Friday, May 25, 2007

Going to save tax - Read this first

Most of them would have come across this phase of 'saving tax' during their first year of working (entering into a professional world). They need help on where to invest to get higher returns and how much to insure themselves. This is to help you in making a decision, so that you needn't have to invest in something/somewhere without proper knowledge and regret for it later. (I have seen many doing this)

How much can I save and where can I save/invest?
How much should I insure?
Have I insured enough?

These are the questions that comes to you and the answers depend upon the returns you want and the risk appetite you have.

The maximum one can save now(2007) as per law is 1Lakh. This also includes your PF. So, exclude that and calculate. You can additionally save a max. of 10,000 from tax, if you are going to buy Mediclaim for your relatives or for you. And also, there are many ways to exclude tax by spending!

Insuring is always a best practise. You can insure yourself for atleast your annual income!. But I am not saying you shouldn't insure more. Actually you should. For insurance, I will write a separate post. The only thing, I will ask you to do is,

"Always go for Plain Term Insurance Plan" -

You can checkout the premium online on all of the insurance company websites. Please do your own research to find out which company offers the lowest. The term insurance plan is with everyone and you needn't have to think to go for any other plan, even your advisor says you to do so. More on this, on the next post.

Let me come back to How much and where to save/invest?

I said this depends on your risk. If you do not want to take any risk,
Try these, (for saving tax)
1. PPF
- Most effective return of 8% compounded annually
- 15-16 years of lock-in period.
- you can take out the money as loan after the third year
- 500-70,000 premium range / annum (Its really wide range)
- The income coming from it is not taxable.
2. Insurance Premium - According to the period and plan you have chosen.

There are many more plans withour rish like (NSC certificate( less returns post tax), Many small savings plan(returns are less than PPF), FD - 5 years(Remember there will be tax to the returns according to your tax slab)

I will recommend only these two for those who do not want to take any risk.

For those who are willing to take risks, but want higher returns,
1. Insurance Premium
2. ELSS - Equity Linked Savings Scheme
- 3 years of Lock-in Period
- Mutual funds - market risk.
- Investing in Equity - Risk is more.

There is also one thing called ULIP - Unit Linked Insurance Plan. What they say is they will combine 1 and 2 with risk above. I wouldn't recommend this. The point is, they also have 3 years lock-in period. But the percentage that they take as the amount for managing the fund in the first year is very high - like 50% or atleast 30%, then some 6-8% for the next two years and it does differ according to plans, while Mutual Funds are managing it with just 2-2.5% according to the plans. There are many Tax saving schemes available and you can see their NAV - Net Asset Value everyday in the internet.

NAV is just he price you pay to get a part of mutual fund on that particular day. The similar NAV will be available for ULIP but not updated everyday and also not easily accessible. So, I would recommend ELSS for getting higher returns (with risk) and Insurance - Term Insurance.

Its quite a long post, I know. If you want anymore information, just give a comment.

Monday, May 21, 2007

Begin Investing

There are various ways to get money and equally more ways to spend it. The question, most of them ask, is "Where to put in my extra money to get higher returns?"

This involves many factors like,
1. How much time you are going to remain invested? - Time span.
2. How much risk you are willing to take? - Risk
3. How often and when do you need money? - Liquidity

The banks give interest for the money you have saved with them in SB account. Surely, I will not call this as investment. You may have wondered, how come they are able to give some more money as interest. This is the time factor that comes to play here.

The thing you buy today at Rs. 100/- will not be the same after, say, 10 years. For example, The price of Gold before 20 years would be very less compared to what it is today. This is due to inflation. Inflation rate is the rise of prices in every year. It is something between 4-8% in India. Now, it is almost 6%. So, What does this mean?

If you are saving in a bank, the return what you get will not even cross the inflation rate. The rate of return in a year by a bank for deposits in Savings Account is almost 3.5% and it is far lesser than the inflation rate. Actually, you are losing the money over the period here.

If you invest some 10,000 in bank for a year. You can buy some furnitures worth 10,000 with this money, at the same time (just for the sake). The return after a year would be Rs. 10000 + 350 (3.5% interest (Roughly)) and you can buy for 10350 after a year. Now, the same furniture will be costing you (10,000 + 600 (6% inflation rate). So, your money has actually has depreciated in value. Don't believe it still?

Also, there will be tax for the money you get as interests. It would be according to your tax slab.
So, it will still be reduced. There is very high liquidity with very less risk and the rate of return will also be less. So, you should not lock the money by keeping it in the locker or putting in the bank for the sake of saving. Invest it wisely.

According to the risk, time and liquidity, you can invest in many ways and there are many ways to attain the same. Also, you shouldn't invest all the money that you have and go into credit for living your life. Always, set aside some cash for emergency. Even though, this money is not growing and beating inflation, this is for your safety. No one can predict what happens the next day and it is always better to be 0n the safe side.

Always try to make money out of your extra money. According to the risk profile, the instrument to make more money differs!

Begin Investing sooner than later. Also do your own research before investing.

Sunday, May 20, 2007

Saving and Spending

One should always think on investing if he has more money left after spending for his needs. Actually, what does that mean? His 'cash flow' must be positive.

Cash flow is the net amount with you after you spend for your expenses from your earnings. Roughly, calculate it this way,

How much are you getting every month (if you are a salaried person, its your salary)? - A
How much you are spending every month (It includes everything like food, clothing and every other needs) - B

Strictly speaking, (A-B) is your cash flow. Simple, isn't it?

Apart from paying for your expenses, you should also have to save for the future expenses. Also, there is a high possiblity that you have some financial goals in your life, like,

1. Buying a car, house, etc.,
2. Do marraige for you sister or son or daughter.
3. Financially free over the years to come.
4. Plan to retire soon...
5. Anything that the money can get you, that you can think of!

For all the above said things, you will be eagerly waiting for increasing your 'cash flow'.

To increase the cash flow, you can either increase your monthly income or decrease your extra expense. Note here, its "extra expense". You can have numerous ways to increase your monthly income, doing more work for incentives and/or creating a new side business.

How to cut short your expenses? First of all, have a pocket diary or something of that sort, to have all your expenses accounted. Anyway, you need to have this for finding the value of B, that was said before in cash flow. Then find, which of them is extra expense. you will be able to find it easily. Of course, whenever need/necessity comes you should have to spend for it.

You will be thinking where to put the 'extra money' to get higher returns, so that, it will be helpful in fulfilling your financial goals/needs. This will be the next post.

Life is a Game

I have been waiting to write a blog for quite some time. Time has come now. I have started this blog.Trying with some philosophies.

You should have to live happily and that lies in your heart and mind. There are many things that money cannot buy and that should also be kept in mind.

Life is always a Game. you can win and lose and thats part of life. Always try to be happy and have a smile in your face, that will give a boost to you.

This post will contain information about my home country (India) - But the concepts hold good all around the world. Its the funda that makes you think in the end.I am also a new investor in shares and also new to making money. I will share my experiences here and will be grateful to see your comments.

Happy saving and investing!