10 most common financial queries

When I started earning, I was not very clear of how to manage my finance (by the way even today I am not very sure) but I have learned few things along the way. The first and the most common questions relating to personal finance that people ask are mentioned below. I will try to put my views on them.

1) Is financial planning for me?

Yes, whoever you are, unless ofcourse you have unlimited access to unlimited money anywhere, anytime. I term financial planning as nothing but a way to optimise the usage of your money to help you lead a comfortable and unworrying life. So anyone who have limited sources of income and have certain ambitions or goals to achieve, should get involved in planning their finances.

A most common complaint is that an individual would like to invest and build a corpus but they dont have enough money saved to invest. A proper financial planning can help them alleviate these problems. There is no age limit or any income limit for getting yourself involved in financial planning. So dont have the mis-conception that only HNWI (High Net Worth Individual) should do the financial planning or only young people who are into their first job should think about it. Anyone including house wives, retired persons should think about planning the finances. And trust me it is not that complicated as it sounds. It is more of a mental game than anything else.

2) I save a lot of money and put it in bank, isnt that enough?

Take note of the inflation. India's one of the biggest banking player, SBI, provides a saving account interest rate of 3.5 % annually.

A simple example will illustrate why money put in savings account is eroding slowly. A person with Rs 10,000 in a savings account earning 3% interest each year would have Rs 18,061 in 20 years time. That's a return of just over 80% of original amount. But if inflation is about 7%, that Rs 18,061 would only be worth Rs 4,668 in today's terms!

3) When should I start managing my finance?

A usual answer to this question is "as early as possible". But I feel that this does not apply equally to everyone. If financial goals of each individual is not same then why the answer to this question should be same. A young graduate who has lived all his student life borrowing money from everyone, when he starts earning why the hell he should put away part of his income worrying about future problems. I personally believe that for the initial two years the youngsters should have all the fun the can sustain spending on whatever they feel on. Once the charm of earning wears off and then they think about future, then only they should start the financial planning. Why to waste today in the fear of a worse tommorow? The answer to the question usually lies with the individual, the higher the financial goals, the better it is to start early.

4) I invest money for tax saving, isnt that same?

No, it is not same. The idea of financial planning stems from the various needs of a person. For example, a person might want to buy a house not less than 20 lakhs and also wants his children to study in US along with a decent 7-8 lakh car and an yearly trip abroad. He also wants to keep aside some money for emergency cases like sever illness. There can be hundreds of things a person might wish for in his lifetime, which in financial field is termed as 'goals'. Ofcourse the goals have to be realistic in terms of his own earning power. A person earning 60 K Rs per year cannt expect to buy a huge mansion in New York. So the goals are the first thing to keep in mind before you start planning.

The 'income tax' is the charge levied by government on all the income earned by an employer. This is essential for the government to provide various public facilities like roads, transport etc. This is similar in principle to maintenance charges in your own apartments for common facilities. The provisions made by government to save money to earn income tax rebate is just a small measure to ensure the saving habits of individual so that any individual should not become liability to the society once he stops earning. But this saving is not enough to achieve the desired financial goals. The investment limits put by government is just enough to make an individual able to survive in his retirement days. (With inflation even this seems to be not enough).

Hence saving for tax should be treated just a part of financial planning but there are lot of other things to be kept in mind (which is what this blog is all about)

5) It is very tough & I could never understand the terms, so I dont care?

It seems tough since you are not able to understand it and that is so because you never tried to learn it. The best way to distill through financial jargons is to discuss it with your friends. Everyone has to manage their own funds and hence a discussion would bring out innovative ideas from different corners. Otherwise check the loads of information on various websites, else put your queries in the comment section here, I might be of some help !!

6) Which schemes are best and where should I invest?

There is no single answer to this question. There are hundreds of good and bad schemes lurking in the markets. So the answer is "it depends". It depends on your financial goals, your risk ability, your initial capital and loads of other things. Keep watching this space for hints and suggesstion.

7) I am too old for all this, now there should not be any need for it?

I mentioned earlier, there is no age limit of planning. If you are nearing retirement, then you need to have more urgency to manage your funds to live a comfortable life ahead. If you are already retired, again you need to take a look at your finances to ensure stability of income and enough funds during contingencies like illness. So whatever your age is, take a stock of your fortune once again.

8) How can I quickly make millions? Should I start investing in shares?

There are people who have this financial goal of making millions. My suggesstion is to think realistically. Is just having say one million in your pockets going to make you happy? It is more about living comforably and enjoying life than keeping loads and loads of moolah in your pockets. There are hundreds of legal and illegal ways of making millions, and investing in shares is just one of them. Take your own pick and stick to it. But beware the road ahead is not rosy !!

9) My expenses are always higher than my salary, so where is the question of saving?

Assuming that you are like most normal people and hence you have a job. Every month you get a pay check for some amount. Lets take an example of a fictitious person named Sachin, a 24 year old computer programmer out of college. He is paid 30,000 Rs each month.

He has taxes. The government, in an effort to make the life easier, politely using TDS (Tax deducted at Source) pockets out something like probably a third of his pay. Poof, it's gone - he never even get to touch it. Sachin's 30,000 paycheck therefore diminishes to perhaps 22,000 by the time he sees it !!

He has expenses. Livng costs money. A normal person in India has some expenses like
-- Rent: 3000
-- Bike maintenance (petrol, repairs, etc.): 2000
-- Power: 500
-- Phone and Long distance: 1000 (if girlfriend then more !!)
-- Cable TV: 250
-- Groceries: 3000
-- Entertainment, eating out, etc.: 2000

He has problems. For example, He blows the bike silencer and it costs 1000 to repair. Or he meets a "special friend" and feel compelled to take him or her out to an expensive dinner. Or he loses job.

Then he has desires. He might desire new living room furniture, a new TV or stereo, a nice gift for mother or spouse, a special piece of jewelry, new clothes…. Whatever.

Therefore he has debt. Debt makes up the difference between income and expense. For most people day-to-day debt goes on a credit card, and large items like cars and houses are handled with more formal loans. Debt itself is not bad. The problem arises when debt accumulates for no apparent reason.
Let's say Sachin's salary got doubled magically. It would be perfect to meet all his expenses, except that he would feel an irresistible urge to double his expenses at the same time. Clearly, making more money is not going to solve all the problem, because we seem to have a natural tendency to spend proportionally to what we earn. It is normal

So is there a solution to this problem? The answer is, it requires a big mental shift. If you are willing to make the mental shift the answer is "yes." It turns out there is a different way to live life. This way of life involves figuring out what you really want to do, and what is really important to you as an individual, and then working toward those goals rather than proceeding randomly. What you gain in the process is a sense of control and satisfaction, and a sense of achievement, that is difficult to beat.

10) I already have hired a professional financial planner, so why should I bother now?

A professional financial planner can really tell you loads of inside info about various schemes and ways of managing your finances, but at the end, he is doing his job. He is not you and his motive would be make you subscribe to scheme in which he would get a fair enough cut. Your money is your money and so are your losses. Also you will be more passionate towards your financial goals than he will ever be, so although it is good to get advise and support functionality of doing the paperwork, but the ultimate decision of managing your money should be yours. For all the schemes mentioned by your planner, you should read about it and cross-check the details. Its your money at stake.

1 comment:

  1. I visited the indiamf blog from your links. It was a good read and very lucid too.
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