5 things to do with your money

This article was written by Personalfn for Business India, and was carried in its October 8, 2006 issue with the title, "Five things “to do” with your money". The original draft, in its entirety, has been retained here. 

There are individuals who have so much money that they don’t really know what to do with it. While these individuals may attract the envy of many, we believe owning money and not knowing what to do can be quite an unenviable situation. On the other hand, there are small time investors, who don’t own a great deal of surplus money, but are in complete control of their finances. These individuals seem to be in the driver’s seat where finances are concerned and should in fact be envied. 

While most would find it a little to digest that there are investors out there who have the money but don’t know what to do with it, that is the truth. Don’t believe us, look around and see the number of people with the latest gizmos, mobiles, cars, clothes and consumer goods. What’s wrong with that? Nothing at all! It’s a free world and you can own anything and everything that your finances permit you. Do this small test – when you see someone flashing his latest mobile or some gizmo, ask him if he has planned for his retirement, or whether he has a financial plan in place to pay for his child’s college fees 10 years down the line. Chances are that person will be more keen on discussing ‘relevant’ points like the features of his latest mobile rather than dwell on the ‘irrelevant’ issues raised by you.

To be sure, these issues are anything but irrelevant. But money has that effect on people, it makes them want to rush towards the immediate and ignore the future. So you have more mobiles being bought than financial plans being prepared. 

So while it’s a good thing to have money, it’s equally important to know what to do with it. We list 5 most critical tasks individuals must accomplish with their money.

If you are liable to pay tax, tie up your tax planning exercise. As a law-abiding citizen paying taxes is most important so investing promptly in the right avenues to save tax assumes importance. An individual can save tax upto Rs 100,000 (Rs 1 lac) by investing in tax-saving investment avenues. These avenues range from the traditional Public Provident Fund (PPF), National Saving Certificate (NSC) and life insurance to the more dynamic (read market-linked) tax saving mutual funds (Equity Linked Saving Schemes - (ELSS)). These avenues not only help in tax planning but if selected well can also help individuals achieve their long-term financial goals.

A common regret for most of us in our twilight years (apart from not having exercised enough) is our poor savings and investment track record. Most individuals wish they had saved either better or more. Planning for retirement is one thing that individuals across age groups must take up on priority. Of course, if you start at an early stage it’s even better, but the fact is it’s never too late to set aside some money for retirement.

What makes retirement planning so important for us to list it second in our ‘to do’ list? To answer that question in a single word – inflation. Inflation is what usually leads to a rise in prices of goods and services. If you are wondering why oil, the gas cylinder, toothpaste, eggs and even idli sambhaar costs a lot more than what it used to even 5 years ago, blame it on inflation. So planning earlier on in your life is a solution. Calculations show that even a 5-year delay in investing (Rs 10,000 annually at 10%) can make a substantial difference (as high as 80%) to your retirement corpus.

Life today has become a lot more uncertain than ever before. Therefore, taking life insurance is another objective that should rank high in the priority list of all individuals. Simply put, the purpose of life insurance is to indemnify the nominees/dependents of the insured against an eventuality. So life insurance must form an integral part of the individual’s financial planning exercise. In addition to life insurance, individuals should also be equipped with adequate medical insurance.

Note that we haven’t mentioned life insurance while discussing tax planning in an earlier point. This is because it’s time insurance got it’s due as an independent entity unlinked to anything but your life. Our advice is don’t mix the two, don’t chase tax benefits while taking a life cover. 

There are three types of life insurance plans; term plan, endowment plan and ULIPs (unit- linked plans), available at investor’s disposal. While ULIPs are not an ideal avenue to take life cover, term plans, the cheapest and most effective form of life insurance are best suited for this purpose.

Contingencies/emergencies never announce their arrival. But that does not mean we close our minds to the possibility of their intrusion in our lives. As always, the best way to deal with such a situation is to provide for it well in advance. Such situations could possibly arise out of an accident/operation that is either not covered by mediclaim or exceeds the mediclaim limit or it could be another expense that you have provided for (like a buying a house) which actually falls short at the time of purchase. At times like these, having a contingency fund can prove to be a boon. How do you know how much to save for contingencies? While there is no formula for the same, having 10%-15% of your entire portfolio in low risk investments should arm you adequately during a contingency.

Even before Bill Gates and Warren Buffet began doing it, charity was always necessary. If you have the money, it’s only fitting that you share some of it with the less privileged. Also, although some charities qualify for tax benefits, our advice is you ignore them and just focus on giving money away without worrying about how you can benefit from it one way or another.