Personal Finance; Different Avenues (Part 2)

Last week, I had written about Personal Finance and talked about certain points. In case you haven't read it, you can check it here.

In today's post, we will discuss about three different avenues available for you to invest and in some cases to protect your savings.

• Fixed Deposits and Recurring Deposits
  
  These two are the financial instruments which you would have easily come across in today's world. FDs and RDs provide a higher rate of interest than a regular savings account. The maturity date is fixed when you opt for a tenure ranging from 7, 15 or 45 days to 10 years. The interest rate usually varies between 4 and 7.50 percent, however it is based on the monetary policy adopted by the Central Bank of any country.
  
  Recurring Deposits is a kind of term deposit mostly useful for people with regular monthly income to deposit a fixed amount every month into their recurring deposit account and earn the applicable interest rate.
  
  The most important point to note while calculating the returns from FDs and RDs is Tax Rate. The interest earned from these instruments are chargeable to Income Tax.

• Public Provident Fund
  
  PPF is a savings and a very popular tax saving instrument in India.
  The scheme is fully guaranteed by the Central Government. A minimum yearly deposit of Rs 500 is required to open and maintain a PPF account. The maximum amount which can be deposited in a year is Rs 1,50,000/-.
  The interest rate is compounded annually and paid on 31st March every year.
  The total duration of the scheme is 15 years and thereafter the subscriber can choose to extend for blocks of 5 years each.
  The interest rate is declared quarterly.
  
  The important point here to note is that there is a lock in period of 15 years. Premature withdrawals are allowed from the start of the seventh Financial year. Entire corpus on maturity is tax free.
  
  For more on PPF click here.
• Stock Markets
  
  One can invest in Stock Markets either by investing directly in stocks or through the Systematic Investment Plan(SIPs) with the Mutual Funds.
  
  For investing directly one needs to open a demat account with a depository and a trading account with a broker.
  The basic difference between Trading and Demat account is that Demat account keeps your shares electronically and Trading account keeps your funds which are invested in Stock Markets.
  Investing directly is generally perceived to be little more difficult than investing via Mutual Funds. The key while investing directly is to understand the basics first and educate yourself.
  
  This is a vast subject and here are a few re plugs of old posts on it which might be useful :
  http://pratikmantri.blogspot.com/2016/11/mistakes-you-should-avoid-while.html
  http://pratikmantri.blogspot.com/2016/06/key-learnings-from-investing_43.html
  http://pratikmantri.blogspot.com/2017/05/books-on-investing-and-stock-markets.html
  
  
  The other option to invest in Stock Markets is through the Mutual Funds route. The basic concept of MF is that it pools money from many investors to purchase securities. MFs help in diversification, liquidity and professional management. MFs not just in invest in securities/stocks but they also invest in debt markets.
  
  There are few funds which are eligible to get you the rebate in Income Tax in India, they are Equity Linked Savings Scheme (ELSS). There is a 3 year lock in period in ELSS.
• National Pension System
  
  It is a voluntary defined contribution pension system in India. It is tax efficient under various Sections of Income Tax Act and is managed by Pension Fund Regulatory and Development Authority (PFRDA).
  
  It is a market linked product but with restrictions on its withdrawal but provides an attractive long term saving avenue to plan for retirement.
  
  You can find all the details about NPS here.

There are other savings instruments like National Savings Certificate, Sukanya Samriddhi Yojana which I have not discussed since that would have made this post even longer!

Personal Finance; Basics (Part 1)

I have always come across many people who have done all the hard work in their respective careers and professions but have been unsure of how to efficiently manage their personal finances. I will attempt to present few basics of Personal Finance in the layman's language.
So, Personal Finance at a very basic level is managing your money in the most efficient manner. It includes saving, investing, insurance requirements, retirement planning, real estate needs and tax planning.

It is about meeting personal financial goals, funding different goals like your child's education and marriage, planning for your retirement, buying a dream home or just accumulating wealth.

The first rule of personal finance is always 'Pay yourself first' this simply means that a certain percentage of income needs to be saved before it is spent. Income minus savings is expenses and not the vice versa. Once you have identified your financial goals, take an estimate of inflation adjusted requirements and decide how much of savings or investment is needed to achieve that. Saving the 10 percent of your income is a good start according to me and then increase it to 20 or 30 percent. You also need to manage based on your phase in life like when you are young, you have relatively less liabilities but that increases as you age. There are a very few basics on this, one of them is 50/30/20 rule.

The 50/30/20 rule is a very popular budgeting method. This method can be divided into the following three parts:

• 50 percent of your take home income should ideally go towards living expenses including routine household expenses, groceries, rent, utilities etc
• 30 percent of your take home income should ideally be for lifestyle expenses and spending on things like dining out, travel etc
• 20 percent of your take home income should be saved for your future goals including retirement, short and long term goals and also paying down debts.

The idea is to create a broader framework for maintaining a better control for your finances. The above percentages can be changed based on the age and circumstances of the person since we cannot accurately predict everything in the financial terms.

Another aspect important here is maintaining an adequate Emergency fund of say 3-6 months. As the name suggests, it is generally for financial emergencies. It can happen anytime hence you need to provide a cover for your household and monthly recurring expenses by saving enough. You cannot risk missing an EMI.

Keep a Tab on your expenses. If you are someone who is used to living a life from paycheck to paycheck then you are probably spending too much or need to work hard to increase the income. There might be a lot of unplanned expenses which can be avoided. There are lots of apps like Mint, Level Money which help in monitoring the expenses, using that might be useful. You can also categorize the expenses based into necessities or luxuries, fixed or variable. A more focused approach will lead to positive results in no time but you need to stay committed to the plan.      

Happy Saving!