Early Bird Catches the Worm
When you first start earning, it’s easy to be overwhelmed by the urge to spend. While it’s perfectly fine to enjoy the fruits of your labor, it’s crucial to prioritize saving. At this stage, you typically have fewer financial responsibilities, such as children or mortgage payments. Understanding the power of compounding can significantly benefit you in the long run. Savings invested wisely can double or even triple over time.
Consult with a financial advisor to identify suitable saving instruments like mutual funds, insurance, and other investment options. By doing this early on, you set a strong financial foundation for the future.
Health Insurance
Most employers provide group health insurance benefits, but these may not be sufficient. Many employees overlook the importance of individual health insurance due to the group benefits provided by their employers. However, if you relocate or your employment situation changes, you might find yourself without adequate coverage. Purchasing personal health insurance ensures that you have sufficient coverage regardless of your employment status.
If you buy a house, you’re eligible to claim deductions for interest on a housing loan from your salary income. The current budget allows a deduction of up to Rs.200000 for self-occupied property and an additional Rs.50000 for loans between Rs.35 – 50 lakh. Even if your developer delays possession, you’re still eligible to claim interest on the housing loan, thanks to a five-year limit for pre-construction interest deductions.
File Your Returns
The current budget mandates that return filing is compulsory if your income exceeds the threshold before claiming exempt income from Long Term Capital Gains (LTCG) on equity shares. This means you need to file returns even if your LTCG on shares was previously exempt and your other income did not cross the threshold. Filing returns is essential for maintaining compliance and avoiding penalties.
Inflation Effect
Inflation erodes the real value of your money over time. For instance, if you invest Rs.10000 in bonds with a 10% coupon rate, you expect Rs.1000 as interest annually. However, considering an inflation rate of 5%, the real rate of interest is effectively 5%. This means your real income is only Rs.500. When planning your investment portfolio, always consider the impact of inflation to ensure your returns meet your financial goals.
Credit Score
Maintaining a clean credit score is crucial for availing loan facilities for significant purchases like a house or car. A good credit score requires managing existing loans and debts effectively. Paying off debts in lump sum can improve your credit score and free up disposable income. This approach also prevents unnecessary borrowing for non-essential expenses like vacations, ensuring your financial stability.
Term Insurance
In addition to health insurance, term insurance is essential for protecting your dependents in unfortunate events like accidents or death. Choose a term insurance policy that offers adequate coverage and fits your financial plan. Avoid getting entangled in unnecessary insurance policies just for tax benefits. The primary purpose of insurance should be protection, with tax savings as a secondary benefit.
Beware of Insider Tips
Operating a demat account based on broker tips can be risky due to the high risk-reward ratio. Instead, base your stock selections on fundamental analysis, which includes monitoring past performance and financial metrics like the Price-Earnings (PE) ratio or beta. This approach reduces the risk associated with speculative investments and promotes more informed decision-making.
Floating an Emergency Fund
An emergency fund is crucial for covering unexpected expenses, such as job loss or medical emergencies. Ensure this fund is easily accessible and can cover at least three to six months’ worth of living expenses. This financial safety net provides peace of mind and stability during unforeseen events.
Diversification
“Don’t put all your eggs in one basket” is timeless advice for investors. Diversifying your investment portfolio reduces risk by spreading investments across various sectors, instruments, or stocks. This strategy balances returns and mitigates the risk inherent in concentrating investments in a single area.
Conclusion
While the temptation to live a luxurious lifestyle is strong, disciplined financial planning is essential for long-term stability and security. A robust financial plan includes goal setting, cash flow management, and expense tracking. Leveraging financial planning platforms can help streamline these processes, providing unbiased advice and ensuring data security.
Disclaimer: The views expressed in this blog are based on personal opinions and do not reflect the company’s views. Investments should be made after consulting a financial advisor. The company or its communications are not responsible for individual investment decisions.
