How Can Your Family Help You Reduce Tax Liability?

Hemant Beniwal
-
1
How Can Your Family Help You Reduce Tax Liability?

A family not only gives you love and support – physically and emotionally – but it can also help you financially.

When it comes to financial help from the family what comes to mind at once is a loan or gift from parents or in-laws, for education, weddings, businesses, and in case of emergencies.

But that’s not all, your family can help you in saving taxes too!

How Can Your Family Help You Reduce Tax Liability?

Also Check: How to Reduce Interest burden on Home Loan

Very few among us have ever wanted to pay taxes but then we must mandatorily. By understanding the provisions of the Income Tax Act, you can make use of different investments and deductions available to you and reduce your tax liability.

But making use of these provisions only on themselves is not only selfish but also imprudent. If you can spend on your family, invest for their health and future, and even given them gifts or loans, then you can make substantial savings in your overall tax liability.

When you save tax by making use of provisions applicable with regards to family, you not only get tax refunds, but you also get higher post-tax returns on any investments you make in their names. Though, all such expenses, investments, gifts, or loans are not admissible for rebates and deduction under the IT act. Certain rules govern what and up to how much is eligible for rebates and deductions.

How Can Your Family Help You Reduce Tax Liability? Click to Tweet

Family help you reduce tax liability

Here we present a simple categorization of perfectly legal ways your family can help you reduce tax liability. We have categorized these rules under three categories – Parents (including Parents-in-law), Children, and life partners – for simplicity. Some of these provisions are applicable across multiple categories.

Note: Consult your CA before implementing any of the suggestions.

1. Parents always help!

The government wants you to take care of your parents directly and indirectly, and therefore, there are many provisions in the IT Act to help you save tax when you spend on them or invest in their names. Some of these provisions are applicable for your parents-in-law too.

Most of these provisions are applicable if your parents are dependent on you, and some are eligible even if they are financially independent.

How your parents, spouse and children can help you save tax

Must Read – 11 Unusual Ways of Smart Tax Planning 

2. Take Care of Their health.

With seniors, a medical emergency is around the corner and it can entail hefty out-of-pocket expenses. At such times, the health of your parents is much more important than your personal financial well-being.

Section 80D of the IT Act allows you to avail of tax benefits if you buy a health insurance policy or spend on preventive health check-ups of self and your parents. Not only can you provide for the best healthcare, but also save financial distress and save tax by doing so. This benefit is available irrespective of the financial status of your parents or in-laws.

The benefit available is dependent on parents’ age as follows:

  • Under 60 years: Rs. 25,000 on health insurance + Rs. 5,000 on preventive health check-up = Rs. 30,000
  • Between 60 and 80 years: Rs. 50,000 on health insurance + Rs. 5,000 on preventive health check-up = Rs. 55,000
  • Over 80 years: Rs. 50,000 on health insurance + Rs. 7,000 on preventive health check-up = Rs. 57,000

U/s 80DDB, you can avail up to Rs. 40,000 or Rs. 1-lakh as a deduction for medical expenses incurred on treatment of ‘dependent’ parents. The limits are applicable for parents under 60-years of age or above it, respectively.

3. Pay Rent to Them

If like most Indians, you still live in a joint family with your parents, and the house is in their name, then you can pay the rent. The rent will be added to their income, and you can claim the deduction for HRA. This way you can actually contribute towards the household budget and ensure a steady source of income for them.

Your parents can claim the rent as maintenance charges for the house property and the rest will be added to their income. Therefore, it is better to draw the rent agreement and receipts in the name of the parent who has lesser income but is the owner of the house. If the parents co-own the property, then they can split the rent and save further individual tax on rental income.

Tax exemptions for HRA will be calculated as per applicable rules – u/s 10 if the employer grants HRA or u/s 80GG if it doesn’t. Overall, as a family, you’ll save substantially by paying rent to your parents.

Also Check: Should I Buy or Rent the House?

4. Gift them the bonus

If your parents make investments in their name in direct equities or equity mutual funds, then long-term gains (LTCG) on such investments are at a flat rate of 10% if such gains are over Rs. 1-lakh. It means all gains made below that amount are tax-free. (in case of investments like Fixed Deposits tax savings can be huge)

This presents another opportunity to save tax. In your IT return, you have to show a gift to your parents, and they need to make a purchase of equities or equity MFs and hold them for more than one year. There is no limit on the amount or method of the gift made to parents and the gifted amount is not added to their income.

As the clubbing provision does not include parents, any re-investment of the gains will be considered their earnings and you will have no further tax liability against it. You can do similar tax planning for your parents-in-law.

11 Unusual Ways Of Smart Tax Planning

Last-minute Income Tax (IT) planning can be a confusing and cumbersome task just because it was not planned
Kids help too

Like caring for your parents can help you in saving taxes, so can planning for the future of your kids. You can invest in their education, health, and secure their future with insurance and savings schemes. Let’s see how.

5. Think long-term.

With kids, the goals are usually distant in the future with a time horizon of 10 to 20 years. There are many schemes, government-backed and otherwise, that allow you to plan ahead for that long period.

You can open a PPF account in the name of your minor children and invest in it, to avoid clubbing of their income. Another secure and safe debt instrument is the Sukanya Samriddhi Yojana (SSY) available as a lucrative investment vehicle for female children.

If you want to invest in growth and have faith in the long-term returns of the equity markets, you can invest using ELSS from mutual funds, or a ULIP, or a Child plan from an insurance company. (we don’t recommend missing insurance investment)

Also Check: ELSS VS PPF- Save Tax and Make Money

6. Secure their health.

The deduction u/s 80DDB is available for any ‘dependent’, meaning any medical bills up to Rs. 40,000 are admissible minus the insurance reimbursements, incurred on treatment of your children. The treatment must be for specified neurological, malignant cancer, AIDS, renal, or hematological diseases.

7. Secure their future.

A life cover taken on the life of yourself is an expense made towards securing the future of your dependents, especially children. The IT Act grants special status to all life insurance premiums – for the term, endowment, money-back, or unit-linked – paid to insure the life of the proposer, as well as any dependent family member.

Life Insurance is an EEE instrument in case your policy assures returns at maturity or fixed intervals, such returns are also exempt from taxes. The deduction is available up to Rs. 1.5-lakh limit u/s 80CCC.

Also Check:  ULIP vs Mutual Fund + Term Insurance- Which is better for me?

8. Education pays.

Education is the best investment for the future of your children – one for which they’ll always thank you. As the government wants to encourage parents to get their wards the best education, it offers a deduction of up to Rs. 1.5-lakhs u/s 80C towards the tuition fee paid for the education of up to two children. A further exemption of up to Rs. 100 p.m. and Rs. 300 p.m. are available u/s as education and hostel allowances for each child.

Sending children to the best colleges can be expensive, and you may need to avail of an education loan to sponsor your kid’s university fee. The entire interest paid on such education loan, taken for kids’ or spouse’s higher studies is eligible for deduction u/s 80E. This deduction, however, can be availed for only up to 8-years starting from the date of the first EMI.

9. Disability Care

If unfortunately, anyone in your family – children, parents, spouse, or siblings – has a permanent disability and requires constant care and supervision, then section 80DD allows you to avail deduction on expenditure incurred to support such person and to provide them the best possible medical care and rehabilitation.

You can avail of a deduction of Rs. 75,000 if the disability is between 40 and 80 percent, and of Rs. 1.25-lakhs for disabilities more than 80%, irrespective of the actual amount spent. The only condition is that such a disabled person must not have availed the same benefits u/s 80U in their person ITR.

11. Go fund them.

You can always make gifts to your children, without any limits, and in the case of adult children, the earnings from such gifts are not even clubbed. But it is also legal to ‘loan’ them the same money on an interest-free basis.

Each of your adult children has the same tax rules and slabs applicable as you do, and therefore they also can earn a tax-free income up to Rs. 3-lakhs/year. So, any loans to your adult kids will earn income in their names, and hence your tax-liability on such earnings will be nil. You can start by transferring all investments done for them, when they were minors, in their name once they turn eighteen.

Read – Understanding clubbing of income & blunders people make

12. Make your Life-partner a partner in finances!

Married and engaged taxpayers can make their life-partners, their partners in finances and save substantial taxes. You just need to file a separate return in the name of your spouse – some people show all extra earnings as a transfer to her/his name from time to time.

However, consult your financial advisor while making a gift to your spouse, as clubbing provisions may be applicable from case to case.

13. Give a loan or gift to your spouse.

If the annual income of your spouse is below the minimum tax threshold or falls in the lower bracket, then you can loan her/him any extra income you may have. When they will invest it in their name, any earnings on such investments will be considered theirs and not yours.

If the property is registered in the name of the spouse with lower income, then any rental income, actual or presumed, is added to their income, after a standard deduction of 30% towards property maintenance charges. To make the transaction legally binding, you can charge your spouse a nominal interest on the loan or keep their personal property (shares, jewelry, etc.) as collateral.

In the case of an engaged couple, the usual limit of Rs. 50,000 on gifts is not applicable. Therefore, one can gift any amount to the other that they will invest before the wedding. Any income from such investments will be treated as the income of the beneficiary and not the giver of the gift.

14. Share the home, and the debt.

Your home, probably, is going to be your biggest investment, and to save on registration charges, most likely it will be registered in the name of the wife. If you have taken a joint loan on the house property, then it always makes sense to share the deduction also.

You can avail following deductions:

  1. 1.5-lakhs u/s 80C on the repayment of principal. You can also avail of the deduction for stamp duty and registration within the same limit, but only in the financial year of such expenses.
  2. 2-lakhs on repayment of the interest u/s 24.
  3. 50,000 u/s 80EE for loans up to Rs. 35-lakhs, on property worth up to Rs. 50-lakhs.

OR

  1. 1.5-lakhs u/s 80EEA for loans on property worth up to Rs. 45-lakhs.

You can claim tax benefits either for points 3 or 4, but not both. With a joint loan, each joint holder can avail of all the deductions. Therefore, a couple can avail up to Rs. 10-lakhs of deductions from joint ownership and a joint loan on the house property.

Conclusion

Your struggle to save taxes can be eased by your family, only if you are aware of the multiple provisions available to you. With such savings, you can meet their expectations, invest the amount in their future, and save any further tax liability arising out of earnings on such investments.

By showing that you really care, you not only earn their respect and trust but can save your hard-earned money. It just needs a little planning, some guidance from an experienced and certified financial planner, and the enthusiasm to take it to a conclusion.

So instead of rushing into the infamous March-Madness, you can take your time, and make a game plan to lower your tax liability by using your most precious wealth – your family – in a perfectly legal way.

If you want to discuss your Financial Life with a Professional 

Schedule The Call TODAY

Please share your views & queries in the comment section.

Biggest Problem With Your Financial Planning, And How to Fix It

Hemant Beniwal
-
15
Biggest Problem With Your Financial Planning, And How to Fix It

Financial Planning involves many things – our money, our efforts, our goals, our personality, and our behavior.

Biggest Problem With Your Financial Planning, And How to Fix It

Must Read – Steps of Financial Planning Process

It is a long-term activity as well that extends to many years/decades. While we do try our best to plan our finances optimally, we do run into some problems –

  • The unexpected loss of income source
  • Mismanagement of income and expenses
  • Unexpected financial burden
  • Underperformance of Investments
  • Our behavior

Yes Our Behaviour is a Big Problem With Your Financial Planning

Yes, our behavior towards our finances is a crucial aspect of optimum financial planning. Social, cognitive, and emotional factors play an important role in financial decisions. Sometimes, they make us behave in a manner that is not in the best interests of our financial status.

How Can a Financial Advisor Help You

Must Read – Behavioral Finance – Make Smarter Financial Decisions

Here are some examples of bad behavior –

  • Manas buys a stock that has appreciated in price significantly for the last couple of months because he has been hearing his colleagues talk about it and everyone around him has been buying it. He might end up buying it at a high valuation which can lead to losses later on
  • Shilpa invests her money only in bank FDs. She is scared to invest in any other assets fearing losses. This is irrational as she has to understand and analyze other investment options and decide on a healthy mix of investments.
  • Many products are heavily advertised. When it was time to file tax returns, Riya invested in a few random products that caught her eye to save some taxes. This is not the best way to make investment choices. Riya should understand her risk tolerance and financial situation and only then invest in appropriate assets.
Modifying Investor Behavior
Biggest Problem With Your Financial Planning, And How to Fix It

My New book is all about Investor Behaviour – available on Amazon

What can an investor do in this situation where behavioral biases affect his financial decisions?

In some cases, an active mindful change in behavior will improve decision making. For example, in the examples above, Shilpa can visit financial portals and blogs to understand other investment options.

Manas should let go of the herd mentality and research and analyze on stocks before investing in them. If he feels, he is inexperienced or not knowledgeable to do so, he can invest in equity mutual funds rather than invest directly in stocks.

Another important consideration that will help one in making better decisions is to entrust the financial plan to an advisor.

Must Check – Do You Need a Financial Planner?

How a Financial advisor helps you to solve your Financial planning problems?

Get your finances in order 

You might be overwhelmed with all the work to be done to manage your financial life. A financial planner will easily get your portfolio in one place. He will set up nominations, joint holders, and other banking and financial steps that will ease your financial life. He can assist in making a will and in estate planning. He can ensure that documentation is complete and accurate.

The Biggest Problem With Your Financial Planning, And How You Can Fix It Click to Tweet

Support in tax issues

A financial planner can plan the taxes such that the tax outgo is minimal. He can help with solving issues related to tax.

Work with you on setting up and achieving your goals

When you set your goals, you might let your emotions color them. An advisor will give advice on setting your goals without any emotional bias.

He will buy and sell assets at the right time (not timing) based on your requirement without getting attached to an asset. He will sell off underperforming assets as he will not have any emotional attachment to them.

Read – 10 Financial Planning Thumb Rules

Regular review of finances

Unless we are highly disciplined, we tend to ignore regular reviews of finances. We forget to check our investments. Sometimes we do not remember to pay insurance premiums. When we are busy or face extreme emotions, finances tend to take a backseat.

The planner will manage finances and review investments regularly for his client. It is his job and he will not let emotions or surrounding situations affect financial planning.

Balance your emotions

When the stock market crashes and your portfolio shows a notional loss or you purchased a property a couple of years back only to see the real estate market stagnating, it is difficult to not be panicked.

You might take some rash decisions as emotions overcome logic. In these cases, a financial advisor can encourage you to think logically and suggest the best course of action. It might be to stay put with your investments or sell off some bad investments. He will give you a true picture of the financial scenario.

Save Your Time and Money

You are busy with work, family, and social commitments. You may not want to spend time and effort in managing your finances with the doubt looming over your head that you may not be making the best decisions. In this case, it is better to have a financial advisor who already knows the stuff and can make decisions quickly.

The investment decisions of competent advisors will generally be better than those of layman investors which will result in saving money and also getting better returns.

Financial planning is not an easy task. It becomes more complex when behavioral aspects such as biases and emotions come into play. It is, therefore, a good idea to consider getting the services of a professional advisor. You need not to give full control but work with him to improve your future.

Get in touch with us to discuss your financial life.

Please share your views Regarding Problem With Your Financial Planning in the comment section.

ELSS Mutual Fund- Best Tax Saving Mutual Fund Investment in India

Hemant Beniwal
-
181
ELSS Mutual Fund- Best Tax Saving Mutual Fund Investment in India

ELSS Mutual Funds – has become a generic term in the mutual fund industry. If we look at the full form of this term it will say Equity Linked Savings Scheme Fund – sounds odd. 😉 Mutual Fund ELSS is a damn good tax-saving instrument but still, it is not used by maximum Indians. “In India, there are close to 3.34 crore  individual taxpayers but less than 20% have ever invested in Mutual Fund ELSS.” This article will cover everything related to ELSS – Its meaning, benefits, comparison with other instruments, SIP in ELSS, and best ELSS to Invest.

ELSS Mutual Fund- Best Tax Saving Mutual Fund Investment in India

Must Check – How Healthy Is Your Mutual Fund Portfolio?

Taxes grow without rain. Like it or not, you have to pay your taxes. The trouble is that understanding taxation requires more than a genius mind. Albert Einstein admitted, “The hardest thing in the world to understand is the income tax.”

Tax planning is an essential part of your financial planning. Efficient tax planning enables you to reduce your tax liability to the minimum. This is done by legitimately taking advantage of all tax exemptions, deductions rebates, and allowances while ensuring that your investments are in line with your long-term goals.

What is ELSS Mutual Fund

ELSS is a mutual fund scheme & is quite similar to diversified equity funds of Mutual Fund. As the name suggests, the scheme primarily invests in the equity market by buying equity stocks of companies listed on the stock exchanges.

The units of the scheme are offered at the NAV (Net Asset Value). The NAV is announced for all business days and keeps changing primarily depending upon the movement in the prices of stocks held in the portfolio of the scheme.

Benefits of ELSS Mutual Fund

How to Invest in ELSS Mutual Fund?

ELSS investments can be made in the same way as other mutual fund investments, through an online investment service account. You can invest either as a lump sum or through the systematic investment plan (SIP) route.

SIP ensures regularity and discipline and reduces the risk to capital

You can invest as little as INR 500 in an ELSS fund

Comparison with other Tax Saving Investments VS ELSS

ELSS Mutual Fund Comparison

Must Read – Mutual Fund ELSS Vs PPF – Save Tax & Make Money

Benefits of ELSS Mutual Fund

Tax Benefit at the Investment

You can get tax benefits under section 80 C of Income-tax. The maximum limit is Rs 100000.

ELSS : Best tax saving instrument – undoubtedly Click to Tweet

Shortest Duration

The Locking period of ELSS is 3 years which is the shortest in comparison to any other tax-saving investment. This locking is the only difference between diversified equity mutual funds & ELSS.

Tax-Free Return

Any profit/ capital gain you have from ELSS is completely tax-free. If you see returns from NSC & Tax saving Bank FDs they are completely taxable & added to your income. Only PPF Offers tax-free returns but it has a maturity period of 15 years.

Here Is Short Video About ElSS

Tax-Free Dividends

ELSS schemes keep giving dividends on regular intervals & the whole dividend you receive is tax-free.

No entry Loads (Less Expensive)

Say if you invest Rs 10000 in ELSS Scheme your complete Rs 10000 is invested in Mutual Fund. You have to decide how much want to pay your advisor. BEWARE some insurance agents sell ULIPS as Mutual Fund + Insurance with lots of expenses.

High Growth

Equity funds can be volatile in the short run but have been known to beat inflation and create wealth over the long run. If you are looking at investing some money that you won’t need future, and are willing to ride the ups and downs of the market, you may find ELSS an ideal tax-saving option.

Best ELSS Mutual Fund Investment in India 2022

The best fund comes out after postmortem so consider them as “Top 10 ELSS Fund in last 7 years”

Fund Name 3 Years Return (%) 5 Years Return (%) 7 Years Return (9%) Min Investment Min. SIP Investment
ABSL Tax Relief 96 Fund 11.08 11.57 9.86 500 500
Axis Long Term Equity Fund 18.17 16.32 12.88 500 500
DSP Tax Saver Fund 22.12 15.57 14.45 500 500
Franklin Ind Taxshield Fund 16.82 13.05 11.09 500 500
HDFC TaxSaver Fund 14 10.11 8.93 500 500
ICICI Pru Long term Equity  (Tax Saving) Fund 18.7 14.25 11.65 500 500
Kotak Tax Saver Fund 21.83 16.67 14.37 500 500
SBI Long term equity fund 17.16 12.71 10.13 500 500
Sundaram Tax Savings Fund 18.34 14.72 12.57 500 500
L&T Tax Advantage Fund 15.62 12.14 11.24 500 500

Performance Comparison: As on  8th Feb 2022

Please note that past performance may or may not be sustained in the future.

Points to remember while choosing ELSS Scheme, Short-term Returns May be Misguiding so always look for 5-10 year performance of a fund.

Check – When not to invest in Equity Linked Saving Schemes (ELSS)

Systematic Investment Plan (SIP) in ELSS

In SIP, you invest a certain amount each month in a fund. It’s an effective way of investing in ELSS as the concept of rupee cost averaging and the power of compounding works well.

SIP ELSS Performance

  • Investment Rs 10000 per month
  • Time – Last 36 Months
  • Total Investment – Rs 1 Lakh
Fund Name Present Value Return (%) Profit SIP Profit Onetime Investment
ABSL Tax Relief 96 Fund 134000 11.08 78000 34000
Axis Long Term Equity Fund 165000 18.17 122000 65000
DSP Tax Saver Fund 182000 22.12 175000 82000
Franklin Ind Taxshield Fund 159000 16.82 165000 59000
HDFC TaxSaver Fund 148000 14 138000 48000
ICICI Pru Long term Equity  (Tax Saving) Fund 167000 18.7 159000 67000
Kotak Tax Saver Fund 181000 21.83 177000 81000
SBI Long term equity fund 161000 17.16 152000 61000
Sundaram Tax Savings Fund 166000 18.34 170000 66000
L&T Tax Advantage Fund 155000 15.62 132000 55000

Source & Credit: Some of the Data/charts used in the article are taken from NJ India Invest, Mutual Funds India & Value Research.

What’s your experience with Equity Linked Savings Scheme?

Always remember “Tax Saving should be result of your Investment planning and not vice versa”

Know you have a better idea about the ELSS Mutual fund. If you have any doubts or suggestions you can add them in the Comments section.

Key Factors of Why Stocks Price Change? Every Investor Should know

Hemant Beniwal
-
2
Key Factors of Why Stocks Price Change? Every Investor Should know

“Price is what you pay. Value is what you get.”

— Warren Buffett in an annual letter to shareholders 2008

The above quote from the world’s arguably richest investor says two things – price does not value, and you can always overpay. When each day billions of shares exchange hands in hundreds of stock exchanges around the world, their prices tend to be volatile – sometimes too much.

It is common to see the How Stocks price change within a few seconds. The simplest reason behind this volatility is the principle of demand and supply.

Key Factors of Why Stocks Price Change? Every Investor Should know

Must Read – Role of FIIs in Indian Stock Markets

If you agree to buy a share that I own, at a higher price than the previous transaction, the asking price for the whole market goes up. Similarly, when I agree to sell a share at a lower price than the rate of the previous transaction, the stock price for the whole market goes down. It’s that simple.

It is easy to know that the stock prices are rising because their demand is high, or their prices are falling as they are not in demand. But to understanding the factors behind that rise or fall in demand and supply is quite challenging. There are many visible & invisible, controllable & uncontrollable, and active & dormant market forces that affect the Stock prices to change.

Must Read –Direct investing in stocks is risky

Top Key Factors Affect Stocks Price Change?

The prices of the stocks of a company start rising when investors feel that the company has the potential to grow its profits, and it is worthwhile to become part of the success story. The net worth or value of the company is the product of its per-share price and the number of shares outstanding.

The free and open marketplace determines the stock prices, where the sellers and buyers both quote a price, they are willing to sell/buy it for. There are many factors determining the buy/sell prices such as the earnings of the company, economic strength of the country, the valuation multiple, and liquidity to name a few.

We can divide these factors into categories like fundamental, economic, technical, and sentimental reasons.

How and Why Stocks Price Change ? Click to Tweet

Fundamental Factors

In a perfectly efficient market, share prices would always follow the fundamentals of the companies. By fundamental we mean current earnings and future valuation multiple

Current Earnings

As an owner of the shares, you have a claim on the post-tax earnings of the company. There are multiple measures for finding how the company is earning on a per outstanding share basis. The simplest of them is the EPS (earnings-per-share). Calculate the price-to-earnings (P/E) ratio on current earnings to know how much you are paying for a claim on current earnings. The other measures include free cash flow per share and dividend yield. 

Future Valuation Multiple

With each share you buy, you are buying proportionally into all the future earnings as well. A future valuation multiple tells you how much faith you have in the company and the price you would pay for expected earnings.

The valuation multiple, the stock price represented as a multiple of earnings, is a way of representing the discounted present value of the anticipated future earnings stream.

Companies may retain some of those earnings for reinvestment in the business, while with the remainder they can pay dividends. The future valuation multiple expresses an expectation about the future and is usually represented by the P/E ratio.

Key Factors of Why Stocks Price Change? Every Investor Should know

Check – Alternative investment funds (AIFs)

Economic Factors

If only fundaments played a role in stock prices, things would be easier. But various economic factors that are external to the stock markets are also in the mix.

Economic Strength

The sectoral, regional, and country’s economic strength (measured by its GDP growth rate) and stability also matter. If investors have trust that the future would be better, they will invest to earn more in the future, otherwise, they will hoard their savings and consume today. Research suggests often the economic and market factors account for the majority of the movement in the prices of a stock.

Download E-book – How and Why Stocks Price Change?

Benchmark Interest Rates

The central bank of each country (RBI in India) sets the benchmark interest rates that affect all the lending and deposit rates. A higher interest rate regime results in tougher conditions to survive and grow, and vice versa, affecting stock prices.

Technical Factors

High-volume traders and algorithms consider technical factors and drive the bulk of the stock prices. These factors solely come into play only when the markets are open.

Trends

The stock price sometimes moves in tandem with its short-term trend line. If a stock has recently picked momentum, seen higher volumes at higher prices, then many traders would start giving a buy call on it. Conversely, when a stock loses its momentum, it can take a beating in a matter of days and go out of flavor.

The oscillations in both directions are completely irrational and can go up t any limits. This happens with the broader markets when they are in their “bull” or “bear” phases.

Liquidity

Here liquidity means the volume of the stock transactions taking on a daily basis. If a stock has too many scrips changing hands, it is considered liquid and a safer bet as in times of a crisis it could be sold to clear the position at an instant. On the other hand, the illiquid stock barely finds any takers at higher prices as everyone wants to avoid getting stuck with them. Small caps almost permanently suffer from liquidity discounts.

Must Read –How to select a stock for investment

Sentiments Factor 

The market is the collective term used for all the traders and investors participating in it. As with any human endeavors, markets are also influenced by human sentiments – fear and despair beget prices crashing, and hope and optimism bring on stratospheric valuations.

Market sentiments are irrational, biased, subjective, and headstrong. These sentiments can be short-term fads or long-term; for a company, sector, or the complete market; bearish or bullish, and can change with any news or trigger event.

News

Sentiments are often driven by the news – outbreak of a pandemic, supply chain blockage, labor unrest or migration, war breaking out, scandals coming to open, new drug discovery, strategic tie-up, new product launch, competition facing legal troubles, etc. Some of them are good for the stock prices and some are bad. Sometimes bad news may turn out to be a blessing in disguise or vice versa. 

The Bottom Line

Despite so many things pulling the stock prices in different directions, the market should have crashed long back. But the resilience of a great company with a strong business model in a decently growing stable economy will only bring you wealth and prosperity in long term.

Take for example the stock price of Asian Paints, which was trading in the range of Rs. 30 in 2005, and at Rs. 80 in 2009 jumped more than 35 times in just 12 years to touch an all-time high of Rs. 2845 in January 2021! It is still trading above Rs. 2550 at 32x gains, despite recent corrections.

“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

— Warren Buffett in an annual letter to shareholders, 1989 

How Much Do You Know About How And Why Stocks Rise In Value? Feel free to add them in the comment section.

Emergency Fund – Why You Need an Emergency Corpus and How to Build?

Hemant Beniwal
-
70
Emergency Fund – Why You Need an Emergency Corpus and How to Build?

Let me clarify – What is Emergency Fund?

An emergency fund is a corpus that will be used to meet expenses related to unforeseen events of life. The aim to have emergency money is to avoid financial hassles which may deviate you from your savings for your long-term goals. A typical example is that this money will not be utilized to replace your 5-year car (as the replacement of the vehicle will be covered in your financial plan) but an emergency fund can be used to make a down payment in case your car gets stolen and you need a replacement immediately.

Emergency Fund - Why You Need an Emergency Corpus and How to Build?

Must Read – How you can achieve Financial Freedom?

Why is an emergency fund important?

When you hear the word emergency all of sudden the ambulance alarm seems to go ON at the back of your ears. For us, emergency means just one thing- a road accident. And on second thought, a lot of us think why to keep an emergency fund, when we travel in a car. Traveling in the car has a low probability of an accident so I don’t need an emergency fund. Hospital charges will be met by mediclaim or by my rich papa so why to have an emergency fund?

What is an Emergency Fund & how to create it? Click to Tweet

When The Emergency Fund is to be utilized?

1)      Medical emergencies if do not have cashless provision with the mediclaim provider.

2)      Financial emergencies like replacement of assets in case of sudden breakdown.

3)      Income emergencies like loss of job or slowdown in the profession for cyclic reasons.

4)      Household emergencies like expenses required for the education trip of a child or a house repair which needs immediate attention.

5)       Your friend or family requires support due to a medical emergency. (not for buying a new flat)

6)      Availing offers which can save money in the future like making payments to reduce the principal amount in case of interest rates rise in flexible interest home loans.

These funds can be used to help to stabilize your monthly budget and even making a few savings like saving on late payment penalties and allows you to negotiate price in certain cases as you have the money to purchase in bulk.

Must Read – Follow the 50 30 20 Rule to Make Better Financial Life

How Much Emergency fund is required?

This is a serious question and requires a bit of calculation. Different experts have suggested different ways ranging from 3 months expense to one year expense. The monthly expenses are very easy to calculate if you do budgeting. But this kitty of the emergency fund is a dormant investment as the rate will be low as liquidity will be preferred. So if you go much beyond what is needed you are losing some profit you ought to earn. Hence deciding on the amount has to be accurate. I recommend that in the modern world one thumb rule will not suffice for clients with different backgrounds and earnings. Hence I would advise that you should maintain the emergency fund as per the following situations:

  • In case you have a volatile job or business with no other source of income at least aim to maintain 12 months monthly expenses in your emergency account.
  • In case you have a stable job but have a mortgage or an EMI running, which is over 40% of your salary, you should aim at keeping 9-12 months of monthly expenses and at least 6 months of EMIs in your expenses.
  • In case you have a fairly stable job or industry and a working spouse you should aim to keep around 6 months of monthly expenses in your emergency fund.
  • In case you have a stable job and a working spouse with no or very minuscule loans, you may keep at least 3 months of monthly expenses in your emergencies expense fund.
  • You must also take into factors your personal situation. If you have a large family to support or someone in the family who is disease prone you need to increase the emergency fund accordingly.

For Better Understand What is Emergency fund  Watch This Video –

How to create an Emergency Fund?

To set it straight, your credit card in NOT your emergency fund, so do not boost that you have a credit limit of lakhs and hence emergency fund is not required. The cash or credit drawn on your card is a loan and a very costly loan. Also you the extent of time the emergency will take to settle is also uncertain. So you may end up yourself with banks chasing you for their money. You need to create a kitty of your own.

Check – Behavioral Finance – Make Smarter Financial Decisions

The steps to create an emergency fund are:

  1. Fix the amount that you wish to save to allocate to an emergency fund. As discussed this will be decided on the individual situation a person is into. So instead of asking a friend how much he has in his bank (he might also think that you are asking for a loan), it is better to put your own mind into calculations.
  2. Know your monthly expense as its helps both ways. You know how much you can save on a monthly basis and also you can calculate what emergency expenses you require.
  3. Open a separate savings account with the bank and designate this account as an emergency fund. Bank does not recognize any account on the basis of emergencies. For them, this is an individual account and for you, it should be a non-personal account only to be used in case of emergencies. See that you have the ATM card facility with the account.
  4. Redirect your savings: now start redirecting your savings to this account. You may set an automatic transfer or do it on manually but you must maintain discipline in maintaining your contribution till the desired corpus is created.
  5. When the corpus has been created ask the bank to add the auto sweep facility. You may also take the help of your financial planner to help you invest in money market mutual funds.
  6. Situations will change in the future so it is advisable to review the amount after every 2 years approximately.

How to create an Emergency Fund

Must-Read – Financial Planning Process

Where to keep the Emergency Fund?

The emergency fund has to be in liquid and easily accessible. You may keep at least 10%-15% as cash at home in properly secured almirahs or vaults. Do not keep much as this will invite burglary. The rest can be put in Banks savings account with an FD sweep facility and ATM cards. Around 40-50% can also be invested in money market mutual funds. But in case you invest in mutual funds you should be aware of the process to withdraw.

Watch out!!!

You will not drain the emergency fund for normal use. You should be clear when to resort to an emergency fund. No NEEDS, WANTS or LUXURY will be bought funded from the emergency fund. Needs are budgeted, wants and luxury is goal-planned. Also if you have used an emergency fund or a part of it you should again recreate or replenish it.

What has been your experience with the emergency funds? Do you have it? Or do you plan to create it? Or do you think otherwise? Share your thoughts in the comments section.

10 Investment Mistakes to Avoid by Investor

Hemant Beniwal
-
40
10 Investment Mistakes to Avoid by Investor

There are ten common mistakes made repeatedly by investors. You can significantly boost your chances of investment success by becoming aware of these typical errors and taking steps to avoid them.

10 Investment Mistakes to Avoid by Investor

Must Read – 15 Types of Risk In Investment Everyone Should Know

10 Common Investment Mistakes to Avoid when Investing

1. No Plan For Investment

People do invest in products but there is no plan. In the name of insurance, most investments are made. Even in the case of mutual funds, there is no strategy, it is just a clutter of products which does not carry any meaning when seen together. No wind is right unless you know which harbor you have to reach.

10 Investment mistakes to Avoid Click to Tweet

2. Too Short of a Time Horizon

People forget that the most important tool of wealth creation is time in hand. People want quick money and even though their financial goals like retirement, kids’ higher education, etc are far off, they still want quick returns. At times to make quick money, they take an undue risk like Futures and Options, trading, etc.

Must Check – 7 Simple Steps To an effective investment strategies for young Investors

3. Chasing Performance

Investments are made in funds which has given the highest performance is last year. Nowadays, gold is preferred as it is rising. Recent past performance is no measure to judge future performance. Investors should look at a past track records like 5 years, 10-year return and that too just as one of the tool to select the fund, not entirely depending on that also.

4. Watching the Markets and Predicting Them Is the Key to High Returns

One of the most common mistake investor make. Market is complex animal and cannot be predicted by anyone. Even the professional managers can’t predict it. The more investor tries to do it, the lesser are the chances of good return. In stock market, inactivity plays more role than activity.

Must Read – What are Alternative Investment Funds In India (AIFs)

5. Mixing financial vehicles: insurance with investment

Insurance is for present planning– “ what if the bread earner is no more today”  and investment is for future planning – “ after 10 years, I need to marry my daughter”.  Mixing these two makes no sense and investor should keep it separate. Buying Term Plan for insurance need is the best policy.

6. Following the herd

Investment is not a game of football where teamwork is required. It is a game of chess where each individual has to plan for his unique need and situation.

7. Churning your investments

Frequent changes in portfolio without any plan or just to increase the return is not a right strategy. It only cost of taxation and other charges. Also, many distributors and banker advise you to churn very often as they meet their sales target and you are no more than just a TARGET.

8. Unrealistic expectations

Return out of any asset class depends on economic condition. If inflation is high, FDs give more return and if inflation is low, they give less. Equity funds will give return which are more or less in line with the growth of the economy. Investment made just to make high returns are usually unsuccessful.

9. Refusing to Accept a Loss /mistake

What would you do if you have taken a wrong route? Obviously you will return back, though it may have cost you time and money. But the same thing does not apply with most of investors when they have chosen the wrong investment. Correct yourself, if you find that there is a mistake, don’t hand up with that investment.

10. Over monitoring Your Investments

Many people look at their portfolio so frequently that they in a way become addicted to it. One should always give time to investment to grow and then reap the benefits. Over monitoring would mean that investors are emotionally attached to market movements and this is one of the biggest reason of people not making good returns.

Please share other common mistakes that you know.

Should A Senior Citizen Invest in Pradhan Mantri Vaya Vandana Yojana

Hemant Beniwal
-
13
Should A Senior Citizen Invest in Pradhan Mantri Vaya Vandana Yojana

What is Pradhan Mantri Vaya Vandana Yojana?

Pradhan Mantri Vaya Vandana Yojana (PMVVY)is a retirement cum pension scheme that was launched a few years back to provide an avenue of income for senior citizens in the country. PMVVY scheme pays out regular pension and the frequency can be monthly, quarterly, or yearly.

Let us dive into the details of the scheme –

Should A Senior Citizen Invest in Pradhan Mantri Vaya Vandana Yojana

Must Read – Best Investment Options for Senior Citizens in India

Eligibility for PMVVY

  • People above the age of 60 years can purchase this scheme.
  • No Maximum Entry age
  • The minimum purchase price is Rs 1.5 Lakh  and it offers a monthly pension of Rs 1000

Documents Required for Pradhan Mantri Vaya Vandana Yojana

  • Aadhaar card
  • Proof of age
  • Proof of address
  • Passport size photo of the applicant
  • Documents indicating that the applicant has retired from employment

How to Register in the PMVVY scheme 

Two ways to Register in PMVVY Yojana

  1. Online

  • Log on to LIC Official Website
  • Select the pension plans
  • Fill the application form
  • Submit the online application form and upload the required documents

2. Offline

  • Collect the application from any of the LIC Branch
  • Fill the Application form
  • Attached all required documents

Read – Facts about Retirement Planning

Features of PMVVY

  • It is a non-linked non-participating scheme.
  • It is available for purchase till 31st March 2023.
  • It is a 10-year scheme which means you will get a pension for 10 years.
  • It can be purchased by payment of a lump-sum amount. The purchase price depends on the mode of pension that the scheme owner wants –
Mode

of pension

 Minimum

 Pension

 Minimum Investment Maximum Pension Maximum Investment
Yearly 12,000 1,44,578 1,20,000 14,45,784
Half-Yearly 6,000 1,47,601 60,000 14,76,014
Quarterly 3,000 1,49,068 30,000 14,90,684
Monthly 1,000 1,50,000 10,000 15,00,000
  • The first installment will be paid after one year, 6 months, 3 months, or one month as per the mode selected.
  • The scheme can be purchased from LIC either online or offline.
  • In the event of the death of the owner during the policy term, the purchase price shall be returned to the beneficiary.
  • The pension income will be added to the individual’s total income and will be subject to tax as per the tax slab applicable.
  • It is available only for residents of India. Pension payment will be released when Life Certificate is presented in the month of November every year as per LIC Proforma or online “Jeevan Pramaaan”.

Must read – retirement expectations vs reality

Benefits of Pradhan Mantri Vaya Vandana Yojana

  • The rate of interest on policies purchased until 31st March 2021 will be 7.40% p.a. payable monthly (effective 7.66% p.a.). The interest rate on policies purchased after 31st March 2021 will be decided by the Finance Ministry at the beginning of each financial year.
Should A Senior Citizen Invest in Pradhan Mantri Vaya Vandana Yojana Click to Tweet
  • The scheme owner can avail of a loan after 3 years of purchase. The maximum amount of loan can be up to 75% of the purchase price. Interest on the loan will be deducted from a pension paid.
  • The scheme allows for premature surrender for the treatment of critical, terminal illness of self or spouse. The surrender value payable will be 98% of the purchase price.
  • The PMVVY scheme provides a fixed sum regularly

  Check- 5 Steps For Happy Retirement.

Should A Senior Citizen Invest In The Pradhan Mantri Vaya Vandana Yojana?

The policy is backed by the government. So there is low credit risk. This is a low-risk investment. The interest rate is slightly higher than the interest rate on fixed deposits in many banks. It will provide a regular source of income for 10 years. A senior citizen and spouse can invest up to ₹ 30,00,000 in the scheme. It also provides features of premature exit and loans against investment.

On the other hand, the interest rate is not fixed. As compared to the Senior Citizens Savings Scheme and NPS, it does not qualify for an 80C tax deduction. Moreover, you can easily exit out of the SCSS on payment of penalty. You can only exit from this investment prematurely in case of a critical or terminal illness of self or spouse. If you are from a higher income bracket or have expenditure that far increases the returns from this, you will have to look at other sources of money. Investments in Mutual funds and stocks will give you higher returns albeit with higher risk. NRIs are not allowed to invest in this scheme.

It will be good to invest in multiple products for retirement, which gives a regular source of income. At the same time, keep an eye on your liquidity and ensure that you have investments that can be liquidated more easily as compared to the Vaya Vandana Yojana. You can go for this product if you want a simple product that gives a regular source of income and your income and wealth sources are limited. Read about Wealth Creation Here – Key To Wealth creation.

This post is written by Vidya

If you have any questions related to Pradhan Mantri Vaya Vandana Yojana (PMVVY) – add in the comment section.

5 Best Investment Options for Senior Citizens in India

Hemant Beniwal
-
20
5 Best Investment Options for Senior Citizens in India

In earlier times, senior citizens used to be dependent on their children for financial needs. But this is changing. Rising income, better investment opportunities, and financial awareness have made it possible for senior citizens to be financially independent. Many of them are able to fund their lifestyle using their savings and investment income. But with inflation, increasing longevity, and the rising cost of medical care, senior citizens should continue to look for avenues of income. The government provides some investment options and benefits for senior citizens. As a senior citizen, you should take advantage of the same so that you have financial independence. First, let us look at the best investment options for senior citizens.

5 Best Investment Options for Senior Citizens in India

Read- Are you ready for your Retirement

Best Investment Options for Senior Citizens 

1. Senior Citizens Savings Scheme (SCSS)

SCSS, or Senior Citizen Savings Scheme, is an excellent investment option for senior citizens looking for long-term saving schemes with security and additional benefits. The scheme is available through post offices and recognized banks around the country.

SCSS is a government-backed savings scheme that is a full debt instrument with zero risks. It is valid for those above 60 years of age and offers the security of assured income for the entire tenure of investment.

The maximum tenure of the Senior Citizen Saving Scheme is 5 years. After this, you can extend it for 3 more years.

Let’s look at all the details of the Senior Citizen Saving Scheme:

Eligibility

Persons equal or over the age of 60 can invest. Voluntary retirees can invest once they are 55 years old. One can open an additional account as a joint account with the spouse.

Investment Limit

The Maximum investment of Rs.15 Lakh and the minimum is Rs 1000. Investors can invest a lump sum amount individually and jointly. The total investment amount Cannot exceed  Rs 15 Lakh across all your investment in this scheme.

You will get interested on a quarterly basis after your first investment is done. The payouts from this scss made on 31st March/30th June/30th September/31st December – as per your date of investment.

Benefits 

The current rate of interest is 7.4%. It is market-linked based on a 5-year government bond yield. Interest is paid quarterly. The interest rate is locked once the investment is done. Low-risk product. Premature closing of the account is possible. Investment can be treated as a deduction under Section 80C.

Limitations

If the interest income you receive from this senior citizen’s investment plan exceeds Rs.50,000 in a financial year, TDS also applies.

Benefits of Investing in Senior Citizen Saving Scheme

Read More – The 3 Stages Of Retirement

2. Pradhan Mantri Vaya Vandana Yojana

The Pradhan Mantri Vaya Vandana Yojana (PMVVY) is a low-risk investment pension plan operated by the Life Insurance Corporation (LIC). The plan has a tenure of 10 years and it offered an interest rate of 7.40% in the previous year. We have Details article on Pradhan Mantri Vaya Vandana Yojana.

3. Senior Citizens Pension Plan (Varistha Pension Bima Yojana)

It is an annuity plan wherein payouts are made periodically to the policyholder.

Eligibility

Anyone who is 60 years or older can invest.

Investment Limits

Minimum – Rs. 63,960 and a maximum of Rs. 6,39,610. The annuity is slightly higher if the frequency of payouts is monthly or quarterly.

Benefits

Returns are around 8%. Premium amount is refunded after 15 years, on death or diagnosis of critical illness/ disease. One can take a 75% loan against it after three years if purchase. Monthly pay-outs are possible. Premature withdrawal is possible though one has to pay a penalty. The amount received at maturity can be reinvested in POMIS.

Limitations – It is relatively illiquid compared to other options. The pension is taxable.

There are other pension plans available offered by private players. The annuity rate is lower but there is no upper limit on how much one can pay for an annuity. They are available for different durations and most of them do not allow premature surrender.

Must Check – Saving for Retirement – Mutual Funds Vs PPF VS Insurance Plans

4. Post Office Monthly Income Scheme (POMIS)

The Post Office Monthly Income Scheme falls under the jurisdiction of the Finance Ministry. This investment option for seniors provides a fixed monthly interest payment. This is a low-risk monthly income scheme, offering considerable capital protection that safeguards those initial years of retirement. POMIS requires you to invest for a minimum of 5 years and no less.

Eligibility

Anyone who is 10 years or older can invest.

Investment Limits

Minimum – Rs. 1500 and maximum of Rs. 4.5 Lakh in the case of a single account holder and Rs. 9 Lakh in the case of a joint account.

Benefits

Fixed monthly interest rate – 6.6%. Monthly pay-outs are possible. Premature withdrawal is possible though one has to pay a penalty. The amount received at maturity can be reinvested in POMIS.

Limitations

Investment is not tax-deductible. Interest earned is taxable. NRIs cannot invest in this product.

5. Bank Fixed Deposit and Company Deposits

Bank FDs are the oldest and most popular form of saving among senior citizens. One can invest money in company deposits for interest returns. The rate of interest is usually higher than Bank FD interest rates.

Eligibility –Banks are allowed to set the age limit for opening accounts. Most banks allow people, 10 years or older to open a sole account and a joint account if younger than 10 years.

Investment Limits –  It ranges from Rs. 5000 to more than a crore depending on the bank/ company.

Benefits – Most banks offer interest rates higher than normal fixed deposit rates to senior citizens. It ranges from 2.95%-5.40% for banks. Company deposits offer 7%-8.26%. Income is stable. Some corporate deposits offer higher returns to senior citizens.

Limitations – Interest rates are going down. FDs will not be able to beat inflation. Company FDs carry higher risk. It is better to invest in companies rated AA and above. Interest earned is fully taxable based on the tax slab you fall under.

Must Read – 5 Reasons you should not Retire

6. Mutual Funds

There are no specific mutual fund investment schemes for senior citizens. Depending on the risk appetite, senior citizens can invest some amount in Mutual funds. They can choose mutual funds that have a lower risk. Debt funds, liquid funds, etc. that invest in commercial paper, bonds, government securities, etc. Can also think of adding 20-30% of asset exposure to equity mutual funds based on risk profile.

Benefits – Well-performing funds give returns that can beat inflation. They are managed by professionals so there is better management and less chance of losses. They provide capital appreciation. Monthly Income Plans give regular income too. One can withdraw money from Liquid funds very easily.

Limitations – Subject to market risks. Long-term gains of Nonequity funds are subject to taxation of 20% with indexation. Short-term gains (holding period < 3 years) are subject to the tax rate as per your tax slab.

Must Check- 8 Most Important Mutual Fund Questions – Sahi hai ya Nahin

Annuity

You should check this post to understand annuities – LIC Jeevan Akshay Review There’s specific reason we have not covered annuities in the best investment options for senior citizens in India – you may get a hint in Jeevan Akshay post.

Benefits Available for Best Investment for senior citizens

Best investment plans for senior citizens in India are limited in India – other benefits are even lesser. Here are some of the benefits that you should take advantage of if you are a senior citizen –

  • Tax benefits – There are tax exemptions and tax benefits provided to senior citizens.

– Under Section 80D which is for payment of premium on medical insurance, there is a deduction of Rs. 50,000 for senior citizens which is Rs. 25,000 more than that for non-senior citizens.

– Deduction of Rs. 40,000 is available to senior citizens and Rs.100,000 for super senior citizens under Section 80DDB, unlike the usual Rs. 100,000 for others.

– Senior citizens can file form 15H so that TDS is not applicable for interest earned on FDs.

– Senior citizens who do not have business income are exempted from paying advance tax.

  • Other Facilities – Senior citizens need not fix an appointment for applying for a passport. They can walk in and will be given preference in terms of waiting time. They are given discounts in MTNL phone bills and priority hearings in the high court. Some hospitals give discounts on medical treatment for them.

Senior citizens deserve to be treated with compassion and concern and therefore some organizations and the government provide certain facilities to them so that their sunset years are easier. Please share if you have come across any other investment options for senior citizens – also share tips, ideas, opportunities & strategies for retired people.

How To Calculate Your Net Worth And Why It’s So Important?

Hemant Beniwal
-
11
How To Calculate Your Net Worth And Why It’s So Important?

All of us should know our net worth and not just the business tycoons and high-profile CXOs. Net worth is the amount by which assets exceed liabilities. It can be used to determine the financial worth of an individual or a business. Net worth is a great parameter to measure your financial standing. It is important to calculate your net worth so that you are aware of where you are in the financial journey and know what you need to do to achieve your financial goals.

How To Calculate Your Net Worth And Why It’s So Important?

Must Read – How you can achieve Financial Freedom?

How Should You Calculate Your Net Worth –

Arithmetically,

Net worth = Assets- Liabilities

  1. List down all your assets. This should include bank balances, bonds, Equity investments, MF investments, property, PPF/EPF, etc. Make a conservative estimate of the assets’ value.
  2. List down your liabilities. This includes all balances left in all loans like Home loans, credit card loans, personal loans, outstanding premiums, etc.
  3. Find the difference. The difference is your net worth. When you are younger you might have a negative net worth due to education loans or home loan amount outstanding being very big. You need not panic but take steps to ensure that you aim towards reaching a positive net worth asap.
How to calculate your Net Worth & why it’s so important.... Click to Tweet

How To Calculate Your Net Worth – Thumb Rule

There is also a thumb rule for how much should your net worth be (minimum).

If you are employed, net worth should be

{(Age*Annual Household Income)/10} – Inheritances

If you are not employed or a student or just started working, your net worth should be

{((Age-27)*Annual Household Income)/10} – Inheritances

Why Net Worth Is Important

Must Check – Behavioral Finance – Make Smarter Financial Decisions

Why Net Worth Is Important?

Net worth is a snapshot of everything you own and everything you owe. It is important to know your net worth as you are aware of your financial health. Net worth should be calculated at least once a year so that you know the trend your finances are following.

If your net worth is high, you will be able to achieve your financial goals and you will be financially secure and you can live your life the way you want without constantly worrying about how every decision affects your finances.

How Do I Increase My Net Worth?

You should always try to improve your net worth. It requires some work, willpower, and discipline. Here is some guidance –

  • Reduce your Debts – You should pay off your debts as and when you can and it makes financial sense. You should avoid taking loans for consumption and personal loans. Revisit your loans once in a while to see if you can change the terms and conditions. Check if you can prepay the debt or pay a bigger EMI to save money.
  • Make smart investments – Asset allocation is very important. It is not a smart idea to leave your money lying idle in the bank. Invest in a variety of assets like Equity Funds, Property, Debt Funds, etc. so that your finances grow and you are hedged against risks if any of the assets lose value. If you are not sure on how to diversify your assets, talk to a professional/ financial planner.
  • Reduce Expenses and Increase Savings – Keep a check on your expenses. You can list your daily expenses in a diary to start with. Do you eat out a lot? Are you always buying new clothes and shoes? Are you the first one to buy the latest smartphone or tablet in the market? Analyzing your expenses can help you find out your bad spending habits and take steps to curb them. You need not give up everything you like but a little self-control goes a long way in increasing your savings and ultimately net worth. You can save money by controlling your expenditure and making smart choices in your lifestyle.

I have added Net Worth & lots of other calculators in my book

“Financial Life Planning”

Do you know your net worth? How often do you calculate your net worth? Do share your tips on how to increase net worth.

A Complete Guide to How to Manage Your Financial Documents?

Hemant Beniwal
-
33
A Complete Guide to How to Manage Your Financial Documents?

According to the Central Finance Ministry, our Post Offices hold billions of unclaimed National Saving Certificates & Post Office Saving Bank Accounts. Do you think people don’t want their money? This is because they have lost the document which will remind them that they have money invested. And maybe it’s not their fault also as the original investor did not record it properly and the family is not aware of the investment. So it is important to file, record, and safely keep financial documents as the consequences are inter-generational.

A Complete Guide to How to Manage Your Financial Documents?

How to Manage Your Financial Documents Normal Process

This is how most people do – We receive a document through the post, we put it on our writing table or worst in the wardrobe and, then forget about it. Actually what happens is that when we received a document we think the purpose of reminding a payment or a due is done and you create a mental note of the last date or actionable. But it is a human tendency to forget as human memory has a non-automatic RAM in place. This is the reason I have seen many of my friends who often forget to deposit their mobile bill because they have not filed it properly or people asking you to pay some bill online as cash and cheque will not be accepted beyond a mentioned date.

How to Manage Your Financial Documents Click to Tweet

Every household must work out their own document management system, but there are some general guidelines that can help you a lot in a long way. The aim of creating a system will be:

  1. Ease the process of finding and saving costs on penalties and late payments.

2. Safeguarding documents from wear and tear, misplacing, and accidents like thefts.

3. Assist your financial planner in locating required documents and pass on the relevant to survivors in case of any mishappening.

Solution

It is useful to keep the important document in order in all financial consequences. Most financial experts recommend the creation of a comprehensive folder of documents that access by family members easily in case of emergency. Otherwise, they have to search here and there at home and run desperately to banks and life insurance companies. It is advised to use colors to show the importance of the documents. For example, Red for the most valuable files, Blue for the less, and so on.

Do not hold too many documents

Sometimes people hold so many documents that their family members can’t find the important ones easily. So instead of filing all statements of the same folio of mutual fund investment, only file the latest one. File the latest in case the details are available online. For example, Life Insurance receipts, utility bills, stock transaction statements, bank statements, etc. are all available online either by signing up or by mail back request. So what’s the point in preparing bulky files?

Managing Passwords

Managing documents online is also not easy as these come only when you create accounts/logins by choosing IDs and passwords… You have to remember multiple passwords of your online accounts and then you have to keep changing them for security reasons. And if you lose a password, it is equally tough to reset a password after going through a stressful process of validation and answering secured questions. It is advisable to maintain an excel file containing your IDs and passwords. (maybe 2 separate files one for login another for password) Some precautions to be maintained here. The file has to be password protected – only you and your spouse should know the password. The file should be used only on personal machines (not office systems or cybercafés). Keep a backup of this file preferably on a personal external drive and never put this file on mails or web. Also do not put details of your credit card passwords or CVV numbers. In case you are putting material information, put in a riddle format that only you know.

Important Financial Documents

Below mentioned is the list of important documents that you need to check and keep ready. You should collect all these documents as soon as possible if not in possession and update them every few years as per your need.

Documents related to Asset and Liabilities

One should keep arranging all the documents related to property & land, any document related to the plot, share certificates, registration certificates of vehicles, and a copy of fixed deposits. If your family members have no information about these then in an emergency situation they can never find them on time. If you have lent money in the market and if you have a loan from the market, keep a proper document related to both so that it can be included in your asset & liabilities.

Bank Account Statement

If you are active online no need to keep a record, otherwise statements not more than 6 months are to be kept. Shred the old statements and after checking their accuracy. Do file important documents related to nominations made or changed. Cheques books need to be kept in a proper lock.

How to Manage Your Financial Documents

Income Tax Return

If you are employed somewhere or you are running your own business, you need to document your return very carefully. You can safely keep soft copies if you are filing IT online. Whenever you require a bank loan the financial institution will ask for an income tax return. Ideally if salaried you should keep copies of the last 3 years’ income tax return all the time and 6 years if in business.

Insurance Policies

Again, if you have an online account, you need not to file premium receipts. Just file the policy certificates. Private insurers also provide a copy of your proposal form. This should also be filed as it becomes an important document if the claim falls into dispute. The photo ID cards issued by insurers should be at a place where all mature family members are aware and have access.

Will

You should keep your will in a place where your family members can find it easily when required. A will is the most important financial document so you should keep it very carefully so that nobody can misuse it – otherwise, it can create a big mess. You can keep it safely in a bank account locker or a safe deposit box with sharing its combination with other family members so that they can use it when required.

The documents which we have mentioned above are very important hence be prudent in filing them. What else?

Scanning documents

Few documents which are used frequently can be scanned so that original is not disturbed. These can be your pan card, passport, and aadhar card which are required as identity and address proofs while making financial decisions. So scan documents that are frequently required or keep adequate photocopies.

So I hope that after reading the article you have an idea how to record and file these important financial documents. Do share how you have been doing it? Also, share any experiences where absence or presence of filing and proper safekeeping of the documents led to crises or a relief. Waiting for your comments.

1...345...44Page 4 of 44