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MAIN ASPECTS OF PERSONAL FINANCE

personal finance

MAIN ASPECTS OF PERSONAL FINANCE

BRIEF INTRODUCTION

One of the foremost reasons we fail to secure ourselves financially is because we are unaware of the things that ought to be done for it. We do what we feel is right thing to do but which may not always be sufficient. Therefore, it’s crucial to get the meaning and knowledge of the key components that one must concentrate on while creating a road map for their financial well-being.

In this blog, we would be discussing about various aspects of private finance, in order to provide an insight about how a complete financial picture should look alike. Before delving deeper into the subject, it’s essential to illustrate that there are 5 contours to one’s complete financial picture. These are saving, investing, financial protection, tax planning, retirement planning, however, there is no specific order for the same.

DIFFERENT ASPECTS OF A COMPLETE FINANCIAL PICTURE

  1. Savings: you would be required to keep money aside as savings to cover any sudden financial need.
  2. Investing: Investing is vital to grow money so you’ll be able to achieve what you aspire.
  3. Financial Protection: Now, financial protection through insurance ensures you and your family are ready to breeze through during the difficulty.
  4. Tax Planning: With proper tax planning, i.e. making adequate expenditure/investment, you’ll be able to bring down your taxable income, eventually saving plenty of money each year.
  5. Retirement Planning: Finally, retirement planning is crucial to make sure that you simply have an enormous bank balance meant solely for your needs during the twilight years.

And now, we are going to discuss each of the 5 aspects in further detail:

SAVINGS

The need for sudden money can come anytime. It will be similar as to any car breakdown or in some serious situations as losing job. However, such emergency events are addressed if we’ve got enough savings to cover the requirement. Thus, as a rule of thumb, one must have sufficient funds, in order to pay off emergency needs, for a period of three to six months.

Debt instruments in the form of Liquid Funds have been considered as an excellent option for investing for emergency needs. Therefore the 3 reasons to back that thought:

  • First, liquid funds give slightly better returns than your bank account, while there’s no guaranteed return.
  • Second, these funds are highly liquid, hence you’ll be able to withdraw the money after seven days.
  • Third, they are not associated with any credit and interest risk, and therefore are seen as safe heavens.

INVESTMENT

It is commonly seen, that people tend to confuse investing with saving, or hence, consider them as synonymous. However, in reality, saving is about setting money aside, but investing is putting money into purchasing of assets like – stock, bond, mutual funds etc. So as to create your money grow. Now talking in terms of investment, mutual funds are a wonderful investment option if it’s done right. However, while investing in mutual funds it’s essential to be mindful about choosing the correct fund for your investment, otherwise it would turn counterproductive. Hence, it’s essential to form your investment as per your investment requirement and horizon.

So, the rule of thumb is that, it is important to turn your dreams into financial goals and set a timeframe to achieve the same. Then pick an investment trust that matches your investment timeframe.

FUNDS AS PER GOALS

  1. Short term goals: The goals that require to be achieved within three years are short term goals. From saving for a visit to saving for a phone, there are multiple things that one must arrange funds within this timeframe.

Best Alternatives: Liquid Funds and Ultra short-term funds.

  1. Mid-term goals: If you have got set a goal for yourself that must be achieved within three to 5 years, for instance down payment for a house, it is often termed as mid-term goals.

Best Alternatives: Hybrid Funds, ELSS, Short Term Debt funds like Banking and PSU Debt Funds

  1. Future goals: Milestone events like retirement, children education, their marriage, i.e. the goals that the timeframe is minimum of 5 years are termed as long-term goals.

Best Alternatives: Multi Cap Funds, NPS (only for retirement), large cap Funds

FINANCIAL PROTECTION

We might weave several dreams in life and make investment plans to show those dreams into reality. But unless we protect them with a security net, the same can become a liability. That safety net is insurance.

TYPES OF INSURANCE

  1. Term insurance: It is a sort of insurance that ensures that your family or dependents don’t must undergo financial hardship if you die early. As compared to other insurance products, the sum assured for insurance is higher as against the premium amount.
  2. Insurance and Significant Illness Insurance: Having insurance ensures that you simply don’t need to pay from your pocket just in case you or any of your members of the family have taken ill. Insurance covers all costs for treatment of the insured like hospitalization, medication, pre and post hospitalization expenses etc. Meanwhile you’ll be able to go for critical insurance together with your basic health policy. just in case you’re diagnosed with one among the critical illnesses mentioned in your policy, the insurer can pay you the sum assured.
  3. Mortgage Protection Insurance: it basically pays off towards the mortgage where the mortgagee dies during the tenure of the mortgage. Thus, it ensures that the loan or mortgage, doesn’t become a liability for your family, just in case you die early.
  4. Personal Accidental Insurance: In case you meet with an accident and find seriously injured, or become partially or fully injured, the insurance company pays the sum assured to cover the expenses for treatment and also loss of income. Meanwhile, if you die during the accident, the lumpsum amount are paid to your family. The payable amount, however, relies on the fatality of the accident.

TAX SAVING

Though we are required to pay taxes as per tax slabs, with the proper kind of investment/purchase we are able to reduce our taxable income to a particular extent. In fact, there are as many as 70 exemptions and deduction options through which we are able to bring down our taxable income.

Here are the two most well-liked sections for deducting taxes:

  • Section 80C: the largest pool for tax deduction is Section 80C. Under this section, you’ll claim deduction up to Rs 1.5 lakh for creating various investments and expenditures. Some of the prominent tax saving instruments are EPF, PPF, NSC, NPS, ULIPs, Children’s Tuition Fee, Insurance Premium, 5-year Tax Saving FD, ELSS, Senior Citizen Tax Saving Instrument, Sukanya Smriddhi Yojana, Home Loan Principal amount.
  • Section 80D: Also, you’ll be able to claim deduction under Section 80D, for the premium amount you pay for your and your family’s insurance policy.

Apart from these two, there are other avenues to cut back your taxable income, to understand them read: Beyond Section 80C: 10 ways to save taxes.

RETIREMENT PLANNING

Retirement is one amongst the foremost crucial life stages, and it may be as blissful or as miserable depending upon how you have got planned for it. The same holds true for financial planning as well. Now, planning finances for retirement may be a two-step process. First one is saving for retirement and second one is for generating passive income from personal assets after retirement.

And, here are the 2 steps –

  • Step 1: Building a retirement corpus: Saving for retirement is crucial for 2 reasons majorly – loss of income and increased anticipation. Let’s assume that you simply retire at 60 and live up to 85. How does one arrange to fund your expenses for 25 years after retirement, at a time after you don’t have any steady income?

Plus, considering inflation, i.e. the increase in prices of products and services for normal use, your expenses are going to be much higher after retirement than it’s today. as an example, if your monthly expenses are Rs 35,000 straight away, it might be Rs 80,000 per month in 20 years, considering you’d want to take care of similar living standards.

Now, building a fund as large as a retirement corpus may be a lifelong process. So, the sooner you begin saving towards, the higher it’s. Investment choice to build retirement corpus: EPF, NPS, and Mutual Funds

  • Step 2: Generating income during retirement:

As much because it is very important to make sure that you simply are are saving enough for your retirement while you’re working, it’s equally important that you just channelize that corpus correctly after retirement. Making the correct investments will make sure that you have got a gradual income as long as you reside.

Some of the options for generating income after retirement are – STP withdrawal/transfer from Mutual Funds, insurance annuity and income.

Being in control of finances and having the ability to make life choice without any concern of money, have been assumed to be the toughest objective of life.

PERSONAL LOAN: A WAY OF FUNDING TEMPORARY MONETARY NEEDS

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Borrowing money becomes essential on several occasions in life be it a medical emergency, buying a home, or a latest brand-new car. Well, to take off our needs and requirements several loans are designed specifically. One such loan which we’ll be discussing during this blog is the personal loan. The loan has been popular for a decade thanks to its offerings and features. a number of its main advantages include collateral free nature and no end-use restrictions.

At the time of utmost monetary crises; many people get stressed about getting financial assistance. Among the various ways to induce assistance, personal loans always lie on top. However, for one who already has an ongoing consumer loan, availing a top-up loan remains the foremost affordable and convenient option. Banks tends to easily approve such a loan, since they are already in receipt of the customer’s documents and credit history.

MEANING

A top-up loan could be a facility provided to the present personal loan holders to increase their borrowing. this is often indeed the most effective option for emergencies because it doesn’t involve any documentation and takes little time for the loan amount to urge disbursed. A top-up consumer loan is availed for any personal need which works in favor of the borrowers.

Eligibility requirement for availing top-up loan facility –

  • A clear chronicle for the payment of ongoing personal loans.
  • Job stability
  • Good CIBIL
  • The borrower is required to have paid the minimum number of EMI as per the lender eligibility criteria. Generally, the said number is of 12 EMIs.

ADVANTAGES

  1. Quick Disbursal– A top informed a private loan gets fast approval and disbursal because the applicant has experienced the same loan process for his first loan. Moreover, the connection between the lender and therefore the borrower isn’t a new one. So it takes less time for the borrower to try to the verification. This makes top-up personal loans best for emergencies where you don’t have time to travel through the paperwork and hassle of latest loan processing.
  2. Collateral Free – like all other loan, a top-up loan is additionally unsecured and hence, doesn’t require any collateral or guarantor to be secured against the borrowing.
  3. Multipurpose in Nature– Being an extension to the continued loan, a top-up loan offers the identical facility. And one such facility is not any limitation on the end-use of the loan amount which makes it a multipurpose loan. It is often used for medical emergencies, home renovation, travel, higher education, purchasing gadgets or to fund the short-term requirements of your business.
  4. Cheaper than Personal Loan– one among the benefits of top-up personal loans is that the lower rate. Generally, the interest rate charged for a top-up loan could be a bit below what it’s charged for a private loan. Getting it even for 1% cheaper rates makes someone save lots during the entire tenure.

SHORTFALLS/DISADVANTAGES

  • Applicable Only to the prevailing Customer– A top-up loan personal loan is applicable only to the persons who are already servicing a private loan with the same lender. So if someone wants to alter the lender, then this facility won’t apply to him.
  • No Tax Benefits– It doesn’t provide any tax benefits. One can save tax on top-up loans providing the loan amount is employed within the home renovation or educational purpose.

DIFFERENCE BETWEEN PERSONAL LOAN AND TOP UP LOAN

  1. A loan and a top-up loan both are often used to get funds. If someone is already serving a personal loan than a top up loan is a better choice to them. this is often because it takes very less time to disburse a top loan whereas availing a fresh/new personal loan can take longer.
  2. If the person encompasses a good repayment history and he contains a good credit score then it’s not difficult for him to urge a top-loan loan. Whereas getting a private loan will be a bit tough because it has some strict eligibility criteria.
  3. The maximum tenure of a private loan is 5 years, whereas a top-up loan can go up to the top of the private loan, but can only be availed only where the borrower has already made payment of minimum of 12 EMIS.
  4. When an individual goes for a fresh loan, he should start everything from the beginning. Researching the most effective lender, applying for the loan, submitting documentation then on. Whereas availing a top-up loan only involves a far smaller process, which is signing the loan agreement.
  5. When considering the value of the borrowing, a private loan is costlier than a top-up loan.
  6. A person is liberal to apply with any of the lenders for a private loan whereas when availing a top-up loan a borrower is restricted to use with the lender from whom he/she has their loan.

Top up personal loans are indeed as very effective tool to fight monetary crises at the time of emergency. However, to avail of this facility, it’s important to own an ongoing personal loan. it’s highly advisable to analyze your requirements together with the pros and cons of a top-up loan before taking any decision.

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