For most salaried individuals, financial planning begins and ends with tax saving investments.
As a regular reader of PersonalFN, you know there's much more to it than that.
While saving tax is a very good thing, there is much more than you can do as a salaried person to have a completely successful and stress free financial life.
Let's see what the 4 most important things are for salaried individuals to keep in mind at all times, starting of course, with making the most of your tax breaks.
Save as Much Tax as Possible
There are many options available that will help you save tax and also grow your wealth, lets briefly go over what the main ones are:
Tax saving can go a long way to helping you build wealth.
Everybody knows Section 80C.
It includes your EPF, PPF, tax saving mutual funds, premiums paid for life insurance, ULIP premiums, repayment of home loan principal, 5 year Bank FDs and more. For more information on each of these, read our article titled Tax Saving Under Section 80C
Beyond Section 80C
This includes Section 80D (health insurance premium), 80CCF (infrastructure bonds), 80E (E is for education, so if you have an education loan for yourself or a financial dependent, this section can help you), HRA (House Rent Allowance - living on rent? it can help you save tax), LTA (Leave Travel Allowance - taken a holiday this year? this can save you tax too), Medical Reimbursement (up to Rs. 15,000 per year is reimbursed so have your medical bills ready as proof), and more. For more details, read our article titled Easy Tax Saving Tips Beyond Section 80C
- Section 80C
Protect Your Family Against Loss of Income
Chances are you are the main breadwinner in your family.
Consider what would happen if one day the income stopped.
This could be because of job loss, or an accident due to which you need to stop working for a while and during which time you will incur medical expenses, or an unfortunate event in which you pass away. You need to protect your family from the financial repercussions of any of these events.
Nobody can completely protect themselves from job loss. But what you can do is constantly upgrade your skills. The more qualified and also the more experienced you are, the easier it will be for you to take your pick of the job offers you will receive.
The remaining 2 factors can be insured against.
If you suffer an accident, you can protect yourself against total loss of income if you have a Personal Accident policy.
A Personal Accident policy is one which provides you with weekly income (in some cases limited to Rs. 5,000 per week for 104 weeks) in case of an accidental injury resulting in temporary total disablement or death. Different policies offer different compensation amounts and each policy should be read carefully before any one is selected. This, in conjunction with enough health insurance, will help foot most of the medical bills during your period of recovery. Thus you wont completely lose your income, and also you wont have to spend too much on medical treatment, as you will be insured at both points.
In the final case, where you pass away due to an unfortunate unforeseen event, your family will be protected if you had the foresight to take sufficient term insurance.
Know Your Goals
Here is a basic example of Mr. A's Goal Calendar :
Year Age Goal Amount required Assumed Inflation p.a. Future Value of Goal 2012 35 Contingency Fund Rs. 5,00,000 Not Applicable Rs. 5,00,000 2015 38 House Purchase Rs. 1,00,00,000 10% Rs.1,33,10,000 2030 53 Child's Higher Education Rs. 10,00,000 10% Rs. 55,59,917 2037 60 Retirement Rs. 5,00,000 p.a. 8% Rs. 6,90,28,321
Until you write down something like this for yourself, you will never fully be aware of what exactly you are saving for. Once you have this table and you know all your goals, you will have a clear sense of direction and purpose, and will be able to efficiently get on track to achieving your dreams.
Different goals can have different rates of inflation, and in some cases you might need professional assistance with knowing your future goal amount and finding out how and where to invest to achieve it. You might also need assistance with cash flow management. Your financial planner will give you a holistic picture of your finances and give you a clear road-map of your goal achievement process.
Understand How Loans Work
There are good loans and there are bad loans. Good loans help you build or buy appreciating assets (home loans for example). Bad loans charge you very high interest and either don't help you buy assets at all or help you buy depreciating assets (personal loans, credit card debt and so on).
Loans can be a great tool to help you build wealth, but be sure to use them wisely. Predatory lending is when a bank loan official tells you that you can afford a certain high loan, when actually you might not be able to. You as the loan taker are happy about being eligible for a higher loan amount because this means you have more funds at your disposal, but when the interest rate rises and your EMI goes up, you might find yourself struggling under the heavier burden. Only take as much of a loan as you can afford and always remember to have atleast 3-6 months worth of EMIs as part of your contingency reserve, just in case. Also, to better understand yourself as a loan taker, read our article titled How To Build Your Wealth With a Loan.
Even Rs. 25,000 saved in taxes each year for 20 years will grow to Rs. 25.61 lakhs.
(assuming investments earn a 15% per annum return)
These 4 points are both simple and crucial. Follow them and you will be well on your way to having a happy and successful financial life. If you need professional assistance, feel free to call PersonalFN, we'd be happy to help you plan your finances.