Whether you are investing or buying insurance or saving taxes, it’s important to pause and ask: Is this decision in your best interest? Is your money working for you? Is it available for you when you need it? Often, you buy the financial product that doesn't help you achieve your life goals. It’s not an optimum use of your precious time and money. How do you ensure that your money is helping you achieve your goals? Let’s take a look at some ideas.
MAINTAIN LIQUIDITY
Extending the above two points, it’s also important to maintain liquidity. You can’t always lock away all your money in long-term investments. Therefore, maintain the requisite amount of liquidity you need. This can be done through bank fixed deposits and liquid mutual funds. Ideally, have six to 12 months of your current income in these instruments. However, remember not to go overboard on liquidity since it doesn’t earn you the high returns you need to create wealth. Maintain an optimum level, and invest the rest.
TRADITIONAL INSURANCE ISN’T FOR EVERYONE
For many families, traditional life insurance has been the preferred way to invest for decades. However, at a time when there is a plethora of investment and insurance options, you may not need to buy a traditional endowment plan. You may cover your life cheaply with a term plan, and invest the rest in attractive avenues such as mutual funds where you can easily redeem your money when you need it.
GOLD MAY NOT GET YOU HIGH RETURNS
Over the centuries, gold had been the preferred way to invest. Gold doesn’t corrode, is malleable, and can be converted to money without hassles. However, as an investment, it has disappointed many. Gold returns have been stagnant, and you may have to hold on to it for several years to get worthwhile returns. Many Indian families prefer to invest in gold. However, you must assess your own returns expectations to know if they can be met by buying gold.
DON’T OVERSPEND ON TAX SAVERS
People often equate investment with tax-saving. This need not be the case always. At the start of a financial year, take stock of what your taxable income is going to be. Refer to your salary slip, or speak to an accountant. Then, you know what your taxes for the year will be. Next, take stock of tax deductions already available to you.
For example, your projected taxes for the year are Rs 40,000, and you already have a deduction of Rs 24,000 from your EPF and a term plan with a premium of Rs 10,000.
Therefore, you only need to buy a tax-saver worth Rs 6000. You can, of course, spend more than this amount on tax-savers. But it will not earn you additional tax deductions for the year. Therefore, if you have savings after meeting your tax-saving needs, they can be diverted to more beneficial instruments, such as equity mutual fund SIPs.
RECOGNISE YOUR OWN MONEY GOALS
Your money goals are your own. Not your friend’s. Not your parent’s. Not your relative’s. You must find your own way to achieve your goal. For example, your father may be investing towards his retirement through PPF and he wants you to do the same. However, your goal is to travel to an exotic destination in a year from now, and a PPF account with a lock-in of six years will not help you achieve it. Identify your life goals. This will lead you to picking the right investment instr-ument to achieve that goal.
The writer is CEO of BankBazaar.com
