Consumer Durable Loans
28 October 2018
Getting your very first job is one of the most significant turning points of your life. You start making money, you start believing your dreams can finally come true. That’s wonderful! But are dreams enough? Hardly!
When you fail to plan your goals, you plan to fail your goals. Confused? Ask yourself how much money you need to make your dreams come true and that is when your dreams start to become an achievable financial goal. Wanting to own an expensive phone is a dream; planning to buy an iPhone X worth 1 Lac in 5 month’s time is a financial goal.
The starting point of any financial plan is to determine your cash flow or the difference between your monthly income and expenses. It is important to first differentiate which of your expenses are essential and which are discretionary and then to limit those discretionary expenses.
Your financial goals should ideally be broken down into three categories; short-term, medium-term and long-term goals.
First, you need to calculate the inflation-adjusted price of the goal based on your time horizon. And when you have ascertained the goal cost, your monthly savings and the time horizon in mind, find out the tax adjusted rate of return (rate of return is the difference between the gross rate and inflation).
For a net return of 10%, tax slab of 20% and inflation of 7%, your gross return would be a handsome 22%! You also need to factor in long-term and short-term capital gains tax.
Long-term goals (over 7 years) ideally should have an asset allocation of 100% equity or 80% equity with a 20% debt.
For medium-term goals (between 4 and 7 years), a ratio of 60% debt and 40% equity is desirable.
Short-term goals (below 3 years), could comprise entirely of debt or a 90% debt and 10% equity.
That is how calculative you should be from the very start!
Also, as investment options, long-term equity-based mutual funds, New Pension Scheme or Public Provident Fund can be considered. For medium-term, it could be balanced mutual funds or equity-linked savings schemes with debt. For short-term, the choices are liquid funds, recurring deposit, fixed deposit or short-term debt funds.
There are certain statutory deductions available for tax-payers from their taxable income. Take a quick note of these too!
– Section 80C of the Income Tax Act allows deductions when you invest in Equity Linked Savings Schemes of mutual funds, New Pension Scheme (NPS), life insurance and so on. The maximum deduction is for a sum of up to INR 1.5 Lacs.
– Also, the Income Tax Act has a deduction for health insurance premiums paid in Section 80D with the upper limit being INR 25,000/- each both for you and your parents and INR 30,000/- if your parents are senior citizens.
Insurance is meant to be a protective cover for you and your family. Investments help you achieve your financial goals. Both are not to be confused.
In today’s uncertain times, the best life insurance solution is a term plan which has no maturity value but provides high protection at a low cost. We might fall ill or need an operation. Hospital costs are very high, so a health insurance policy will also come in handy.
Emergencies strike without a warning! A contingency fund equivalent to 6 months of your household expenses should be created with liquid funds or savings account or both. This should take care of a sudden job loss or illness.
You fall into a debt trap when you don’t pay your credit card bills every month or take excessive loans or avoid budgeting.
So first identify your financial goals. Then begin with your saving and investment processes as early as possible. Be disciplined in your investments and then watch your financial goals being achieved!