HOW TO MAKE A PERSONAL BUDGET?

The first thing you will need to do is to collect all your bills, receipts and other documents which will help you monitor your spending for the month. A good idea is to jot down all your expenses in a notebook. Include both fixed and variable expenses in your list.

Fixed expenses: are those that stay the same every month (at least for a relatively long period). These are expenses that have been committed for a long term. For example, rent, school fees of your children, wages paid out to domestic helps, etc are all fixed expenses.

Variable expenses, on the other hand, are those that change from month to month. Expenses on food, clothing, electricity and phone bills, entertainment, etc. could be clubbed under this head. You have a relatively higher control over some of these.

Steps to Creating an Effective Personal Budget - 

Make a list of all of your monthly income: If you have received an annual bonus, divide this number by 12. Do the same to all other lump sum incomes of an annual nature. It is important to list all sources.

Next, make a list of all your monthly expenses: If an expense occurs less frequently, convert it to the monthly format. Be sure to include all expenses as housing, food, transportation, utilities, entertainment, etc. It is wise to track your spending for a full month during this stage. Now you can see for yourself if your income covers all of your current expenses. If the answer is no, then you need to cut down on your expenses. Depending on the amount of the shortfall, you may choose to reduce some of your variable expense (such as spending money on movies or junk food!) or increase your earnings. For example, you could take up a part-time job after your regular work hours, or give tuitions.

If your income is in excess of your expenses, consider investing the difference instead of spending it.

If you have just started the budgeting exercise, it may be difficult to keep all records. Do not worry; just keeping tracking of as many expenses as you can. The more accurate and complete this exercise is the easier and more effective will your cash flow planning be.

Strike gold : Choose best options to invest in safe haven!

There is a famous saying in the financial word, 'An asset in need is a true financial asset indeed!" Normally every individual investor builds a portfolio using a lot of financial assets but is he aware which option in the lot prevents him from drowning in times of economic crisis such as currency failure, inflation, and stock market crash?

If you are a serious investor and love your hard earned money, you already know the answer i.e. investing in Gold. Gold as an investment option has the same property as it has as a precious metal i.e. it’s durable. No other investment option endures the test of time so well and hence it’s universally accepted as one of the best financial assets to possess in rough economic conditions.

Not only investors but even nations try to hoard gold in the time of crisis. Very recently, there were reports on how China and India bought tons of gold to hedge against the dollar risk. In this article let’s find out what are the investment options available through which an individual investor can take exposure together with exploring the pros and cons of investing in them.

Jewelry: 

Pros - 

• Investment is very easy. You only need cash to invest

• If you invest early it saves you a significant expense at the time of marriage

Cons -
• You own it in physical form, so threat of theft

• Making charges offsets the profit in terms of price appreciation (varies from 10% to 35% at times)

• Normally it’s a virtual investment as people don’t want to sell it

Investment rationale

Indians invest in jewelry for multiple reasons. They can use it for marriage, wear for parties, and get it liquidated in the time of crisis, though we hardly see anybody liquidating it unless extremely urgent. Moreover, accumulating jewellery is a sort of tradition and hence many families still find it the best way to invest in Gold.

Gold Coins:

Pros -
• Value is quite comparable to international gold price
• One of the most recognized and reliable way to invest in gold
• Investment is very easy. You can buy it from banks, local shops etc
• Big investment is not required to take exposure as it’s available in smaller denominations.
• Easy to store.
• Very liquid.  

Cons -
• You own it in physical form, so threat of theft
• You pay a premium of 4% to 10% while buying and same % is discounted while selling resulting in lesser overall return

Investment rationale

Since most of the gold coins are sold by banks, the purity is guaranteed unlike jewelry where you have to rely on your known jeweler. Investors who do not want to take any chance but still want to invest in physical gold go for gold coins.

Gold Bars:

Pros -
• Value is quite comparable to international gold price.
• Premium/discount paid while purchasing and selling is the least
• Most recognized and reliable way to invest in gold.
• Investment is very easy. You can buy it from banks, local shops etc.
• Quite liquid.  

Cons -
• You own it in physical form, so threat of theft.
• Initial investment can be large as smaller denominations are not available.
• Increased risk of forgery.
• Storage cost for large bars.

Investment rationale

If you are comfortable with storage and large initial investment amount, this can be one of the best options as loss in terms of premium/discount is the least. Issues of fake purchases can be taken care if you buy from an authentic source.

Gold ETFs:

Pros - 
• Investment is very easy. You only need a demat account for investment.
• No concept of losses in terms of premium or discount.
• Safe as no physical possession.
• Low initial investment.
• Various options available because of technology advancement like SIP etc.

Cons -
• You don’t possess it in physical form so might be at loss in crisis situations (war, bankruptcy etc).
• Might have liquidity issue.
• Complex structure.
• Transaction fee and annual maintenance charges.

Investment rationale

These are relatively new options and are not as popular as physical Gold. Investors who usually invest using demat account are aware of this option. They provide very easy access to gold investment without having the burden of physically owning it.

Gold Mining Stocks:

Pros - 
• A way of taking indirect exposure.
• Capital appreciation potential is more as compared to direct investment.
• Safe as no physical possession.
• Low initial investment.
• Highly Liquid. 

Cons -
• You don’t possess it in physical form so you might be at loss if the Gold deposit yield is less than expected or if the company faces bankruptcy.
• Deep research required before investing.
• Volatile and risky as compared to other options.

Investment rationale

It’s one of the most creative investment options and hence requires a lot of careful research before investment. If you are a seasoned investor and enjoy making your hands dirty this can be an option for you as you can strike gold if you choose the right one.

Conclusion:
Gold reserves are held in significant quantity by many nations and they are synonymous to money. Gold investment acts as the best shield against economic downturn and crisis situation, so it’s a wise decision to take exposure via any of the routes suggested above, which suits you the best.

Eight simple ways to plan your taxes

When you have got only a few more days to complete your tax investments for financial year, you must have already got a call from your company to submit the proofs for tax saving investments. So why don’t you spend some time on organizing your tax plan?

1) Proper Allocation of Annual compensation

Restructuring your salary with some additional components can reduce your tax liability. This restructuring doesn’t require any additional cash outflow. The following components can be efficiently used to reduce your income tax liability.

- Transport allowance to the extend of Rs.800 is exempt.

- Medical expenses which are reimbursed by the employer are exempt to the tune of Rs.15000.

- Food coupons like sodexo or ticket restaurant are exempt from tax up to Rs.60000.

- Individuals who are all living in a rented accommodation can include House Rent Allowance ( HRA ) as a part of their salary.

- Leave Travel Allowance (LTA) can be part of your salary as this can be claimed twice in a block of 4 years.

2) Effective Utilization of Tax Exemption

As far as possible utilize the maximum exemptions available under section 80 C, 80 CCF and 80 D. The maximum exemption available under section 80 C is Rs. 100000.

Under this section Rs.100000 investment or contribution can be made in PPF, NSC, Life insurance premium, 5 year FD with banks and Post offices, Mutual Fund ELSS, Principal Repayment of housing loan, and the tuition fees paid for children’s education.

Under Section 80 CCF, you can invest up to Rs.20000 in infrastructure bonds.

Under Sec 80 D, the premium paid towards the mediclaim policies are exempt. The maximum limit of exemption is Rs.15000 and for senior citizens the limit is Rs.20000 and for covering senior citizen parents there is an additional exemption to the extent of Rs.15000.

3) Properly Structure your Housing Loan

The Principal repayment of a housing loan is eligible for a deduction up to Rs.100000. The interest paid on a housing loan is eligible for a deduction up to Rs.150000. If the housing loan is for a sizeable amount, then it is possible that the principal repayment and interest may exceed the specified tax exemption limit. To utilise the maximum tax benefit, an individual can consider going for a joint home loan with his/her spouse or parent or sibling. This will make sure that both the co-owners can claim tax deductions in the proportion of their holding in the loan.

4) Tax Plan in Sync with Overall Financial Plan

You should not do your tax plan in isolation. You need to do it in sync with your overall financial plan. So a tax plan is not only to just save taxes and also it should assist you in achieving your other financial goals like children’s higher education, buying a home or retirement.

5) Avoid Last Minute Rush

In fact the right time to do the tax plan is the beginning of the financial year. If you postpone your tax planning even now and do it in the last minute, then you will not be able to choose the right investment. In the last minute rush, you will be forced to choose a scheme which gives the proof immediately. Is the investment sound and profitable? Is there any other better options? You will not be able to choose the best scheme and you may settle with a mediocre one.

6) Invest Some Quality Time

Before investing your money, you need to invest your time. You need to take some quality time to understand the various tax saving options and compare their benefits and limitations.

7) Check for Future Commitments

Some tax saving options like NSC or ELSS need only onetime investment. Some other tax saving options like PPF, Ulips need periodical investments year after year. You need to be careful in choosing a tax saving scheme where you need to commit for periodical future payments. You need to check on a few things like; do you need such a future commitment? Will you be able to meet the future commitments at ease? The law may change and you may not get any tax exemption for your future payments. Would you consider the scheme irrespective of tax benefit for the future payments?

8) Changed Your Job; Redo your Tax Plan

Did you switch your job in the middle of the financial year? Then you need to redo your tax plan with consolidating the income from both the companies. It is advisable to inform the new company about the income during the particular financial year from the old company. So that your new company will deduct the right amount of TDS. Otherwise you may need to pay extra tax at the end of the financial year.

Whenever you change your job, you need to have a sitting with your financial planner or tax advisor. So that the required changes in your tax plan can be done proactively.

With proper tax planning you can reduce your tax liability; save more; invest better and become wealthier.

Do’s and Don’ts in the Stock Market

Most of us have our own perception of investment based on our experiences, but also tend to be confused with the opinions given by others. Knowing the do’s and don’ts of the stock market would help us turn really as a smart investor.

The do’s and don’ts in the stock market are:

Slow, steady, and boring wins the race:

It is best not to panic over information about stocks on the media. Being slow and steady with looking at the activities that your money is to be used for would ensure that you invest in ventures that are good, useful and profitable. 

Reading good books on personal finance will help you in taking right financial and investment decision. In addition, finding good financial advisors would help you get advice regarding stocks and mutual funds, along with entrusting the custody and management of your funds to them.

All this may seem too boring and time consuming, but it is better to be cautious than bitten too hard.

Don’t give any weight to market forecasts. All opinion pro and con is already built into the price of equities today:

Market forecasts on the media has got good entertainment value but doesn’t have any investment value. It is just enough for long-term investors to invest in good stocks, and mutual funds that would appreciate in the long run.

It is best to understand that market forecasts only show you the expected direction in which the market is heading based on the available information. This forecast is only a forecast and need not become reality.

In addition, market fluctuations are the very nature of share markets and should mean nothing to long term investors. Making accurate market forecasts is tough, as they are influenced by various factors like the outcome of political elections, the direction of the economy, interest rates and world events. It is also wise to know that these fluctuations are incorporated in the price of the share, stock or mutual fund.

Do make your own analysis of the stocks, shares and mutual funds:

It is unadvisable to place your full faith on analysis of others regarding stock, shares and mutual funds. No wise man would always tell you all about his market beating strategy. Making one’s own analysis keeping your financial goals in view and framing a strategy would help.

This involves studying the performance of top performing stocks and mutual funds over 5 years and existing mutual funds over a period of 3 months to decide on which stock to maintain and which to dispose off. All this would ensure that you are investment smart.

Don’t think you can successfully engage in short-term market timing:

As a long- term investor you should never contemplate taking advantage of short-term market dealings and speculations. Playing with shares and mutual funds in the short-term market may give you a profit in a few transactions but will not give you profits forever. So you can’t have an investment strategy which gives profit inconsistently. We need a strategy which can bring profits consistently so as to be a successful investor in the long run.

It is true that playing in the share market is neither entertainment nor fun. It is also futile to borrow or work on short-term margins to make money.

Don’t assume that if anyone were genius enough to devise a market-beating strategy he would be stupid enough to share it with anyone:

Stock tips are good to learn, but not to act on for speculations. It could prove dangerous to act on speculation tips given by one and all, as they may not be correct.  In addition, everyone has his or her own perception of investment, with other not having full knowledge or skills.

You need to take time to think over each tip and analyze if it contributes to your long-term objective of capital appreciation. Similarly it is not advisable to subject your money to risk with investing in investment fads that may or may not earn you huge profits.

The final advice:

You need to make a calculated decision considering the pros and cons whenever you make an investment. In addition abstain from trading often in the stock and mutual funds market. Always think in terms of long term investing.

Eight mistakes to avoid while investing

Investing is not just about picking winners, but also about avoiding mistakes. Retail investors can be better off if they avoid making the following mistakes.

1. Overconfidence - Don't be unrealistically optimistic

A bull market makes retail investors believe that they are geniuses - after all, anything they put money into goes up. This overconfidence in their own abilities leads to a complete disregard of the risks involved. Every new generation that invests in the market ignores past experience. These new investors wrongly believe that stock prices only go up.

Don't be overconfident and don't start believing that you have superior skills compared to the market. Recognise that in a bull market you are benefiting because the whole market is going up. If those around you are getting unrealistically optimistic, start managing your risk accordingly. Remember that sometimes markets do come crashing down.

2. Over enthusiasm to trade - Not every ball should be hit

Good batsmen realise that some balls outside the off-stump should be left alone. Similarly, professional investors realise that sometimes it’s better to just stand still than to rush into a stock. Retail investors often make the mistake of "flashing outside the off-stump" because they cannot resist the temptation to trade in every opportunity. And, like an inexperienced batsman, they suffer the same fate.

Too much trading will lead to a lot of churn, extra commissions to your broker and huge tax implications for you. Some of the world's best investors follow a buy and hold strategy - you should too.

3. Missing the benefits of compounding of capital - Learn from Einstein

Albert Einstein is reputed to have said that compounding of capital is the 8th wonder of the world because it allows for the systematic accumulation of wealth. Even though any one in class 5 could tell you how compounding works, retail investors ignore this basic concept.

Compounding of capital can benefit you only if you leave your money uninterrupted for a long period of time. The sooner you start investing, the bigger the pool of capital you will end up with for your middle-aged and retirement years. Don't wait to start investing only when you have a large amount of money to put to work. Start early, even if it's with a small amount. Watch this grow to a very large amount with the passage of time.

4. Worrying about the market - But there is no answer to your favorite question

Smart investors don't worry about the direction of the market - they worry about the business prospects of the companies whose stocks they own. Retail investors are obsessed with the question "Where do you think the market will go?" This is a wrong question to ask. In fact, no one knows the answer.

The right question to ask is whether the company, whose stock you are buying, is going to be a much bigger business 10 years from now or not? Don't take a view on the market; take a view on long-term industry trends and how your chosen companies can create value by exploiting these trends.

5. Timing the market - Around 99% of investors will fail in this strategy

It’s very difficult to time the market, i.e., be smart enough to buy at the absolute bottom and sell at the absolute top. Professionals understand that timing the market is a wasted exercise.

Retail investors always wait for that elusive best opportunity to get in or to get out. But by waiting they let great investment opportunities go by. You should use systematic or regular investment plans to make investments. You'll have to make fewer decisions and yet can accumulate substantial wealth over time.

6. Selling in times of panic - You should be doing the opposite

The best opportunity to buy is when the markets are falling and there is fear in the minds of investors. Yet, many retail investors do exactly the opposite. They sell when the markets are falling and buy only when the markets are high. This way they end up losing twice - by selling low and buying high, when they should be doing exactly the opposite.

If nothing has changed about the long-term outlook for the company that you own, then you should not sell this company's stock. Use this opportunity to buy more of the same stock in falling markets. Some of the world's biggest fortunes were made by buying when others were selling in panic.

7. Focusing on past performance - Its like driving forward while looking backwards

It is a very common perception that because a stock has done well in the past one year, it's the best stock to invest in. Retail investors do not realise that often the best performers will under-perform the market in the future because their optimistic outlook has already been priced into the stock.

Don't go after hot sectors that are currently producing high returns. Don't let greed drive your investment decisions. Look forward to see whether the gains produced in the past can get repeated or not. Short-term trends of the past might not get repeated in the future.

8. Diversifying too much will kill you - Investing is all about staying alive

Beyond a point, having too many names in a portfolio can be counterproductive. You might end up duplicating, or end up taking too much exposure to a sector. Over-diversification can upset your portfolio, especially when you have not done enough research on all the companies you have invested in.

If you are an active investor in the stock market, maintain a manageable portfolio of 15-25 names. Instead of adding new names to this portfolio, recognise ideal ones. Then back them with more capital. In the long-run, this will produce better returns for you than adding another 20 names to your portfolio. Investing is all is about patience and discipline. By avoiding mistakes you can improve the long-term performance of your portfolio, whatever the economic conditions prevailing in the market.