Saturday, February 1

Be Wise: Start Investing Early

Imagine this, if you start investing Rs 2,000 per month at the age of 20, you could accumulate a massive Rs 1.08 crore (assuming 9.5% interest p.a.) when you retire at the age of 60. On the other hand, if you started investing the same amount at the age of 30, you would accumulate only Rs 40.66 lakhs.

The investment decisions you make in the first 5-6 years of your career have the potential to transform your financial future. The longer you stay invested, and the greater is the power of compounding.

Life Insurance: Insurance is the first thing you should start investing into. The earlier you buy life insurance, the lower is the premium. If you wanted to buy a 20 year Term Policy for Rs 1 crore at the age of 35, the amount of premium you’d be required to pay is Rs 34,000, whereas if the same policy is taken at the age of 20, the amount of annual premium you’d have to pay is Rs 19,700 [the premium for 35 years term i.e. till you reach the age of 60 would still be lower at Rs 23,800]. (Ref LIC Amulya Jeevan I).

Note that the insurance cover should be big enough to generate a monthly income for your family, cover major expenses, and settle outstanding loans. The policy should cover you at least till the age of 60. Don't try to lower the premium by mis-stating facts in the form. Also, never substitute insurance with investment, while insurance can be source of investment, remember that insurance covers life risk and ensures financial safety for your dependants even after your death.

Tax Benefits: Most Life Insurance Premiums are included in the total deduction of Rs 100,000 under Section 80C.

Health Insurance: Health insurance is also cheap when you are young and costlier when you are old. More importantly, the rule about pre-existing diseases makes a compelling case for buying a cover early.

Tax Benefits: Medical Insurance premium is allowed as a deduction under Section 80D (Up to Rs 15,000)

PPF Account: Next area of investment is retirement planning. The PPF is the most tax-efficient debt option in the market today. The interest it earns every year is tax-free, and so are the withdrawals. It has a 15-year lock-in period, which makes it an ideal tool for long-term goals such as retirement. Current rate of return is approximately 8.7% p.a. which is tax free and is more than most investments would fetch you. Maximum amount of investment allowed in PPF is Rs 100,000 per year.

Tax Benefits: Investment in PPF included in the total deduction of Rs 100,000 under Section 80C.

Systematic Investment Planning (SIP): SIPs are efficient modes of investment and ensures disciplined investment over a period of time. With SIPs you can invest as little as Rs 100 per month and still build a huge portfolio over time. Investments are done even during market downturns or upswings and hence averages out the cost of investment. The amount can be predetermined and investments are done in Mutual Funds of your preferred category. Investments can be automated through ECS schemes to ensure you don’t miss on the investments.

Tax Benefits: If investment is done in Equity funds, all withdrawals after 36 months of investments are tax free as Long Term Capital Gains. Accordingly Short Term Capital gains tax is applicable for investments withdrawn before 36 months.

Contingency Funds: To be prepared for an emergency keep some money (usually 3 months income) that can be accessed at short notice. This need not always be cash, but can be invested in liquid funds (e.g. money market funds) that will earn you some interest as well.

Expense tracker: Car EMI, the house rent and the grocery bill in your monthly budget, are not the only expenses to be tracked. Petty expenses, such as casual shopping for clothes, eating out, gifting, and entertainment are smaller expenses that go unnoticed even though they take up a large portion of the monthly budget. Maintain an expense tracker to ensure that these expenses don’t eat up on your savings and investments.

Happy Saving!

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