28th
Feb 2015- It was chilly mid night of February in New Delhi, even after switching on the
heater , the table and handle of chair felt cold to Alex. He was anxious and
bit agitated after receiving SMS regarding deposit of salary in his account. He
had to take a drastic cut in the salary due to TDS (Tax deducted at source) by
his employer, a well known multinational. It was not like Alex was not aware of
his tax liabilities, he had plans for investments in tax saving instruments,
plans which he kept pushing to the final 3 months of fiscal year.
Alex was a
smart young executive in his early 30s having 1st class post graduate degree ,
earning a decent six figure salary in a Multinational giant. Alex wanted to
live life to the fullest and though saving money was one of his priority but
not the top priority. He had to spent some sleepless nights and run around from
pillar to pillar to fulfill his tax saving obligations. With monetary help from
his retired parents and friends, Alex was able to fulfill his tax saving
obligations and then had to wait for refund of excess tax deducted from Income
Tax department after filing up his Income Tax Return (ITR). Later on, Alex
realized that he had been taken on ride by the insurance agents and he could
have made better investment decisions if and only if he had time on his hands.
“Oh boy, that was close”, thought Alex breathing a sigh of relief as he glanced
at the encircled date of 31st March on his desktop calendar. Just then a
message popped up in his mobile phone that his outstanding bills for his credit
card had ballooned and he had to pay penalty at the rate of 3 % per month
(that’s 36% Per Annum) !
Sounds familiar!! Aren’t most of us , resemble
Alex when it comes to tax planning ,personal finance and expenses? Well let me
tell you 5 most important things Alex did to make his personal finance
decisions disciplined and automatic
1) SIPs instead of Lumpsum investments
Systematic
Investment Plans (SIPs in short ) are one of the most important disciplined
approach one should adhere to while making investment decisions. They also ease
out the fluctuations in market created by uncontrolled variables. More over
with ECS mandate SIP based investments can be automated . Alex made a detailed
list of his expenses, liabilities and cash flows through salary and other
sources. He decided that that he can spread out his SIP deductions over entire
30 days to balance out cash flow, expenses as well as investments. He chose 5th
, 15th and 25th of every month for auto debit of SIP deductions. With the
predetermined days, he felt more disciplined towards his approach related with
financial matters and also left with more spare cash in his pockets every
month.
2) Use Credit free period of credit card to the fullest
Credit cards are dual edged swords, if use wisely they can help you sail through your limits as well as enhance your credit ratings .However if they are not handled properly , they
can burn a hole in your pocket, as Alex found out. Just like SIPs , Alex
decided to give mandate for auto deduction of minimum due amount for his
credit card. He negotiated with his bankers to adjust the due dates to fall
next day after credit of his salary. This helped him to maintain a healthy
balance of cash flow as well as allowed him to enjoy credit free period of
30-40 days without incurring interest liabilities.
3) Separate accounts for separate activities
Alex
borrowed this concept from his employer , the MNC, where specific expenses
were booked under their respective General Ledgers (GLs ). The
company was also following Fund based management approach where funds were
released to particular cost centers/Fund centers based on pre-decided budget.
Alex made separate hypothetical accounts for his activities like
“Entertainment”, “Bills and Necessary expenses”, “Holiday and Outing Fund”
while the real money was kept in same bank account. From April 2015 onwards, he
started maintaining excel sheets to keep track of his expenses as well as to
monitor fund usages. This simple activity helped him reap good relationship dividends
in form of self funded family vacation for Christmas with parents and sister.
It also boosted his confidence in his abilities to tweak his expenditures in
more meaningful and fulfilling ways.
4) Start early then finishing late
“Early
bird gets the worm”,
the title of a newspaper article , caught Alex’s attention while travelling via
metro to his office. Suddenly the though struck in his mind, “why wait for last
few months for completion of tax saving and other investment goals, why not
start with the beginning of financial year itself”. This thought energized Alex
like anything , he worked out his tax saving potential , investment plans for
entire year in first 2 weeks of April. Then he spread out the entire investment
plan on next 12 months on proportionate basis keeping in mind his cash flows
and liabilities. He made provisions for amount he may get by means of promotion
at work and bonus. He also included sufficient cash and equivalents like short
term bank fixed deposits to take care of contingencies and dedicated funds for
term and medical insurance as well. He calculated his risk aversion and
allocated proportion for equity and debt mutual funds. Alex followed his plan
religiously with strict discipline for entire year. Alex was now a happy
person. He needn’t run to his parents and friends asking for funds to meet his
tax saving obligations. Alex was satisfied as he was paying his dues on time,
he was researching the financial products thoroughly before jumping on any
offerings. Alex felt content now.
5) Buy only what you need
Heena,
one of Alex’s colleague and a good friend was a happily married jovial girl in
her mid 20s, who earned less than Alex but always had her ends meet with good
financial discipline. She knew how to carry herself with confidence and had
bowled Alex with her simplicity in terms of choices whether it was food,
clothing or holiday destinations. In one of the office parties, Alex
approached her to know the secret of her balanced life, Heena smiled and mentioned
an evergreen quote from Investment Guru, ‘Warren Buffet’ “If
you buy things you do not need , soon you will have to sell things you need”. Alex did a quick mental analysis of his
expenditures; his wardrobe was full of clothes which he wore only 5-6 times in
a year. He had build a stock of shoes purchased through various ecommerce sites
to take advantage of “heavy discounts” but he kept on postponing the family
vacation he had dreamt off , till now. Heena had shown him that he needs to
reconsider the real value his purchases were bringing to him.
Note:- The
characters of Alex and Heena have been fictionalised based on the self
experience of author and his friends. Any coincidence with real life characters
and story is purely incidental. The above article should not be used
solely for making investment decisions . Author suggest readers to seek
professional financial assistance before making investments in any kind of
financial instruments. The images used in this blog are royalty free images taken from website and belong to their respective owners.
