Personal Money Management Tips

By technical definition personal money management refers to a program specifically designed to help you simply save money. As you all know, saving simply is important and is rightfully one of the first step in achieving success.

Here are some of the most useful personal money management tips to help you out:

1. Pay yourself first.

Nothing beats this number one tip. Never regard savings as Income - Expenses = Savings rather think of it this way Income - Savings = Expense. Following this equation will make sure that you get to keep at the end of the day whilst learning to budget things accordingly along the way.

2. Determination, Discipline, and Decisiveness.

These 3D's are the key to an effective personal money management. To keep it simple, what matters most is to stick to your budget and learn when to say NO.

3.Have an Adequate Financial Literacy.

Nothing beats the good old education as they say. And that is rightfully one key in the road to an effective personal money management. As much as possible read articles, books, and journals about finance, money management, or even economics. Better yet enroll on an effective personal money management course. These will enlighten you from the use of money management worksheets, investments and accounting to some economic concepts like devaluation and inflation. Knowledge and information is the key, if you have these, you'll never fail.

4. Resource optimization

In layman's terms, it's simply making the most out of everything. Right, you read it, it's making the most. Free stuff are always your best friends, so take advantage of them. (By any reason I do not imply that you take advantage of your friends in any way. Along with it are discount and package coupons, and free personal budget planners - these always come in handy, especially if you're forgetful of bills that have overdue costs. Heck they can even track your spending trends!

5. Definite Chief Aim

Most importantly, you must set yourself a personal definite chief aim. Whether a new house or a new car, having an aim simply helps. Why? because it has many important psychological benefits. If you have an aim for example, you unconsciously focus on it and do things that will help you converge towards your goal. It's always bother you and ask you a question every time you spend, 'Do I need this?' and 'What will happen to new car/house?' It'll bother you, and it'll help you think twice before you make a major spending.

Where to buy a mutual fund?

Investors have varied investment objectives and can be classified as aggressive, moderate and conservative, depending on their risk profile. For each of these categories, asset management companies (AMCs) devise different types of fund schemes, and it is important for investors to buy those that match their investment goals.

Funds are bought and sold through distribution channels, which play a significant role in explaining to the investors the various schemes available, their investment style, costs and expenses. There are two types of distribution channels-direct and indirect. In case of the former, the investors buy units directly from the fund AMC, whereas indirect channels include the involvement of agents. Let us consider these distribution channels in detail.

Direct channel

This is good for investors who do not need the advisory services of agents and are well-versed with the fundamentals of the fund industry. The channel provides the benefit of low cost, which significantly enhances the returns in the long run.

Indirect channel

This channel is widely prevalent in the fund industry. It involves the use of agents, who act as intermediaries between the fund and the investor. These agents are not exclusive for mutual funds and can deal in multiple financial instruments. They have an in-depth knowledge about the functioning of financial instruments and are in a position to act as financial advisers. Here are some of the players in the indirect distribution channels.

a) Independent financial advisers (IFA): These are individuals trained by AMCs for selling their products. Some IFAs are professionally qualified CFPs (certified financial planners). They help investors in choosing the right fund schemes and assist them in financial planning. IFAs manage their costs through the commissions that they earn by selling funds.

b) Organised distributors: They are the backbone of the indirect distribution channel. They have the infrastructure and resources for managing administrative paperwork, purchases and redemptions. These distributors cater to the diverse nature of the investor community and the vast geographic spread of the country by establishing offices in rural and semi-urban locations.

c) Banks: They use their network to sell mutual funds. Their existing customer base serves as a captive prospective investor base for marketing funds. Banks also handle wealth management for their clients and manage portfolios where mutual funds are one of the asset classes. The players in the indirect channel assist investors in buying and redeeming fund units.

They try to understand the risk profile of investors and suggest fund schemes that best suits their objectives. The indirect channel should be preferred over the direct channel when investors want to seek expert advice on the risk-return mix or need help in understanding the features of the financial securities in which the fund invests as well as other important attributes of mutual funds, such as benchmarking and tax treatment.

Tax saving investment options

SECTION 80C DEDUCTIONS: Investment options under Section 80C can be broadly categorised as market linked, fixed income and insurance. The fixed income category includes investment options such as the Public Provident Fund (PPF), Employee Provident Fund (EPF), tax-saving bank fixed deposits, National Savings Certificate (NSC) and senior citizens savings schemes.

While it is the most popular tax saving category, market-linked instruments including tax-saving equity mutual funds (ELSS) and unitlinked insurance plans (ULIPs) are gradually catching up.

PUBLIC PROVIDENT FUND (PPF): One of the oldest investment options, PPF scores on all grounds as it is one of the very few investment options that fall under EEE (exemptexempt-exempt) tax regime.

This implies that not only the investor can enjoy deduction on the amount invested in this scheme but the interest received on maturity is also exempt from tax.

PPF offers an interest rate of 8% compounded annually, with the maximum investment restricted to Rs 70,000 a year and mandatory investment tenure of 15 years.

An investment of Rs 70,000 every year in PPF for 15 years will amount to a taxfree maturity sum of Rs 20.5 lakh at the end of the 15 year tenure.

EMPLOYEE PROVIDENT FUND (EPF): Under the current norms, 12% of the employee's salary is contributed towards EPF, which is exempt from income tax. Any contribution over and above the 12% limit by the employee towards EPF is consider as voluntary provident fund (VPF) and the same is also exempt from tax, subject to the overall 80C limit of Rs 1 lakh per annum.

Like PPF, EPF, also falls under the EEE tax regime wherein the interest received (on retirement from service) is tax-free in the hands of the investor. The interest payable on EPF is determined each year by the Employee Provident Fund Organisation (EPFO). After having maintained a steady interest rate of 8.5% per annum for quite some time, the EPFO has enhanced the rate of interest to 9.5% for the financial year 2010-11.

While it is still not sure whether such an attractive interest rate will continue in the following years, those who have been contributing to EPF for quite some time now and have accumulated a large corpus are bound to benefit immensely with this year's higher interest as interest is compounded annually.

NATIONAL SAVINGS CERTIFICATE: Similar to PPF, NSC also earns an interest rate of 8% per annum and investment up to Rs 1 lakh is exempt from tax under section 80C. However, unlike PPF, interest received on NSC, at the time of maturity, is taxable in the hands of the investor which makes it comparatively less attractive.

Why read the offer document while zeroing in on a mutual fund scheme

What's an offer document? It is one of the most important sources of information regarding the fundamental and other attributes of a mutual fund and is issued by the asset management company (AMC). It solicits prospective investors and serves the same purpose as a prospectus that is issued by companies in the primary capital market. 

The offer document of a closed-ended fund is brought out only once at the time of issuance as no new units are sold to investors after the offer period. However, the offer document of an open-ended fund is valid for all times as the fund can issue and redeem units on a regular basis. This information helps investors choose a mutual fund that matches their requirements. Let us look at some of the important points covered in the offer document. 

Investment objectives and policies: This section lists the asset allocation pattern and diversification policy of the fund. The former reflects the flexibility of the fund in terms of rebalancing its portfolio (equity, debt, money market, cash) so as to benefit from market movements. The diversification policy determines the kind of sectors or stocks (large-, mid-, or small-cap, value stocks, growth stocks) in which the fund will invest. The investment objective of the fund must coincide with that of the investor and, hence, one should analyse it before buying into one. 

Risk profile: The offer document must make investors aware of the risk factors, which can be standard or specific. The former are governed by market movements, whereas scheme-specific factors are due to the fund's investment strategies like lock-in period (closed-ended) and limited diversification. For example, closed-ended sectoral funds exhibit high risk as their investment portfolio comprises stocks from the same industry. Such factors can significantly affect the investor's choice and need to be evaluated. 

Fund expenses: This section contains information on the estimated expenses, which include recurring expenses, initial issue expenses, loads, etc. If there is a variation in the estimated expenses for the scheme and actual expenses for similar schemes in the past, the reasons should be clearly explained. This information can help determine the costs involved in investments and should be scrutinised as these can significantly affect the returns over the long term.

NAV and valuation: This section explains the valuation norms of assets and frequency of disclosure of NAV. Generally, open-ended funds calculate and declare NAVs daily. The valuation norms are critical for funds that trade heavily in non-traded securities as it affects the NAVs significantly.

Procedure for redemption or repurchase: It explains how to determine the redemption and repurchase price of units and lists the centres where investors can redeem their units.

Redressal mechanism: This section helps investors judge the operational efficiency of fund management. The name of the person to approach for queries, complaints, or redressal of grievances is mentioned.

Investor's rights: The offer document lists the rights and obligations of investors with respect to the scheme's assets, management, AMC and other constituents. 

The offer document is the primary vehicle for the investment decision. It acts as a legal document that protects and governs the right of the investors to information.

Car Insurance Tips

Know Your Coverage Types

What is your car insurance actually insuring? Although you're buying a single insurance policy covering a specific vehicle, a number of components make up the final cost:

 Bodily injury liability: Covers injury and death claims against you, and legal costs, if your car injures or kills someone.

Property damage liability: Covers claims for property that your car damages in an accident. Because liability coverage protects the other party, it is required in all but three states.

Medical payments: Pays for injuries to yourself and to occupants of your car. This is optional in some states. In "no-fault" states, personal injury protection replaces medical payments as part of the basic coverage.

Uninsured motorist protection: Covers injuries caused to you or the occupants of your car by uninsured or hit-and-run drivers. "Under-insured" coverage also is available, to cover claims you may make against a driver who has inadequate insurance. In some states, as many as 30 percent of drivers are uninsured.

 Collision coverage: Covers damage to your car up to its book value. Collision coverage carries a deductible, which is the amount per claim you have to pay before the insurance takes effect. The lower the deductible, the higher the premium. While it is legally optional, a lending institution or leasing company usually requires collision coverage.

Comprehensive (physical damage): Covers damage to your car from theft, vandalism, fire, wind, flood, and other non-accident causes. Comprehensive also carries a deductible.

Money Saving Ideas

It seems that far too many people spend more money than they bring in. And yet, saving money for a rainy day, for your retirement or your child’s education can be far more important than some of the things you’re currently spending money on. It can be difficult to switch from a spending to a saving mentality, but it can be done, and it can be done without depriving yourself unnecessarily.

Probably the most important thing to do when it comes to saving is to have goals. It’s hard to deny yourself now if you don’t know what you’re saving for. But once you have something concrete in mind- your dream home, a wonderful vacation, a worry-free retirement- it’s much easier to say no to things you don’t really want or need right now.

When you have a tangible goal in front of you, take a look at each individual expense to see if it’s something that is truly necessary, or if you can do away with it for the sake of reaching your goal more quickly. Quite a few people spend money on things out of habit, not necessarily because they need or even want them. By analyzing your expenses more closely, you might be able to make some cuts that won’t hurt at all.

If your employer won’t do it, then it’s easy to do yourself. Most banks let you set up an automatic transfer between one account and another. Once your money is in your account, set up a transfer to go to a savings account for the same amount on the same day of every month. If you don’t have to remember to do it, it’s more likely to get done, and again, it’s far less painful.

With online banking, it has become far too easy to disregard our bank balance and pay bills automatically or with the click of a mouse. Paying bills automatically is a great idea, but you should still keep track of your bank balance and carefully read over your bills every month so you are aware of any rate changes. If you are alert to your bank balance, it makes it easier to adjust mid-month if you see you are spending more than you normally do.

Getting into the savings mindset is probably harder than actually doing any of the above. Once you have changed your orientation to your future goals however, it will become a lot easier.

Various ways to save tax

Section 80D: Health Insurance Premium

You can take advantage of an annual deduction of Rs. 15,000 from taxable income for payment of Health Insurance premium for self and dependents. For senior citizens, this deduction is Rs. 20,000. 

Section 80E: Interest paid on educational loans

You can claim a deduction on the interest paid on loans taken for higher education for yourself, your spouse and children. There is no limit on the amount of deduction you can claim. 

The only thing to keep in mind is that the program for which the loan is taken should be a graduate or post-graduate program in engineering, medicine or management or a post-graduate course in the pure or applied sciences. 

Section 80G: Donations to Charitable institutions

You can claim a deduction for any donation that you might have made to a charitable fund or institution. However, please note that these donations should be made only to specified institutions. And a proper proof of payment must be provided for the same. Based on the classification of the charity, you can claim either 100% or 50% of the donated amount as deduction. The deduction might also be subject to a certain limit again based on the type of charity that you are donating money. 

Section 24: Interest paid on housing loan

Under Section 24, a maximum of Rs 1, 50,000 can be deducted from your taxable income as interest repayment for a self occupied house. Please note that this deduction is not available if you the house is still under construction and you do not have occupation of the house.