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8 Easy Ways To Reduce Your Expenses

Spend less than you earn. That’s the mantra of personal finance success. Every week, month, and year that you spend less than you earn, the more you save and the better your financial situation will be.

A big part of that solution is cutting back on spending, and for many people, the thought of cutting back on spending seems unpleasant. Losing out on the things that bring you pleasure in life seems like a pretty steep price to pay for a little financial success.

The secret is to intentionally target spending on the things you don’t care about and rarely use while holding steady on the things you do care about.

Scale back on entertainment costs
1. Cut cable: These days, streaming services and free over-the-air television provide more content than any one person could ever watch. Take advantage of the variety by eliminating cable service.
2. Focus your interests on finishing rather than collecting: Rather than collecting physical or digital items in a media collection, focus on actually finishing those things or enjoying them to completion. For example, instead of buying yet more books that go unread, aim instead to build a long list of books you have read. Make doing the center of your hobby, not buying. After all, isn’t that what you really love?
3. Don’t treat shopping as entertainment: It’s fine to go out in the town to be entertained but keep to a simple rule: don’t go into a store unless it’s for the purpose of buying something you’ve already decided you need before going in. Don’t go to stores just to browse for entertainment, as they’re designed to convince you to buy things you don’t need or even really want, but just react on impulse. Find other places to be entertained.

Reduce your food costs
4. Use a meal plan and make a grocery list: Instead of going to the grocery store whenever you feel like you need food, get into a routine of making a meal plan once a week, then constructing a grocery list from that plan. The time invested in making that plan is more than saved by spending less time in the store and having a list to stick to saves a ton of money on grocery store impulse buys that just sit in your pantry.
5. Learn how to cook: Cooking for yourself doesn’t have to involve three-course meals or Gordon Ramsey-level skills. Start by identifying things you enjoy eating, then look for how to easily prepare it from scratch and with basic ingredients.
6. Buy in bulk: The big bulk packages might seem like they have a high price, but they’re usually quite a bit cheaper per use, meaning you get more value for your dollar. If you frequently buy something at the store, look at the big bulk versions and save up for them. You’ll save over the long run. It's basically what our parents or grandparents did - buy - store and use efficiently.
Cut your monthly bills
7. Go through your bills: Sit down with every regular bill you have and go through it line by line, making sure you understand everything you’re being charged for. If something isn’t clear, Google it. If it doesn’t seem like something you should be charged for or is a service you don’t want, call the bill issuer and get it removed from future bills.
8. Cut your subscriptions down to just the things you actually use: If you have a subscription or membership that you haven’t used in the last month, cancel it. Turn off any auto-renew you have with that service and allow it to expire. You can always renew it in the future if you decide you have a need for it again.

What you should do with the money saved from trimming your budget?
The key to making frugal living tips really work for you is to not simply spend that money on something else fun. Keep your “fun” spending at the same level and use the money you save when you cut down your monthly budget on something smarter.  Cut un-fun things like your energy bill for something financially useful that can build a bright future for you.

One great option is to open an account and use your savings to create your emergency fund or you could save it up for your next trip. Whatever excites to reduce your unnecessary spending. These are just some of our suggestions. Do let us know what you had like to read and learn more about and we shall share more content on that.

 

Disclaimer: - The articles are for information purposes only. Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. You must consult a financial advisor who understands your specific circumstances and situation before taking an investment decision.

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Sukanya Samriddhi Scheme - points to note

Sukanya Samridhi scheme was launched in January 2015 to encourage savings for a girl child’s education. Till November 2017 more than 1.26 crore accounts have been opened across the country in the name of the girl child, securing an amount of Rs 19,183 crore.

Here are things to know about Sukanya Samriddhi account:

1) Under the new rules, known as Sukanya Samriddhi Account (Amendment) Rules, 2018, the minimum amount required for opening a Sukanya Samriddhi account has been brought down to Rs 250, from Rs 1,000 earlier.

2) The minimum annual deposit requirement, or the minimum amount required to be deposited in Sukanya Samriddhi account every year, has also been lowered to Rs 250, from Rs 1,000 earlier. These new rules came into effect from July 6, 2018.

3) The interest rate on Sukanya Samriddhi account is revised every quarter, like other small savings instrument such as public provident fund (PPF), and Senior Citizen Savings Scheme (SCSS). Currently, Sukanya Samriddhi account fetches an interest of 8.1% per annum, compounded yearly.

4) Tax exemption is also one of the greatest advantages of the Sukanya Samriddhi account.

5) Deposits in a Sukanya Samriddhi account may be made until the completion of 15 years, from the date of opening of the account. For example, if an account was opened on 10 April 2016, deposits can be made up to 9 April 2031. After this period the account will only earn interest as per applicable rates.

6) Contribution in to Sukanya Samriddhi account up to Rs. 1.50 lakh in a financial year qualifies for income tax deduction under Section 80C of Income Tax Act. The entire interest earned and maturity amount is also non-taxable. The maximum amount that can be deposited in a Sukanya Samriddhi account is Rs 1.5 lakh in a financial year.

7) Sukanya Samriddhi account will mature on completion of 21 years from the date of opening of the account.

8) A Sukanya Samriddhi account can be opened up to age of 10 years only from the date of birth of the girl child. A guardian can open only one Sukanya Samriddhi account in the name of one girl child and maximum of two accounts in the name of two different girl children in post offices and designated banks.

9) Partial withdrawal will be allowed on the account holder attaining the age of 18 to meet educational or marriage expenses. Withdrawal will be limited to 50% of the balance standing at the end of the preceding financial year.

10) Normal premature closure will be allowed for the purpose of the account holder’s marriage if she has attained the age of 18.

You can also check for other benefits provided by the government:

  1. Atal Pension Yojana
  2. Pradhan Mantri Jan Arogya Yojana (PMJAY)
  3. Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY)
  4. Pradhan Mantri Shram Yogi Maan-Dhan
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Impact of Compounding - Why should you start your SIP now.

Compounding is also one of the reasons why you must invest as early in your life as possible, even if the amount that you are planning to invest is small.

SIP (Systematic Investment Plan) is the best way to achieve the same too.

Many people keep waiting to have enough before they could start investing. In fact, the key to wealth creation lies in starting to invest immediately and staying at it for a long period of time. Let's understand this with the help of this example.

Bunny - A planned guy, started investing at the age of 25

Avi - A bit laid back, started to invest only at the age of 35.

Bunny Invested 10,000 per month for 30 years, investing a total of 36 lakhs, whereas Avi started late so he invested 15,000 per month for 20 years, totalling his investment of 36 lakhs and matching Bunny's Investment.

At the age of retirement at 55, Bunny makes 6.92 crores, 3 times more than Avi, who makes only 2.24 crores.

Bunny has the edge over Avi for starting 10 years early and continuously investing even if it is with smaller amounts.

Now what if Avi wants to achieve the corpus of 6.92 crores that Bunny did. How much will Avi have to invest to achieve that?

Well given that Bunny is making 3.5 times more than Avi at the age of 55, Avi will have to invest 3.5 times more than what she was investing originally. Avi will have to put aside INR 46, 240 per month from the age of 35 to 55 i.e. a total investment of 1.1 crores. Versus Priya invests only 36 lakhs to achieve the corpus of 6.92 crores.

Now one thing that is very clearly evident from the case is that the investing style is the difference in their portfolio and how Starting early can make all the difference in your returns. Bunny started 10 years earlier than Avi in his 20’s and he achieved a higher corpus by over 4.5 crores. Another best thing done by Bunny is he stayed invested for a long period of time. i.e. 30 years.

Tabular representation

Particulars Bunny Avi
SIP amount              10,000                 15,000
Start Age 25 35
Invested Till 55 55
Maturity Date At age 65 At age 65
Maturity Amount 6.92 crores 2.24 crores
Total Amount Invested           36,00,000  

1.1 crores

 

So the 2 things that create magic for your investments are

1.Starting early

2. Investing for long……….. Long term.

When it comes to investing, the earlier you start the better, the compounding effect grows your money exponentially.

These can give you astonishing results, so what are you waiting for! Start today.

That is the power of compounding taking effect for the investor who started early.

 

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How to save tax

Mid-January is a stressful time for most salaried individuals. Most of them are calling their CAs, talking to their friends or opening fixed deposits to make investments to avoid/reduce their taxes. It is the time when most offices require the employees to submit their investment proofs for availing the tax benefit.

Most of us know about the deduction of INR. 150,000 available to individuals. This deduction means that an amount of INR 150,000 is reduced from your total taxable income and then, the balance is taxable under the Act. Generally, people know that this INR 150,000 deduction is available when you invest in the Provident Fund (PF), an insurance policy or a new fixed deposit (FD) of 5 years every year.

These are not the only options available for tax savings. In our Article, taxation of salary, we discussed ways and reasons to make the most of your salary. Here, we are going to discuss, means made available to you under the Income-tax Act, 1961 to reduce your tax payable. To make use of any of these options, you will have to actually spend the money, invest it i.e. there will be an outflow of funds. You also need to have a backup and the relevant documents to claim the tax deductions.

The deductions for the following expenses/investments are allowed.

  • Popular INR 150,000 deduction: Claiming a deduction of INR 150,000 under section 80C of the Act can reduce your tax outgo by around Rs. 45,000 (for someone in a 30% tax bracket, calculation without considering cess). Also, the government has included many options under this to inculcate and increase the practice of investing and saving.
Product Tax Benefit
1. Insurance Policy Payments made towards the premium of self, spouse, and children. The debt should be made from the individuals' bank account who is claiming the tax deduction.
2. Provident Fund (PF) Payment made towards provident fund or superannuation fund
3. Tuition Fees Tuition fees paid to educate 2 children
4. Construction or purchase of residential house The principal amount of the loan towards purchasing or constructing a new house.
5. Fixed Deposit Investing in an FD for a period of 5 years or more and stay invested for 5 years.
6. Mutual Funds Investing in a specific tax-saving MF categorized as ELSS for a lock-in period of 3 years
7. Others National Savings Scheme, sukanya Samriddhi Scheme, Employee Provident Fund, Voluntary Provident Fund, Senior Citizens saving scheme, Unit-linked insurance plan, Infrastructure Bonds, NABARD Rural Bonds
  • Invest for retirement and taxes – Under section 80CCD (1B), an additional deduction of up to INR 50,000 for the amount deposited by a taxpayer to the National Pension Scheme (NPS) notified by the central government can be claimed. This is subject to the contribution being less than 10% of the basic salary of the employee. Contributions to Atal Pension Yojana are also eligible.
  • Employer’s contribution to NPS – Section 80CCD (2), an additional deduction is allowed for the employer’s contribution to an employee’s pension account of up to 10% of the salary of the employee. There is no monetary ceiling on this deduction.
  • Interest earned on the savings bank account:   A deduction of maximum INR 10,000 can be claimed against interest income from a savings bank account as per section 80 TTA of the Act. Interest from a savings bank account should be first included in other income and deduction can be claimed of the total interest earned or INR 10,000, whichever is less.
  • Health Insurance and preventive health check-up: A deduction of the amount paid towards health insurance premium of your family (including your spouse and children) and parents, which are different from the benefits, based on the costs related to health check-ups. The deduction limits are as follows:
Persons covered Exemption Limit Health check-up exemption Total
Self and family INR 25,000 INR 5,000 INR 25,000
self and family + parents (INR 25,000 + INR 25,000) = INR 50,000 INR 5,000 INR 55,000
self and family + senior citizen parents (INR 25,000 + INR 30,000) = INR 55,000 INR 5,000 INR 60,000
self (senior citizen) and family + senior citizen parents (INR 30,000 + INR 30,000) = INR 60,000 INR 5,000 INR 65,000
  • Save tax on loan taken for higher education- A deduction under section 80 EE is allowed to an individual for interest on a loan is taken for pursuing higher education. This loan may have been taken for the taxpayer, spouse or children or for a student for whom the taxpayer is a legal guardian. The deduction is available for a maximum of 8 years (beginning the year in which the interest starts getting repaid) or till the entire interest is repaid, whichever is earlier. There is no restriction on the amount that can be claimed.
  • Save while you pay for a disabled dependent: Under section 80 DD medical treatment for handicapped dependent or payment to specified scheme for maintenance of handicapped dependent '

Disability is 40% or more but less than 80% - Rs.75,000

Disability is 80% or more – Rs. 125,000

  • Medical expenses of a disabled Individual - Self-suffering from disability:
    An individual suffering from a physical disability (including blindness) or mental retardation. – Rs. 75,000

An individual suffering from severe disability – Rs. 125,000

  • Save tax while you donate: The various donations specified under section 80G are eligible for deduction up to either 100% or 50% with or without restriction as provided in section 80G. From FY 2017-18 any donations made in cash exceeding Rs 2,000 will not be allowed as deduction. The donations above Rs 2000 should be made in any mode other than cash to qualify as deduction u/s 80G.
  • Contributions given by any person to Political Parties: Deduction under this section is allowed to a taxpayer except for a company, local authority and an artificial juridical person wholly or partly funded by the government, for any amount contributed to any political party or an electoral trust. The deduction is allowed for contribution done by any way other than cash.

These deductions are the best ways to reduce your taxes and also save and invest your money. We have included all the sections for deductions above. However, if you have any query, please leave it in the comments below and we shall revert to you at the earliest.

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Mutual Funds Taxation

Income-tax on Long term gains made from mutual fund investments was introduced in the budget last year. It is very important to know how your mutual fund gains are taxed and report correct numbers in your returns.

3 Factors that determine the Mutual Fund Taxation

Any fund which invests 65% or more in equity is called as Equity Fund. For example, large-cap funds, multi-cap funds, small and mid-cap funds or equity-oriented balanced funds (where the equity exposure is 65% or more) are all called equity-oriented funds.

If the equity portion is less than that, then they are all treated as debt funds or non-equity funds. For example liquid funds, ultra-short term funds, short-term funds, income funds, gilt funds, debt-oriented balanced funds, gold funds, fund of funds or money market funds.

  • Holding periods of Investment–

The holding period for Equity and Debt Funds will be different for taxation purpose.

  Equity Debt
STCG If the holding period is less than or equal to 12 months If the holding period is less than or equal to 36 months
LTCG If the holding period is more than 12 months If the holding period is more than 36 months.


Mutual Fund Taxation FY 2018-19 -Capital Gain Tax Rates

Now that you have clarity on what is Short term capital gains (STCG) and Long term Capital gains (LTCG). Let us move further and understand the Capital Gain Taxation for mutual fund investors.

The biggest change from FY 2018-19 is the introduction of LTCG in Budget 2018. The table below will give you a brief of the same:

 Note: Surcharge @ 15%, is applicable where the income of Individual/HUF unit holders exceeds Rs. 1 crore. Also, surcharge @10% to be levied in case of individual/ HUF unitholders where the income of such unitholders exceeds Rs.50 lakhs but does not exceed Rs.1 Cr. Further, Health and Education Cess @ 4% will continue to apply on the aggregate of tax and surcharge.

Where an individual/HUF total income (income from all sources) is less than the slab rate, then any income from long term or short term is a part of the slab rates.

Short Term Capital Gains on Equity Mutual funds/Equity Shares

Cost price of MF (10,000*100) 1 January 2018 10,00,000
Selling price (10,000*120) 31 March 2018 12,00,000
Gains STCG 200,000
Tax payable (15%) 30,000

Note: There is no change in the STCG with the new amendment. STCG remains taxable as it always was. It is to be computed based on the equity or debt fund. There is no impact of 31 January 2018, cut off dates prices for STCG.

Long term Capital Gains on Equity Mutual funds

There is a cut-off date of 31 January 2018, which has been introduced for the purpose of computing LTCG. LTCG is to be computed in 2 parts:

  • Units purchased on or  before 31 January 2018
  • Units purchased post 31 January 2018

Gains up to Rs. 1,00,000 is exempt while computing LTCG from equity-oriented mutual funds or shares.


Long term Capital gains on mutual funds purchased before 31 January 2018 and sold after 12 months.

There was a benefit introduced to investors by considering the cost on 31 January 2018 for the purpose of computing LTCG. However, this method can be a bit confusing so you may take expert advice. We have described the same below for your understanding:

The Cost to be considered :

Higher of Actual cost or (the formula amount)

The Formula Amount is Lower of

  • The highest price of the unit on 31 January 2018 from all recognized stock exchange.
  • Actual Selling Price

For Example:

Date of buying – 1 April 2017

Date of selling – 31 April 2018

Number of Units – 10,000

Price of  MF on following Dates

Sr. No Dates Price
1 Date of buying (1 April 2017) – Actual Cost 100
2 31 January 2018 (highest price on cut-off date) 150
3 Date of selling ( 30 April 2018) 120

Step 1 – Calculate the Formula Amount i.e. Lower of (2) and (3) i.e. 120 (lower of 150 or 120)

Step 2 – Calculate the cost to be considered i.e. higher of (1) or Step 1 answer – 120 (higher of 100 0r 120)

Hence,

Cost price of MF (10,000*120) 12,00,000
Selling price (10,000*120) 12,00,000
Gains Nil
LTCG (10%) Nil

Things to Note:

  • Comparison of prices on 31 January 2018 is done to compute the considered cost price.
  • The highest price of the MF/share as on 31 January 2018 is to be considered for this calculation.
  • Final selling price is the lower of 31 January price or the price on the selling date.
  • Hence, this cost determination method may lead to nil gains, benefitting the investor.
  • The gains will not be Nil in all the cases.
  • This method will never lead to a long term capital loss for an individual/HUF.

Long term Capital Gains on mutual funds purchased after1 February 2018

No comparison of prices as on 31 January is required. However, the exemption limit of Rs. 1,00,000 is available.

Cost price of MF (10,000*100) 1 February 2018 10,00,000
Selling price (10,000*120) 10 February 2019 12,00,000
Gains LTCG 200,000
LTCG (10%) 20,000

TAX – Savings Equity Mutual Funds

Equity Linked Savings Schemes or tax saving mutual funds are one of the most sort out for financial products under section 80 C of the Income-tax Act, 1961.

ELSS comes up with a lock-in period of 3 years. It means that once you invest in ELSS, you cannot redeem your units before the expiration of 3 years. You can claim a tax deduction of up to Rs 1.5 lakhs and save taxes up to Rs 45,000 by investing in ELSS.

Upon redemption after 3 years, the long-term capital gains (LTCG) up to Rs 1 lakh are tax-free in your hands.  LTCG in excess of Rs 1 lakh is taxed at the rate of 10% without the benefit.

You can read about various ways to save taxes under section 80 C in out Article - How to save tax?

Note: It is not compulsory to redeem ELSS mutual funds after 3 years. You can stay invested for a longer duration. To maintain the 80C benefit, you must stay invested for 3 years.

Mutual Fund Taxation FY 2018-19 – Dividend Distribution Tax (DDT)

There are few investors who opt for dividend option in mutual funds. Hence, let us see the taxation on the dividend of such funds. Earlier there was no DDT for equity investors. However, from the Budget 2018, DDT @10% will be applicable to equity investors also.

Base Tax Rate Surcharge and Cess Total Tax
Equity Oriented Schemes Nil Nil Nil
Debt Oriented Schemes Nil Nil Nil

 

Tax Payable by Mutual Fund Companies

Equity Oriented Schemes 10% 12% SC + 4% cess 11.648%
Money Market/Liquid Schemes/debt funds 25% 12% SC + 4% cess 29.12%
Infrastructure Debt Fund 25% 12% SC + 4% cess 29.12%

Note: In spite of the 10% long term tax now payable on mutual fund investments. It is a very good form of investments and the gains made are far more to compensate the taxes to be payable on the Long term. However, it is advisable to get your returns working reviewed by an expert where you have a lot of equity/ mutual funds gains in a particular FY.

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How to save Income-tax on Health Insurance

Owning health insurance covers your basic risk of health and secures your family. We have discussed in detail what are things to note while buying health insurance.

What's more, the premium paid for health insurance also provides a tax benefit by reducing your taxable income and thereby your tax liability.  We are going to discuss the same here:

Deduction under section 80D of the Act

Premium paid for self, spouse and children

The premium paid towards health insurance policies qualifies for deduction under Section 80D of the Income Tax Act. The benefit is available to individuals on health insurance premium paid for self, spouse, children, and parents. Importantly, it does not matter whether the children or parents are dependent on you or not.

The quantum of tax benefit depends on the age of the individual who is medically insured.

You can claim a deduction of INR 25,000 for the premium paid for self, spouse, and children. If you and your spouse are of the age 60 and above, then you can claim a benefit of INR 30,000 for the premium paid.

Preventive Health Check-up

You can claim a deduction towards health check-ups too. It is included in the above limitations of INR 25,000 (or INR 30,000). Preventive health check-up of up to INR 5,000 is allowed.

Premium paid for parents

Premium paid for health insurance of parents/  guardians up to INR 25,000 is allowed. If they are above the age of 60, then you can claim a benefit of INR 50,000 for the premium paid.

Health checkup expenses for super senior citizens

Very Senior Citizens (who are above 80 years of age), can claim a deduction of up to Rs 50,000 incurred towards the medical expenditure, in case they don’t have health insurance.

Things to Note:

  • We have tabulated below the maximum health insurance and medical expenses you can claim under section 80D for the year ended 31 March 2019.

  • Health insurance premiums paid in cash will not be allowed as a deduction. It has to be paid from banking channels. A Health check-up of INR 5,000 can be paid in cash.
  • Premium paid for health insurance of your siblings is not allowed as a deduction.
  • *Nature of the amount spent on your senior citizens' parents and self-family can be towards medical expenditure as well.

To learn more - you can check our course - NM 102: Build a Safety Net. Use code SAVE20 for 20% off.

 

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    Should you switch from the traditional endowment plan to a mutual fund?

    In spite of being a financial planner and helping people invest and understand investments, it took me a long time to convince my husband to stop paying his endowment plan and invest the equal amount in the term-insurance and good equity oriented mutual fund.

    It is just not him, 9 out of 10 people own an endowment insurance plan rather than a term insurance plan. The only reason for the same is to get their invested money in return.

    Further, even after knowing that the endowment plan is not a wise investment choice, they are not convinced to surrender the insurance policy because they do not want to bear the loss on surrender.

    We have tried to make your decision of switching much easier by calculating the actual loss that you might incur on surrendering the insurance policy versus the benefit of investing the premium amounts in the mutual funds.

    To make it easier for you, I have tabulated below the gains that one would receive in both the scenarios to help you take a smart decision.

    Scenario 1 – You continue to invest in the endowment plans such as Jeevan Labh or Jeevan Anand from LIC. (this is purely for an example purpose)

    Total Premium over 35                            8,40,700
    Maturity value after 35 years                         12,20,000
    Total Gains from Insurance                            3,79,300
    CAGR 1.1%

    Scenario 2 – You withdraw the insurance premium amount and invest the same into mutual funds. You would also incur an additional cost of buying a term Insurance which would give you a cover of 1 Crore for INR 1200 per month.

    Total Investments      8,13,551
    Value at the end of the term   41,06,447
    Total Gains from Mutual Funds    32,92,896
    CAGR 5.5%

    For detailed working of the above 2 tables and how we arrived at those numbers, refer to surrender of an endowment plan vs investing in mutual funds (working).

    We have attached the excel sheet here for your own calculation. Just change the numbers in the boxes highlighted in pink, the sheet would compute the gains value and CAGR in each scenario. The same shall help you take a decision of whether you should stay invested in an endowment plan or move out your money and invest in an equity mutual fund.

    These decisions are very case specific and factors such as risk-taking ability play a huge rule in deciding the movement. Never forget the following base rules before making the switch:

    • Understand your risk taking capacity.
    • An equity mutual fund is very volatile in short-term, investments in them are made from a long-term goal of 10+ years for the best results.
    • Where you cannot bear the risk, it is best to consult your financial advisor, who shall guide you in the same.

    This transition is easier and profitable in the first few years of insurance premium has been paid. If you plan to move after 10-12 years of paying insurance premium it will generally not be profitable. The premium amount lost on surrendering the policy would be higher as compared to what you can receive in the balance tenure in mutual fund investments.

    Please note the assumptions and explanations provided in the excel sheet for the computation of gain numbers and do your analysis accordingly.

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    How to do goal based investing

    Setting up a goal is something that no one does these days. I am asking you all to set a financial goal.

    Every time I ask someone – Why are you investing? What is the purpose of your investment? 90% people will answer to grow my surplus money.

    I have money lying in my bank account. I am just spending too much. I thought it was time to start investing.

    My next question is ‘for what do you want to grow your money?’ Their answer is to become rich or help in a financial need or to travel. Travel is a more focused goal but becoming rich? Isn’t everyone working to become richer than what they are today?

    In cases, where your goal is more focused and clear, you will be in a better position to achieve it than your investments where it is not.

    When you know where you are going, you are halfway there.

    I know it is extremely difficult to sit with a pen and paper and jot down your financial goals. However, the difficulty of the process does not reduce the importance of the same.

    I have listed below a step by step process of identifying your goals, requirements, money that you need and the products into which you must invest to achieve your goals.

    What do you want to achieve in life?

    I am sure you have been asked this question by various people ‘What do you want to be when you grow up? Where do you see yourself in 5 years? What do you want to do in life?’ These are all your various goals that people want to know.

    What are the things that require money to be achieved – i.e. financial goals?

    Yes. All goals need money but all goals are not financial goals. Wanting a promotion at work, Best in your field, learn a new hobby or activity are all personal and professional goals which does not require too much investment or any investment of money from your end.

    Owning a  house, traveling to Europe, buying that car, your child’s post-graduation are some examples of goals which require a huge investment of money from your end and are called financial goals.

    Hence, make a list of all your goals and from that highlight your financial goals.

    Prioritise your goals - difference between Need and Wants?

    It is very important to prioritise your goals based on its importance and requirement.

    Needs are such things that you cannot do without and cannot be canceled, such as your child’s education or your first house.

    Wants are things which you desire but can do without them such as a vacation, your second home etc.

    Segregating your goals into needs and wants will help you prioritise them better. All the needs can them be numbered based on their importance followed by your wants.

    How much money do I need today to achieve these goals?

    Once you have made an entire list of your goals and sequenced them, you must identify what is the cost of achieving those goals. For example, if your goal is to buy a car, you must identify which car you want and how much would it cost. 'I want to buy a car like I20 and it would cost me 7 lakhs INR today' - this a well-defined financial goal.

    Where you are estimating the cost of goal because you do not have an exact basis to calculate it, always consider the amount on the higher side.

    By when should I achieve these goals?

    The fact that it is a goal, it means it is futuristic and you do not have sufficient means to achieve it today. Hence, you must identify and apportion a realistic timeline towards your goal.

    For example, I want to buy a car in next 2 years.

    • Goals less than 5 years: Short-term goals
    • Goals between 5 years to 10 years: medium-term goals
    • Goals more than 10 years: long-term goals

    Adjust the Inflation

    Given that goals are a futuristic, the current cost that we have associated to our goals will obviously increase in the future because of inflation. Identify the inflation rate towards your goal. The inflation rate is not the same for all types of goals; it varies depending upon the market conditions and the goal.

    After knowing the inflation rate and the current cost, you will be able to compute the future value of your goal.

    It is very important to identify the correct inflation rate. If you take a lower inflation rate your goal will cost you more than what you estimate and if you take a higher inflation rate, the future cost may scare or reduce your confidence to be able to achieve the goal.

    Asset allocation based on the goal, cost, and tenure

    Once you know your goal and its value, it is time to identify the investment products.

    The tenure of your goals will help you to identify what asset class you must invest in and in what ratio.

    • The term is less than 5 years – 100% Debt
    • The term is 5 years to 10 years – 40% Debt 60% Equity
    • The term is more than 10 years – 30% Debt 70% Equity

    This is a very general method of asset allocation. It may vary depending on your risk taking capacity and ability. Hence, it is important to analyze the same for oneself.

    Portfolio Return Expectations

    Return expectation from each class of the asset is as follows:

    • Equity: 12%
    • Debt: 8%

    You will have to invest money in your goals based on the tenure and asset allocation. Each goal will not have one investment but may consist of many investments some in equity and others in debt. Hence, it is important to compute the return expectations for the entire portfolio, to be able to compute the exact amount you must invest to achieve your goals.

    For example, my goal of buying a car is a mid-term goal, my asset allocation will be 40:60.

    My portfolio return will be (40% * 8%) + (60% *12%) = 11.2%

    How much money to invest?

    This is the most crucial part, the entire computation of the above working will lead to identifying how much money you need to invest to achieve your goals.

    There are various ways of investing but it is better to do it in a systematic manner. You can invest as a monthly fixed investment amount or invest annually with a fixed percentage of investment increasing per annum.

    SIP - 7900 per month invested for 7 years will give you a return of 10,14,000 @11.2 %.

    Lumpsum-

    This method can be a bit complicated when followed step by step especially the last step of computing the actual amount that one needs to invest to achieve their respective goals. However, it is the most defined way of achieving your goals. There are many software used by us - financial advisors where the software does the same calculation for us. When you will sit with an honest financial advisor, the first thing that they will ask you is to define the goal. There is no plan without a goal and hence, such a working is extremely important for your financial planning.

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    The trap of cash back offers

    Recently, while booking my flight tickets through one of the travel booking websites, I saw this “100% cash-book offer “flashing on my laptop screen. I got super excited, 100% cash back means the entire flight ticket would be for free. Who would not use this offer? I immediately registered on the mobile e-wallet and made the payment through the same. However, after making the payments, when I started to book my return flight tickets with the cash back I got, I realized that I had done a grave mistake of not noticing the tiny ‘*’ and thus, not reading the conditions specified in fine print below the offer. Following unfortunate events happened after I made the payment using mobile e-wallets:
    • The offer was a 100% cash back offer of only the base price of the flight ticket and not the entire amount I spent on buying that ticket. So where my total cost including charges and taxes was INR 4200. I only got a cashback of INR 2700.
    • This is not that bad right; I got almost 70% cash back which is still an amazing deal. To make most of the cash back, I decided to book my return tickets using the wallet cash back. I was still happy because if not 100% I did get a 70% discount on my flight bookings.
    • While making the payment, after I had put the mobile wallet details, the system asked me for my bank details for balance payments. How could this  be possible? My return flight ticket was worth INR 2500 and my wallet had a balance of INR 2700. Why is the travel website ask for my bank details as well?
    • After a little more '*' reading, I realised I had missed on another fine print. It stated that I could only use 15% of the cost of each purchase from the cash back balance in my mobile wallet. Thus, only INR 450 would be paid through the mobile wallet, balance INR 2550 had to be paid separately.
    • I declared that this was outright FRAUD and I am now a victim of cash back offers from MOBILE WALLET Company.
    Cash-back offers; Discount; Sale - Are we really saving money through these?
    Are we all actually benefiting from the cash back offers and these discounts? Some of you may say whatever is the discount, it is still a discount. The cash back appears to be like it is reducing my expenses but it actually makes us spend more, worry more and definitely, calculate more on every rupee spent. I have discussed the same below: Spend more than required: My flight cash back seemed like a decent discount inspite the restrictive clause of using it. To make the most of it, I had to do make next few purchases through the mobile wallets. Hence, I decided to shop for my upcoming trip. I shopped for things like shampoo, body wash etc which I did not specifically need for my trip but was buying to exhaust my cash back. This wallet did not work on so many regular e-commerce websites that it was a struggle to make the most of it.

    I just spend on things I did not need to utilise my cash back. This is what cashback offers do to you, it makes you spend more than required so that you can benefit completely from the cash backs received. It becomes your personal loyalty programme.

    Limited Validity: Most of the cash back offers come with a validity period. I had to utilize the cash back  in my mobile e-wallet within a fixed period of  6 months and to utilize the same, I ended up ordering daily use unnecessary items in advance. Inspite of this, after 4 months,  I gave up on this regular hassle and ignored a cash back of INR. 1100 lying in my mobile wallet. The effort, time and unnecessary small purchases that I made to utilise the cashback were not worth the money that I wanted to save. Like me, many people are falling into the traps of the mobile wallets and cash back offers. Such cash back offers are also provided by various credit cards which makes us shop for that one extra shirt or dress so we can cross the specified limit to get the cash back in our credit card. If you get a 5% cash back on a purchase of INR. 5000 it is Rs. 250. You might end up shopping for lot more than the cash back just to get that cashback. Cash Back offers are a loyalty programme: The trap of cash back offers is not direct. As stated above, cash back offers are like a loyalty programme. It generally makes consumers spend more than we want by convincing us that we are getting more benefits out of it. Cashback works as a nuclear reaction making us purchase continuously. Usually, we end up spending more compared to the cases where there are upfront direct discounts or no discounts at all eroding the cash back completely. It is very important to know that none of the financial institutions including mobile wallets, credit card companies, banks, etc are doing charity or customer support in any form. Any discount or cash back is what they can recover from us easily. Nothing in life is for free, when anything is for free or at a discount, you are the product. Thus, we should be wise enough to understand where we are getting a discount and make most of it rather than falling prey to unnecessary cash back traps. I hope next time you see that cash back flashing on your screen, you will take a more informed decision.  
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    Why Start Saving Early?

    A very simple solution to the question.

    Below we show a very simple comparison between an individual who invests Rs. 25,000 per year in PPF @ 8% when he is 25 years for 10 years versus and another individual who invests DOUBLE the amount when he is 35 years, again for 10 years. 

    Assuming they both hold the amounts invested till they retire at the age of 60 years, we let the number do the talking:

    START INVESTING EARLY

     Not only has the early starter multiplied his investment by 11.57 times compared to just 5.36 times, even his total corpus on retirement is higher by Rs. 2,12,962.

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