Sounds familiar? Then this article is for you.

Earning a living is no walk in the park, what with trying to keep the nose to the grindstone, shoulders to the wheel, eye on the ball and ears to the ground. One rarely has the time, energy and inclination to worry about when, where and how to invest. Plus, this tax saving thing is so tedious and boring. Some money ‘has’ to be invested to get you a tax deduction. Bottom line—less TDS [tax deduction at source] and more income for the rest of the year. That’s all Priya was concerned with, then why bother with the planning and details, right? Wrong.

Because the cheque written today has got enormous ramifications on your finances tomorrow. So you better know what you are doing.

Make the effort

Assuming you are serious about your job, you must be spending the better part of your day giving it your blood, sweat and tears. In return, you are paid a salary. Even for the self-employed, it is no different. This income helps you to spend and save money for the future. So just because something seems tedious and boring, it shouldn’t be used as an excuse to be careless about money. Especially when it is neither tedious nor boring, but actually simple and straightforward. And the ten minutes that you spend reading this article is all it really takes. So do make the effort and it will pay you rich dividends—pun intended.

Understand the basics

First of all, let’s understand that the maximum amount of tax deduction allowed is Rs 1,00,000. Out of this, take out the total amount of provident fund [PF] deducted from your salary during the year. Of course, for the self-employed, this figure would be nil. Those who have taken a housing loan should also reduce the principal portion of the EMI [equated monthly installment]. Now the balance left needs to be invested.

For example in Priya’s case, the PF was Rs 60,000 for the year and she lived with her parents. So she needed to invest Rs 40,000 [Rs 1,00,000 – Rs 60,000] more to reach the limit. Now, she can invest this Rs 40,000 in a variety of instruments such as bank deposits, life insurance, NSC, PPF, ELSS [tax saving mutual funds] and Post Office deposits. Space constraints preclude a detailed discussion of the pros and cons of each one of these instruments. So, I will spare you the ‘tedium’ and ‘boredom’ and directly get to the point.

Simply invest

Instead of depending upon your colleague, ignore everything else and simply invest in a combination of ELSS and PPF. If you are relatively young and just starting out, put 70 per cent into ELSS and 30 per cent into PPF. As you advance, lower the proportion in ELSS funds and increase the proportion of PPF eventually reaching a 30 per cent ELSS and 70 per cent PPF combination. Of course, since each person’s situation is different, taking the advice of a financial planner [as against an agent] would be better than this kind of template investing—however, it would beat the last minute frenzy any day.

Now that the tax saving is taken care of, lets go a step ahead. Beyond a point tax saving is simply not possible. So don’t fret about saving tax, worry about optimising post tax income. How do you do it?

Perhaps by making a small modification to the usual mindset. Normally, the amount we save out of our incomes is what we call savings. In other words, Income minus Expenses equals to Savings. Now, for the almost presumptuous suggestion. How about Income minus Savings equals to Expenses? It’s the same equation, but redrawing it is infinitely more efficient as far as our finances are concerned.

Start small

So starting next month, pre-decide how much you want to save out of your income and the balancing figure should automatically make up your expenses. Take care not to set too ambitious a target, or you will end up just strait-jacketing yourself and give up soon. So start small and make the adjustments as you go along. This strategy introduces an element of financial discipline and ensures that you don’t feel too much of a pinch.

Be an early bird

This holds good for anyone with an income. You need not wait till the last minute and take decisions in a hurry. The early bird gets the worm. You can be that early bird by investing in tax-saving avenues at the very beginning of the financial year, even on April 1. Doing so has a two fold advantage. Firstly, your tax saving investments will earn returns from the beginning of the financial year [April-March]. Secondly, you will not have to worry about paying a lump sum [which you may not have] at one go at the last minute.

There is no compulsion to invest for tax only towards the end of the year. A much more efficient strategy is to invest throughout the year in a staggered manner such that by the time the financial year comes to an end, you can take full advantage of the tax saving opportunity. And don’t worry about how much or little you save each month. As Benjamin Franklin has so succinctly put, “A penny saved is a dollar earned!”

This was first published in the January 2009 issue of Complete Wellbeing

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An early start

Actually, we are introduced to the concept and process of financial planning at a very young age—in fact, since our pocket money begins. I have fond memories of my week starting with pizzas, movies and soft drinks. As the weekend neared, vada pav substituted the pizza; one hung out outside the movie theatre instead of inside and the cola was swapped for a cutting chai. Of course, I felt a special thrill on the rare occasions where I actually managed to save some money.

In fact, it was with these savings that I made my first investment in a Recurring Deposit [RD] at a bank opposite my home. Bullying my parents, I managed to add two hundred rupees to my princely capital of INR 800 and was a delighted owner of a INR 1,000 bank deposit. It gave me a thrill to periodically visit the bank to add to the corpus and act grown up.

Looking back, the RD, proved to be great investment. Though the capital wouldn’t have made a Donald Trump look over his shoulders, the entire process instilled a discipline of savings at an early age. Not to mention the fact that I used the money to make my first foray into the stock market—100 shares of a company and my first investment as a professional. Thinking about this subject brings tears to my eyes, not on account of the nostalgia but because as a novice investor, I made the mistake of getting out of the stock way too early, just as soon as I had made a few bucks. Had I held on, perhaps Trump would have really had to look over his shoulders.

Why plan

You need to plan your investments simply so you get rich before becoming old rather than getting old before becoming rich. Planning your investments carefully is the difference between building up capital and accumulating wealth. The difference between capital and wealth? Wealth is when your capital brings a smile to your face.

The good news, however, is that there is nothing esoteric about the financial planning process. There are no intricate spreadsheets that will tell you how much money you will have, up to the second decimal, on your 65th birthday. So, it’s so much better to have an objective blueprint in front of you.

How to plan

Start with the basics: what is the debt – equity mix you are comfortable with? This is the key starting point. Once you determine this ratio, you should also be determined to stick by it, no matter what. They say, discipline achieves what ambition seeks.

It takes all the restraint in the world not to withdraw from your PPF and get into equities. Similarly, it requires conviction and sometimes even a sleeping pill or two not to pull out of the market in a bear phase like the current one. However, once you get this thing sorted, you are on course.

The next step is to factor in and optimise risk, return, liquidity and tax-efficiency. If you need tax efficiency, you may have to sacrifice some liquidity, if you want more liquidity, you may have to scrounge on the return a bit. Each person’s life is different and the financial plan should be tailored to suit your unique situation. Therefore, it is best to have a goal-oriented approach as far as possible.

The numbers game

The next milestone is defining your objectives. For example, you wish to start a small business after retirement, your daughter wonders if you could lend a little financial support for her education abroad; you also want something in hand for her marriage and then there is this small row house at your native place that you always wanted to buy. The wants are many and all may not be fulfilled. The thing to do is to put it down on paper, in terms of cold numbers. This way, you graduate from a hazy idea of your requirement to a ball park figure.

The last step is completing the other side of the equation in terms of your net worth. Go ahead and list down your assets—things like a flat, car, family jewellery and investments. Be careful to deduct any liabilities in terms of loans that you may have taken [and may need]. The difference between the two is your target. If you think it is needed, by all means use the services of a professional financial advisor.

A continues process

Financial planning isn’t easy. Neither is it too difficult. The bottom line: chart your goals clearly, use the products available for maximum benefit and start early. They don’t say make hay while the sun shines for nothing. In addition, try and undertake periodical reviews. Financial planning is a constant and continuous process of knowing where you stand and what you have to do if you have strayed from the demarcated trail.

Lastly, use your investments to self-indulge. You only live once and what is the point if you can’t pamper yourself once in a while? For me this year, it was an iPod; a limited edition version with more gigabytes than I’ll ever have time to listen to. Perhaps I overdid it. But hey, if you have to do something wrong, at least do it right!

This was first published in the April 2009 issue of Complete Wellbeing.

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