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Personal Finance Golden Rules

Personal Finance Golden Rules

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Published by kirang gandhi

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Published by: kirang gandhi on Jun 21, 2010
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Golden Rules to manage Personal Finance
1. Split your Term Insurance
Your should split your Term Insurance for two reason . Top most reason is flexibility in Decreasing thecover later , So in case you need cover of 60 lacs , you can divide the cover into 30:30 or 20:40 and thenin future whenever you need that your insurance requirement has gone down , you can just stop one of the policy .
2. Invest in Tax Saving Products for long term goals
Most of the people still invest in Tax saving funds for their shot term financial Goals . The fact that themoney invested there will get locked for long term should be taken in positive way and hence youshould invest in these for your Long term goals , so that you don’t feel bad about the lock in periodbecause you anyways need money after many years for those goals . For example Child Education ,Retirement , Holidays abroad after many years . For short term goals like Buying , saving for some shortterm commitment should not be taken care by Tax saving Instruments , You should use Fixed Deposit ,Fixed Maturity Plans , Debt Funds , Balanced funds and Non Tax saving Equity Funds (Risky) for Shortterm goals . Once you think like this , the lock in period will not matter to you at all
3. Investing in GOLD ETF’s instead of physical GOLD
Why do you want to invest in Physical Gold ? The biggest reason is for Daughter’s Marriage andJewellery , But the underlying reason always is capital appreciation . So why not always invest in GoldETF’s [ Understand what is ETF ] and whenever you need Physical gold , sell the ETF’s , take the moneyand Buy the Physical Gold at that time . Most of the people invest in Gold physically for Daughterseducation , But the better way would be to invest in ETF’s and when time comes you buy the physicalgold by selling the ETF’s . That is a better way because its more flexible , safe and easy route .
4. Use your LTA , HRA and Medical Reimbursement
I am amazed to see that many Salaried Employees especially youngsters do not care to take the benefitof LTA , Medical reimbursements and HRA , just because of laziness . So make sure you take advantagesof these , even if you partly use these things you will save couple of thousands in Tax . All you have to dois , save the bills , take the xerox and walk couple of steps to your Finance department and submit them, don’t you think its worth if its can save you couple of thousands in tax saving .
5. Control your Credit taking Habit
Most of the people take Debt more than they can afford or deserve . Criteria for giving credit is mainlyhow much you earn . The company never knows your expenses and your future goals, your risk appetiteyour future plans . People earning 5 lacs per annam take debt of 30 lacs for Home , unnecessarypersonal loans for buying LCD’s , going vacation and other non-priorities in life . This can have ill-effectslater . Also companies are now keeping an eye on your credit taking behaviour and it affects your credit
score , which companies in India have started using as a decision making variable . So watch out yourcredit taking behaviour . Don’t over-do it .
6. Dont Over monitor your Portfolio
Keeping an eye over your portfolio is great , You should look at your shares , mutual funds , ULIP’s etc .But overdoing it can be fatal sometimes . Some of us have this obsession of watching our shares ,mutual funds NAV and ULIP’s NAV on daily or may be weekly basis . See How much time you shouldinvest in Personal Finance . This is not a good sign for long term investing especially for people like uswho are into regular jobs and have no much time to contribute in your Finances . When you are a longterm investor, why keep track of short term movements , these moves will have no much value in yourall growth and short term movements will affect you mentally and tempt you take take decisions inshort term because your money is either going up or down fast . More of anything is bad and samethings is true for your involvement. Couple of hours per month or every quarter is good enough . Don’tget a feeling that successful financial life means more action.
7. Share your Financials with Family
If you are dead in another 1 hour, do you think your Family will be able to find out all your investmentsand Insurance documents and successfully claim them? . Are they unaware of the fact that you took ahuge Insurance cover for them or you invested 50,000 in a ULIP last month.Most of us graduate fromnovice investors to a good investor but still are left behind in taking care of this extremely critical pointof sharing each and every details of our finances and making sure that the documents are within reach .Let your wife , children have a good idea of where the documents are and where your investments arehave xerox copies of every document and have them at 2-3 different places and make sure people knowabout them . Emotional pain of loosing some one and no idea of the finances which will take care of them is a kind of situation you never want you loved ones to be into.
8. Dont compare your returns with others
You are different, be proud of this fact . If your returns are less than your friend mutual funds , thats fine. Dont compare your self with others , there are many things which determines what you get in life likeknowledge , luck , skills , timing etc . So just make sure that you are getting what you try for . Dont loosefocus from your goals ,
your main aim in life is to achieve your financial goals easily and smoothly ,Financial Planning is a race where everyone who reaches their personal target is winner, Make sureyou dont hurt yourself by competing with others
9. Investigate everything before you Buy it
When you buy something, make sure you try to get information on Internet , ask on forums at differentwebsites and make sure you find out maximum about thing product you are buying . Spending 30minutes investigating your product can save you from lot of trouble . One person I know recently took ahome loan from HDFC and went for additional Life over from same bank for 30 lacs. He didn’tinvestigate much about the cost . It was around 9k per year for the term Insurance . When some daysback we saw quotes from other company , Just think what is the loss of spending some time
investigating your product .
How many of you took an ULIP after agent explained it to you and didntinspect much about it .10. Invest and Spend , not vice Versa
You receive your salary -> then you spend all your money -> then save or invest if you are left withsomething . This is not a right attitude .You should change it to Get Salary -> Invest your money as peryour future goals -> Spend the rest . Once you saving some part of your salary, somehow you will findways to spend on things which are of first priority and would refrain from spending on things which canbe avoided , But if you spend first and try to save later, you will end up spending on unnecessary things .So better change the order of spending and saving . You can definitely live with your 90% salary , so atleast save 10% . There is no harm in trying out this . If it does not work , you can go back to spend andsave .
11. Build your Emergency Fund now
Make sure you have emergency fund , if you are listening about this from long time and haven’t done ityet , the best thing would be to take a pen and paper right now and plan for it. This is the money whoseaim is to provide you immediate access, not growth of money. Dont concentrate on getting greatreturns from this part of your portfolio. The aim of this part is just to give you high liquidity in case of emergency , Thats all .. So simple rule is 2 months of expenses in Cash which you can access in minutesfrom ATM and 3-4 months of expenses in Liquid funds, which you can get back in 3-4 days . This ispreparation for a situation like if you loose you job and need time to search for something you really like, or get a long term illness and cannot earn money in short term or special emergencies . You can alwaysreach out to close friends and Family for money , but why to depend when you can be self-dependent .Its all about strong planning .
12. Equity for Long term , Debt for Short term
I say this again and again, this is the golden rule , one of the fundamentals of Strong financial planning.Long term goals whose target date is more than 7-8 yrs like Child Education and Retirement shouldalways be linked with Equity products like Equity Mutual funds , Direct Stocks , ULIP’s , Index ETF’s ,Index Funds. Thats because you can get great returns in long run from these things with lesser risk. Onthe other hand short term goals should be achieved by debt products like FD’s , Debt Funds , RecurringDeposit , Short term bonds . You can also use Balanced funds if you have moderate risk appetite andtime horizon is 3-4 yrs .
13. If you dont understand , Dont take it
How many investors understand how their ULIP works and what are different costs and how to use itefficiently ? Not more than 3-4 % i believe . How many people know why they have invested in Mutualfunds which had a fancy name and which makes you feel like you have invested in something great andhow many Endowment Policy holders know the overall final return they would get from their Policies ?Investors get into products which they do not understand well and then they cant make best use of itwhich defeats the purpose. In reality the best products are least complicated one’s like Mutual funds ,

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