Financial planning - How to save tax

I would rather suggest you not to try and do anything for the next couple of months except for monitoring your spending pattern. Develop the habit of recording your daily expenses every night. You may forget once or twice, but, try and follow a disciplined approach. If one cannot be disciplined enough in a thing as simple as this then it wont make much sense going forward with anything else (be it RD, ELSS or PPF).

After recording roughly 60 days of your expenditures, segregate the expenditures made on weekends (or holidays) from those made on the weekdays. (I am not going into the details as you might have figured out yourself that there are several ways of "saving" money by just not spending on weekends )

Further, segregate the items on which you spent money based on "necessary", "could have waited" and "not required".

All this will give you a fair bit of an idea about where you can "save". I believe that if one can curb spendings, savings automatically happen.

Once you have identified all that and you have got a clear idea of where you can "save", practice "saving" for the next couple of months. Don't forget to record your expenses!

Now, you should have the following -

1. A fair idea of the minimum (or average) amount of money you HAVE TO spend every month.
2. A fair idea about where you were going wrong with your financials.
3. A good amount of money in your savings account (as you stopped spending on the "not required" items and perhaps thought a 100 times before buying that "could have waited" item).

The next step is to keep some money aside for contingency (we all do some contigency planning while doing project planning, why not do that with our finances?). Since now you know how much you spend each month (approximately), multiply this amount by 3 (its a minimum, you may increase the amount if you want to play it safer) and keep this amount in your other savings account so that you don't touch it (read: spend it).

Once you have done the above exercise(s), you are all set to "invest". Savings can easily be defeated by inflation. Since you are just 23 yrs young, you need to invest rather than save. You have already "saved" for yourself by the steps you followed for the first six months while generating enough funds for contingency.

You need to wait for some more time before we get to the various investment instruments . Thought to remember: Never invest/save to "make money".
It will take you nowhere since any amount of money is not enough to satisfy man's (or for that matter woman's) greed/desire. So, the next step is to note down your financial goals. E.g.:

1. buying a 2/4 wheeler.
2. a holiday abroad
3. marriage
4. kids' primary education (good school's take huge donations these days)
5. kids' higher education
6. house
7. kids' marriage
8. retirement

Once you have noted your financial goals, place them under long-term and short-term goals.

Now, we are good to go!

Let me take each investment instrument one-by-one. Before that let me make these points very clear -

1. Insurance is NOT an Investment.
2. The suggestions below do not take into account your personal/financial commitments, your priorities and your short-term goal.

There are 2 broad categories of investment -

1. Debt
2. Equity

A thumb rule:

100 - (ur age) = investment in equity

Hence, going by your age (23), you may have approximately 75% of your investments into equity and the rest is obviously debt.

Considering debt first (since you are a first time "investor"):

You have the following options:

1) Bank Fixed Deposit (which is quite an interesting option now-a-days as interest rates have gone up considerably) - here you park your funds with the bank (returns assured), for any number of days you like. Several banks are offering 8%+ rate of interest on FDs. If the duration is more than or equal to 5 yrs, you automatically get tax benefit under section 80C

2) Bank recurring Deposit - wherein you deposit a fixed amount every month. This account can be held with either a bank or the post-office.
E.g. if you open this account in the post office for 5 years (now-a-days the post-office is not offering this account for a smaller duration and I am not sure about the banks) and you decide to deposit a sum of Rs.1000 every month:
12 (months) x 5 (yrs) x 1000 (rupees per month) -> Rs. 60,000
That's the sum you deposit and at the end of 5 yrs you will get Rs. 78,000

3) PPF (public provident fund) - This is different from EPF which is maintained by your employer. In PPF you can invest upto Rs. 70,000 annually. When you invest - time of the year - and how you invest - monthly, quaterly, half yearly or randomly - is completely your choice. This money will be locked for 15 yrs. and is an ideal instrument of planning for your kid's education/marriage or any other long-term goal. Also, contribution towards this is eligible for income tax deduction under section 80C.

There are several other details linked to the PPF like when can you withdraw, can you take a loan, can you have more than one PPF accounts, etc. which, I am not including here.

4) NSC (national savings certificate) - Similar to PPF, but a shorter lock-in of just 6 yrs. Also eligible for tax deduction.

There are several others like KVP (kisan vikas patra), company bonds, etc. I don't have considerable knowledge about them. You also have several mutual funds that invest in debt related instruments and you can go for them for your short-term goals

My definition of a short-term goal: Any major expenses, which, you might incur within 1 yr to 3-4 yrs. like buying a bike/car, planning a holiday abroad, etc.

Coming to equity. Equity is the best option for achieving your long-term financial goals because when you invest for the long-term, you are insulated from the day-to-day volatility of the stock markets and the returns beat inflation by a huge margin. So, invest in equity ONLY for your long-term goals.

My definition of a long-term goal: Any major expenses, which, you might incur after 6-8 yrs. like buying that dream house of yours, starting a business of your own, retirment, kids' education and marriage, etc.

You might be wondering about your goals which fall somewher between 4-5 yrs from now! I am sorry for that confusion, but, you need to take call on that or (better still) consult a professional financial expert in selecting the appropriate investment instrument.

Note: If, after reading my definitions of long-term and short-term, you need to shift some items to/from one list to another then please do that now

Talking more about equity -

You may go for it directly (having a demat account and trading online) or indirectly (investing in mutual funds and/or going for portfolio management if you have really huge amount of money). Again, considering that you are a first time investor, I would suggest you go slow on the equity front.

There are several equity mutual funds, broadly classified as -

1. diversified
2. ELSS (equity linked savings scheme - for tax planning)
3. balanced
4. sector funds
5. fund of funds
6. index funds
7. and the list goes on...

I would suggest you go for a balanced fund initially with a SIP of 1k or 2k per month (in just 1 or 2 schemes to begin with). My favourites are -
HDFC Prudence and SBI Magnum Balanced.

When going for mutual funds, you might have to opt for one of the 2 -

dividend, growth, and re-investment. In the first option, whenever the fund declares a dividend, you get the money. In the second option, there is no dividend at all and the NAV (net asset value) of the scheme keeps going up (or down). In the third option, whenever a dividend is announced by the fund, you get units worth the amount you were entitled to get in cash.

I would like to stop here for now. We can discuss further if you have any doubts or you would like to know more about something in particular.

Moreover, I would like to apologize for any typing, spelling and gramatical mistakes made by me. Also if there are any fundamental mistakes please feel free to point them out.

Avnip

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