Importance of financial stability in your personal wealth management



You might have heard the news of highly paid actors, athletes, models, etc. going bankrupt. So, does earning a huge amount of money ensure financial security? Despite earning a 6 figure salary, people face a cash shortage in times of emergencies. Income and wealth are different and you need to accumulate your money and make it grow to attain financial stability in the long run. Financial stability is very important as it reflects a sound financial system, a secure life, lesser stress, and more options in life, financial strength and most importantly financial security. But how to achieve it? Here are some tips that would help you attain stable financial health.

Start Saving Early

The earlier you start saving, the sooner you reach your goals and financial stability. When you are young, you are free from a lot of added liabilities, take advantage of this and start early. Keep investing your savings as you are earning because mere savings will not grow your money. An early start will also allow you to take risks. For example, mutual funds call for higher risk tolerance, but these also give you much higher revenues when compared to other forms of investments and assets such as gold, debt, and real estate, in the long run. Statistics justify this claim: Over the past 31 years, equity markets (Sensex) delivered a 16.85 percent compound annual growth rate (CAGR) return, which is greater than most other types of investments.

Income Tax Planning

Saving and investing are very essential, and so is income tax planning. There is no use of saving if your take-home income gets reduced due to excessive taxes. You should never evade taxes, but pay only the required amount and save on taxes as much as you can. Income Tax Planning is a legal way of cutting down your yearly tax liabilities. There are several tax saving options in India, these deductions and exemptions are available under Section 80C to 80U of the Income Tax Act, 1961and you can claim those.

You could do some tax-saving investments like medical insurance, life insurance, mutual fundsIndexfunds, take up a home loan, etc. Investments like fixed deposits (FDs), Public Provident Fund (PPF), National Savings Certificate (NSC), National Pension System (NPS), ELSS Funds, etc. also help you claim tax deductions and exemptions.

Another point to keep in mind is that you should start your income tax planning at the beginning of the fiscal year. If you procrastinate until the last quarter of the year, you would end up with hurried decisions. Rather, if you plan your tax-saving investments at the beginning of the year then your investments will get the opportunity to compound and take you closer to your long-term goals. You should first check your objectives as well as your risk profile and then choose from the best SIP plans, ELSS mutual funds, NPS, PPF, and FDs, which are some of the popular investment options.

Savings

If you have just started earning, then save 10% of your post-income. As your income increases over time, hike it up to 15%. This will give you a steady headstart. As you start aging, and your income increases and liabilities add up, ensure that you are meeting your financial goals. When you reach middle age, save 35% or more of your post-tax income. This should be a general level as your expenses increase during this period.

Never make the mistake of spending first and then saving the leftover. That is never going to happen. Instead, you should save first and then spend whatever is left. Besides, if you happen to incur any emergency, then you need your savings to fall back upon. This is why you should invest in emergency funds like medical insurance, life insurance, and so on.

Your thumb rule should be to save first and spend later. If you are not sure about how much to save to spend every month, then this is how you start. Follow the 50 – 20 – 30 rule: Dedicate 50% of your income towards living expenses (household expenses, groceries, etc.), 20% should be towards savings for short, medium and long term goals, and the remaining 30% would go towards spending. This is a planning procedure to give you better control over finances.

Investments

The market is overflowing with products whose creators will try every possible trick to make you believe that their scheme is the solution to all your troubles. Make sure that you don’t fall for such traps and marketing campaigns. Check if the plan promises desirable returns and matches your capacity.

SIPs: This is the foolproof way to inculcate financial discipline into your lifestyle. SIP (Systematic Investment Plan) is an intelligent way of investing in mutual funds. This is a planned process and is perfect for wealth building for your future. There are several schemes out there in the market so make sure to check out the best SIP plans. SIP is a must if you wish to accomplish your long-term as well as short-term financial objectives. Besides, it will provide you with protection from market crashes and cycles that could affect your fund portfolio. So, you should develop the habit of investing in suitable mutual funds through SIP.

Mutual Funds: If you start investing early, then you can invest a big amount in equity or other mutual funds. For instance, if you shall retire after 25-30 years, then you can choose to invest 70-100% savings in stocks or some of the best SIP plans. When you approach your retirement age, you could start liquidating your high-risk, high-return mutual funds and opt for the safer Fixed Deposits like debt funds, PPFs and bank fixed deposits.

Equity funds are ideal for those with high-risk tolerance and equity-oriented hybrid funds are best for lower risk-taking ability. The long term capital gains from these are tax-free which would further help you with your income tax planning.

National Pension Scheme (NPS) and Provisional Pension Fund (PPF) should also be considered. These are for your retirement solutions.

Retirement Planning

You need to start planning early for your retirement if you have not already. If you are sitting content because your company provides a pension plan or a fat gratuity, then you are doing it wrong. You should always plan for your retirement life. You should set aside some amount of your income in equity or balanced mutual funds and allow it to grow. A good way to do this is by choosing one from the list of best SIP plans, that way you would invest regularly and would eventually become financially disciplined.

Financial planners generally suggest targeting a retirement corpus which is around 20 times your annual income. Some also feel like 30 times could serve better as that would cover for market inflation. Keep in mind that the money you put aside for retirement savings should not clash with your short or medium-term goals like children's education, home, etc. The retirement corpus is to be touched only after you stop earning.

If your financial situation does not allow you to make such investments right now, still, you should put aside as much as you can and as your income increases, add more to your existing investments.

You could also go for some pension schemes from various investment houses or insurance provides. A PPF account is also a good option to consider.

Few points to keep in mind:

·         Keep your short-term and medium-term financial goals separate from long-term goals. Also, keep your insurances separate.
·         Cater to your needs and push back your wants as much as you can.
·         Invest smartly- research well and choose your investment plans wisely.
·         Stop living on credit cards.
·         Try complimenting your income by getting a second income.
·         Build up assets and pay your liabilities.
·         Follow a budget.
·         Maintain financial discipline.

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