liability (legally), so why not. Therefore, your investment list must have tax saving at the top. Investing in tax savers will increase your net income as well as will get you a decent return on your investment. When you invest Rs 1.5 Lacs in a tax saving instrument, you save Rs 45,000 (taxes saved assuming 30% slab) + 12,000 (Return from your investment, assuming 8% fixed return), a total of Rs. 57,000.
• A salary increase = A savings increase: The general reflex action to a pay raise is we fall prey to the consumption instinct. When your salary increases, the need to splurge increase, a wage hike proportionately increases the standard of living. And a dominant part of the additional expenditure is on stuff that we can easily do without. Ideally, when your income increases, your saving & investment must also increase in a similar proportion. This will make sure that your investments are able to catch up with your escalated lifestyle.
The above thought-points form the protocol for a productive management of your salary, and if followed religiously can create magic. Money management has to be pursued at all times, irrespective of which end of the hierarchy you are at, the bottom most or the topmost, because building wealth is a lifetime goal.
“Your salary gives you a start, the end is a wealthy you.”
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√ The month is February, the deadline for submitting investment proofs is approaching.
What do I do?
√ Some money got accumulated in my savings account, want to park it in a safer avenue.
What do I do?
√ I have invested enough in equity, now I want to put some money in a safer fixed return option.
What do I do?
√ I want to invest, but I don't want to take the risk.
What do I do?
In all of the above situations, what we do is: Go to a bank and invest in a fixed deposit.
Many research reports and survey came out with the facts that still there is huge amount of money get invested into Fixed Deposits. figures presented in all such reports testify the fact that whenever we want to invest for a long term, fixed deposits are our favorite option.
Why do we invest in FDs?
Better Interest rates: Since fixed deposits offer better rate of returns than saving accounts, we prefer investing in the former. Safe: We invest in fixed deposits in banks because we believe it is the safest investment option and other avenues carry a greater degree of risk than Fds. Traditional: We invest in Fixed Deposits because it is tried and tested. Our parents, relatives, friends, practically everyone, invests in Fixed Deposits. 'So even I must have one' is the logic behind the investment.
Did you know?
There are some interesting facts about fixed deposits which are often overlooked:
TDS is deducted from the maturity value if the total interest from your accounts including the FD account exceeds R10,000. If you are falling under a 20% or a 30% slab, then too the TDS will be deducted @ 10% and you will have to pay the remaining as a self assessment tax. Most people realize this at the time of
filing the returns, which is mostly the last date, since this TDS reflects in your account on the income tax website. You can however submit form 15G/15 H to the bank, but then again it needs to be deposited every year.
Interest rates are falling and are expected to fall further with easing inflation. Currently, the interest rates are in the 7-7.5% range for a five year FD in banks. If you check the rates 15 years back, this rate is much lower now and the trend is likely to continue.
Are there any other options ??
BONDS are another great option to invest your money. Bonds are issued by banks or public sector entities. Bonds are offered for a fixed tenure by the issuer at a fixed rate of interest. You can either buy the bonds at the time of their issue or from Secondary market where they are traded after the issue.
Lets understand in detail the features of a secondary market bonds
Interest Income: Bonds offer fixed interest rates like FD’s. The interest rate may differ from issuer to issuer based on tenure & credit rating of the bond. Liquidity: Bonds offer an edge over Fixed Deposits in terms of liquidity. Premature withdrawal of a fixed deposit attract hassles, time and massive penalties. However, in case of bonds, if you wish to liquidate your investment, it can easily be traded in the secondary market.
No Paperwork: You can buy a secondary market bond simply through your Demat Account. You don't need to submit hard copies of the application form or your documents. You just have to sign a Deal Confirmation Sheet and send it on-line or through whatsapp before paying for your investment. Unlike FD, you don’t have to safeguard the FD certificate as all investments in bonds are in Demat.
No TDS on interest payouts: as bonds are listed on the exchange and issued in Demat mode. You shall pay your taxes due as per your tax slab on the income generated if you sell the bond within a year, and you are entitled to the benefits of Long Term Capital Gains if you redeem after one year. There is no hassle of annual submission of Form 15G or 15H unlike Bank FDs and you will not be paying a TDS if you are not liable to pay taxes.
Quick: Payment is via RTGS only and bond will be credited to your Demat a/c by end of day.
Credit Rating
Bonds are analyzed by credit rating agencies like ICRA, CRISIL, etc., for their credibility and they give them credit ratings. The ratings are like AAA, AAA+, AAA-, AA, BB, BBB, etc. and each rating represent varied levels of safety with regard to payments of interest and principal. The better the rating, the lesser the risk. So the investor must always look for bonds with good ratings.
Tenure
You must also consider the tenure of the bond, it should be in line with your investment horizon. Though, there is an option of secondary market trade, but there is always an interest rate risk if you encash it before maturity. So, if you are heading towards the bank for investing in a fixed deposit, change your direction to Bond, which bears all features of the former with added advantages of higher income and less complications.
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Your income meets your needs and looks after your present, and your savings and investments create wealth for you and takes care of your future.
Welcome to the investment world!
It's great that you are thinking about your future and are ready to take the first step on to the ladder. When we invest, what we see is gains coming through and how our investment will be quadrupled within a short span of time. What we often overlook is the darker side of the mirror. Whenever you try your hands on something new, mistakes are bound to happen and it's okay, since we learn from our mistakes. But when it comes to investments, mistakes are counted in financial terms. And it is always good to avoid the mistakes and save our money. It is better not to get very high hopes of making quick money and you should be aware of few things. Following are the common money mistakes which not only a newcomer but any investor can commit:
Money making is the only goal
This is the primary mistake of an investor. He believes that he is investing and he will profit from it soon. If someone asks him, what's the purpose behind him investing? What future goal will he be able to meet with the investment? He most likely will not have an answer. And when need arises, he would either not have the money, since it's illiquid or it is not sufficient to fulfill the need. The solution to this is make it a point that you will plan before you perform. Plan and allocate your investment into different goal paths.
TV We believe that the TV journalist or the author of a magazine article on investments is the God of investments, whatever he says is set in stone. What we do not realize is, if he actually knew what's going to happen next and where to invest, he would have been the next Bill Gates. He would not have been giving free advice. The solution is switch to a movie channel and relax.
Emotions
Emotions play a very important role in our investment practice. You would somehow have a very strong conviction in a particular stock. You would fall in love with that stock because you have read so much about it, you like the brand, or at times the investment manager is from your hometown and you know he is very knowledgeable. However, these investments are not a good deal and not performing. But because of your emotional connect, you believe that a day will come when they will perform and you will gain and the day might never come. So, keep your emotions separate from your investments, the latter should not be influenced by the former, rather should be based on thorough research and performance records.
No time horizon
Not having a time horizon in mind, or having a time frame too short to meet a goal, is a problem. You have to give appropriate time to an investment to get the best out of it. It is better to invest according to the time period left to accomplish a goal.
Speculation
Some investors are often tempted by speculation. Easy and quick money appeals and in order to make money quickly, they become speculators and not investors. They engage in risky transactions like hedging, take short and long positions and attempt to profit from fluctuations in the market, than by capital gains, interests and dividends. They deal in huge amounts, and they can't afford to purchase these stocks. The result is if the price of the purchase transaction is higher than the sale transaction, they are bound to book losses. Most new investors are wiped out because of such speculative activities. So, we should always keep in mind that we are investors and not punters.
Trying to average out
An experienced investor is easily able to get rid of a wrong product that has entered his portfolio, he would book a loss and concentrate on the rest. On the contrary, an unseasoned one would try to average out the purchase price by buying more of the This strategy has offered historic trading losses especially in the short term. Investors need to accept the fact that a wrong stock has entered and it has to be removed to protect the health of his portfolio. It is better to go by the advice of a financial advisor, and rely on the mutual fund managers because they are experienced enough to handle such things.
Lose focus easily
We tend to purchase and sell at very short intervals based on others' recommendations. One friend who is an active trader suggested, stock A is the best, so we will also invest in A, another friend who is a researcher suggested stock B will outperform all others, so we will sell A and buy B. Lack of conviction in a particular product would lead you nowhere, you would not be able to ripe the benefits of either.
Market timing
Even the big shots have not been able to time the market, nobody can predict what will happen next. Some investors on the basis of their research try to time the market and it does nothing but damage. Investors should rely on professionals, they shall resort to mutual funds, concentrate on their goals and should not panic due to a here and there in the market conditions.
Ignoring the cost
Every investment has a cost associated with it. You have to pay commissions in stock trading, real estate investment exit loads for mutual funds. Investors generally analyse their profits on gross basis and compare products likewise. However, commissions form a part of the cost and at times can bring down the profits significantly. So, you should consider the impact of costs while evaluating a particular investment.
Lack of diversification
Some investors do not have a proper financial plan or even if they have, they often go off track. They tend to purchase a particular product or invest in a particular segment only. This inclination results in lack of a diversified portfolio and if that particular segment or stock fares poorly, his entire portfolio fails, because there is nothing else which can cover up.
Procrastination
Procrastination is the mother of failure. The markets move very fast and we take time in researching and by the time we go ahead with implementing our research, the markets have moved to a different level, however our strategy is the same. And thus we lose out because of improper time management. All these mistakes are mainly due to lack of planning and knowledge. The investor should resort to the services of a financial advisor, devise a proper financial plan and invest accordingly. He should go for professionally managed mutual funds than burning his hands by experimenting on his own.
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Ramesh: Hey Suresh, good morning, how are you doing?
Suresh: Hey.. I am doing good, how about you?
Ramesh: I was wondering if you would be interested in investing in that bond which Anil was talking about yesterday, I am thinking to invest in the new bond too.
Suresh: Why do you want to invest in that bond?
Ramesh: Because I have never invested, and I have some money left from my last bonus. So I thought to go for it since a lot of people in the HR department are investing in it and it is supposedly a hot pick.
Suresh: My brother recently got associated with ABC Life Insurance company, and they are offering very good investment options. All of us in the family have invested in it. Why don't you invest in a ABC policy through my brother, he will also pass on a % of his commission to you.
Ramesh(excited): Hey, that's amazing, tell your brother I will buy ABC Life policy. Can you ask him to meet me in the morning tomorrow?
Suresh: Sure. Bye
Ramesh: Bye
What do we interpret from this conversation?
Ramesh is an amateur investor, and wants to park his money into some investment option. But even if that money is spare, it is his hard earned money and it should not go into any channel whatsoever, irrespective of his suitability and requirement. So, what should Ramesh do? Should he look for a financial advisor, who can devise a financial plan for him and suggest investments for him?
Ramesh should not rush through the process, or for that matter anyone, one who is a first time investor or the one who has been investing regularly. The first step is to prepare a list of goals that you want to achieve in life. What all should be accomplished in the next 5 years, the next 15 years and the 20 years and so on. Your life plan should be penned down before proceeding to invest. Before buying an investment, it's important to ask yourself if you really require it. More than half of the mess can be cleared just by asking yourself certain questions pertaining to your investment. Don't just enter into an agreement for any investment before asking the following questions from yourself:
Why do I want to invest?
The first question that should come to the investor's mind is what is my investment objective? What is the reason behind taking the pains of the entire investment process? What future purpose will it serve?
Will I be able to afford it?
Do I have the money to commit to it. There can be lump sum or regular payments. Will you be able to save money for this investment after providing for your routine expenses, other investment commitments and emergencies.
How much will I need at for the goal?
If this investment is allocated towards a specific goal, will the maturity value be sufficient to meet the goal? This will take into consideration the inflation factor as well.
What is my risk profile? What if I lose?
Will I be able to sail through the loss? What is the worst case scenario? Is the product matching your risk profile. What if you are not in a position to take risk and the investment that you are choosing is equity oriented. And if it fails, you fall in a pit of economic crunch which you can't handle.
Does the investment fit into my financial plan?
Is the product a hit or a miss in my existing portfolio? Does it complement my existing investments? This should be measured in terms of your ideal asset allocation and according to priority of goals. If you have enough of debt in your portfolio, and this is another debt investment, then there is no point going for it.
Do I know everything about the product?
Do I understand the investment product such that I can explain it to someone else? Do I know how exactly does it work?Any decision being uninformed can prove to be fatal for the health of your investment portfolio.
Do I know the company fundamentals?
Who is the provider of the product? What is the cash and debt position of the company? Who are the executives of the company? What are the company policies, etc? You should be aware of the demographics of the company from whom you are buying the investment.
What are the costs associated with the investment?
What am I paying to purchase the investment? Higher the cost, lesser the profit. It does not, however mean that you should always consider cheap options, rather the cost should be able to justify its worth. A good way to evaluate the cost is comparing it with similar products, it will give you a better idea.
What is the track record of the investment?
How has been the product performing in the past? Not only in absolute number but also in terms of peer performance, if the absolute number was low, but it outperformed the peer average and there is scope for growth, then it is a good product, worth considering.
Will I be able to liquidate if required? What if I need the money before maturity?
Or what if the investment doesn't prove to be as good as I thought it would be? There may be penalties for premature withdrawal, or there may be a complete no-no to withdrawal before a certain period. The easier and cheaper the withdrawal, the better it is.
Have I confirmed the authenticity of the financial advisor?
Which organization does the financial advisor represent? What is the track record of the advisory? How well does it caters to customers? Or at least, does it even exist? It is your responsibility to find out about the person to whom you are entrusting your hard earned money.
What are the alternates available?
What are the other options available? Is the product under consideration any better than others in terms of cost or performance? You must evaluate other options before making an investment decision.
There are so many people who do not ask themselves these questions and go ahead with investing without a thorough thought. They could have avoided troubles later, by asking themselves these basic questions in the beginning. You might not have answers to all the questions. Your financial advisor will be there to answer the one's which are beyond your understanding. He will devise a solution for you, and direct you if you shall or shall not invest in the product under consideration.
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There is a strong correlation between your investments and your goals. To make life simple, every goal must have an investment attached to it. To justify its presence, the investment must qualify in two tests viz. it must mature at the time of attainment of the goal and the maturity value of the investment must be adequate to meet the goal. We have spoken a lot about the investment options that are available and how they can be customised according to your goals. Today we would talk about the latter, i.e. the basis of investments “your goals”. Most people do not invest because of lack of excitement to achieve or lack of knowledge. “Plan for your retirement” may not excite you, but “Having R5 crore at the time you retire” or “Getting R50,000 a month even after retirement” would definitely excite you. It's just a matter of choosing the right set of words. You have to make your goals simple and exciting and your financial advisor will take care of the need for knowledge. Personal finance, saving and investments are terms which might scare you off, but a little modification in your perception and presentation of these terms can make things smoother to understand and apply. As a part of the simplification process, you must make your goals exciting, as the thrill will motivate you to invest for them and work to achieve them. Following are a few key points which can help you make your goals exciting:
Pen down your goals
We do remember what is important for us, what do we want to achieve at the back of our minds, yet it is prudent to write down your goals along with the target date. Writing down your goals will remind you constantly that you have to work hard to achieve them, you can go on check marking the ones you've
accomplished. You can review the list to track your status and edit them as per your requirements. So, whatever short and long term goals you have set for yourself, just write them down irrespective of how and when you'll achieve them.
“Written goals have a way of
transforming wishes into wants;
cant's into cans; dreams into plans;
and plans into reality”
~ Michael Korda
Step by step
If you are the one who is averse to investments, try your luck with investing for one short term goal. Start with a small step - you may go for a one year debt mutual fund to actualise your dream of going for a vacation with your wife, the one which you have been postponing for dearth of money. After one year, when you get the first hand experience, you will not be hesitant but an eager investor. The contentment of achieving one goal will help you in setting and working for the next goal. The joy which you will imbibe
from this vacation will motivate you to invest for your next goal, and this motivation will set you on track.
Challenge yourself
If you feel you may not be able to conserve money from your income, to provide for your investments, “Challenge Yourself”. Your income is limited and you have a lavish lifestyle. Due to maintenance of your standard of living, you have not been able to own a house and it is your dream to have your own house. However, you feel setting a goal to buy a house is of no point since you will not be able to achieve it. It is only you who can help yourself at this point. Provoke yourself, start with a short period, say a month, develop a conviction that you will not waste money in parties, fine dines and shopping, and for this month you will limit your expenses to necessities only. After a month, when you see the extra money, you'll realize that your dream can be actualized. And at that point, the goal of buying a house occupies a place in your mission list.
Process driven
Make a list of short and long term goals. Break down your longer term goals into short term goals. Let's say you want to leave certain assets for your kids to inherit. This is a very long term goal. But before that you must provide for their education,
Achievable
The goals that you set for yourself must be exciting but attainable, else they will loose their charm. If today, you are hardly able to make both ends meet, you have other important objectives to fulfill, like your children's education, owing a house and you set a goal of owning a BMW after five years. You are most likely not achieving this goal. So, by exciting we mean goals which are thrilling and realizable. Now, keeping these points in mind, once you are through with setting your goals, approach your financial advisor, who will help you in prioritizing your goals, allocating budgets and developing a portfolio to help you achieve your goals.
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