Towards most effective financial planning
There are many of us who always feel that we are insecure. In the name of resource mobilization, every Government, including the present Union Government, wants to really squeeze the middle classes, and naturally, we feel very much worried about what will happen next, and how we can manage the rising medical costs, the cost of vegetables, fruits, education of children, transport and so on.
However, one thing is very certain. We all need to be very much concerned. We need to be worried too. Only such worry can bring about desired transformation in us.
What can worry lead to? Many an action. Most of us are already taking such actions, but are unconscious about it. We have indeed been doing what needs to be done, but are unaware about it, at least in the short run.
Let us focus on the specifics.
Let us all understand some basic truths which we need to take into consideration.
The five basic truths
There are five basic truths, that we need to accept as a given. The first basic truth is that the cost of living will never come down. The so-called inflation rate dished out by the Government, is a myth. In absolute terms, the inflation is so high. The second basic truth is that the Government will always fall back only on the middle classes. The ruling party needs to protect the very rich, as the very same rich give them money to fight the elections.
The poor are vulnerable, but have votes and that makes the vital difference. So subsidies in some form or the other will somehow flow to them, but the middle-classes will face the music of high taxes and very high inflation. The third basic truth is that transportation will become very costly, with the ever-increasing oil prices and any disturbance in the middle-east will naturally have a disastrous effect on oil prices. Th West will deliberately create some disturbance, so that oil prices remain high. All this is international politics, often beyond the control of our own Central Government itself.
The fourth basic truth is that the cities will become very big and unmanageable. So travel within cities will become a huge problem, even if one has the costliest car on earth.
The fifth basic truth is that our children will never get to live with us as a joint family. The younger generation would be going off to the foreign countries to earn their billions, as they know very well that they would never get the kind of salaries in India.
The Choices
Given the aforesaid realities we need to plan for our future. This "we" also applies to the now upwardly mobile middle-class -- the aspiring rich class that is now clearly bent on spending more money than ever before.
This class should rather realize that it is high time that they realize their folly of too much consumption now, assuming that these times will continue forever. Alas! Once they reach the age of 45, they will have nowhere to go, given the fact that the average age of the high-performers is now coming down., so rapidly.
The first thing that is need is a very long span of planning. Sometimes it is called the time value of money. It is simple. The compounding effect gives one a big corpus.
The most ideal vehicle is the Public Provident Fund (PPF). There is a variable rate of interest that is now announced by the Government, but this is unlikely to fall below 8.5 per cent on an average, and so, year on year, the corpus will grow to the maximum extent.
There are some schemes like the ELSS, of some mutual funds. It is called the Equity Linked Savings Scheme. This is a rather good scheme, but it is always risky. If the stock markets crash, the net yields will be that much low., During good times, the schemes are very good, as they offer good return. The minimum amount that one can invest is Rs.500/-, and hence it is quite attractive. It is called exempt, exempt and exempt from Income tax. The amount invested qualifies for income tax exemption under Section 80C. Similarly, the dividends are also income tax exempted and the sales of the units at the Net Asset Value, are also exempted from the Capital Gains Tax.
However, for those who prefer safety, the PPF is still very good.
Let us take the case of a very young MBA from the IIM, say, at Bangalore, earning a salary of rupees one lakh. Even this one lakh cannot assure the person a good income, as the housing loan he or she would aspire for, would eat away at least thirty thousand rupees. The rent, if the property is rented out, would also attract tax, as it is clubbed with the income of the particular year.
The best option is to go for a house in the suburbs, rent it out, but still claim tax exemption, as the full amount of one a half hundred thousand rupees would qualify for income tax exemption, by way of interest on the housing loan.
Such high net worth individuals, would necessarily have to rely on the income of the wife for financial support. Still, it is wise to put at least fifteen thousand rupees into PPF, as it is totally tax free, at the time of maturity. So, it will be fifteen thousand into twelve for one year, and look where this will lead to. The individual would have a good corpus at the time when he or she needs it most -- in the later years, the cost of education in India, would shoot up through the roof, and there is no way in which we can manage expenses. Such very long term planning is called for.
The second point that should be noted is that the gold prices have now reached a maximum. It is futile to think of investing in gold, as the prices are very unlikely to rise any further. A much wiser operation would be to go in for the roads near the main road, in areas that will develop in another seven to eight years from now, in tier two and tier three cities.
The real estate values in such areas would be in the manageable sphere in such areas, and it is extremely wise to go in for investment in these areas. One should note that these areas are the very same areas where the shops and establishments will come up, five or six years down the line. Such investments will simply shoot up through the roof, when development takes place.
It is very wise for those with limited incomes to sacrifice a bit today, and pump the money into recurring deposits. These will come in very handy when the maturity date comes. Time just flies. It does not matter, even if the RD account runs for ten years. Once again, the compounding factor will be the real issue.
Health insurance is a must. Without this, the middle-classes will continue to suffer. We all need to take care of our health, but when we are hospitalized, only health insurance can help us.
What is meant by sacrifice? It means doing without the monthly dining out expenditure. It means doing without any form of conspicuous form of expenditure, for example expenditure on interior design in our houses, when we cannot afford it. And even cutting down on marriage expenses.
Let us learn to be wise. Let us save for tomorrow, to at least sort of maintain the same standard of living. Those who are very strictly vegetarian, are likely to pull it off. Those who are not vegetarian, will have to spend quite a huge amount on such food, and this also needs to be taken into account.
Financial planning is a must. Let us all do it with a missionary zeal.
Like it on Facebook, Tweet it or share this article on other bookmarking websites.