Get Money Smart – A Guide to Investing Money Wisely

If you ask the previous generation how they managed their money the reply is frugal living and regular savings. Today these terms are almost alien to us. Though we do understand the importance of saving, very few are able to sensibly invest the earnings.
Following a few simple steps can help you manage your finances better.

Your income will include all the money you are receiving from various sources like paycheques, rent, investment income, and gift.

Make a list of your expenditure. This can be weekly or monthly. The list will contain all the expenses incurred during the time period of your preference. It will include everything from house rent, car payments, food, clothing, utilities, child care, insurance payments, medical bills, entertainment etc.
Maintaining a daily record of all the expenditure made helps in keeping a close eye on where your money is going. Regularly checking your bank statements is another way of keeping track of your expenses.

Once you are aware of your expenses the next step is to set a goal for yourself. Setting a goal helps in moving systematically towards it. A goal can be anything from buying a car to saving for retirement. One should start saving as soon as one can. The younger you start the more you can save.

Keeping in mind your earning and your past expenditure and debt you can now fix a budget. There are several software available to assist you in planning your budget, the simplest tool of course being a pen and paper.
KISS is the way to go, the acronym for Keep It Simple Silly! Do not complicate the process and be flexible. Expenditure might change from month to month. People with irregular income should take extra care that they don’t over spend and maintain their expenditure within their average income limit. A ‘safety cushion’ should be kept ready in case of unprecedented expenses. Keep money aside for emergencies and contingencies. One can never tell when disaster strikes and its advised to always build an emergency fund.

50/20/30 rule is usually prescribed as an effective way to distribute your expense. In this 50% of the income goes into fixed expenditures like rent and car loan, 20% comprises the savings and the remaining 30% is for purchases like grocery, entertainment etc.

Keep expenditure below your income level. Cut down on unnecessary expenditure. Simple lifestyle changes can aid you in this. Use of public transportation once in a while, cycling to work even better, sell unused items, switch off the lights and use CFL or LED light bulbs and cut down electricity bills, checkout inexpensive entertainment alternatives, reduce eating out, don’t have to always buy from big brands, reduce cell phone bill, move to low rent housing. Avoid debt, less financial liability means more money you can invest. Remember a penny saved is a penny earned.

One can lose track of the purchases made using a credit card until the bill arrives. Net transfer and debit card are a far better option as you can see the direct impact of the spending in the bank statement. Credit cards should be strictly kept for emergencies. Your credit card usage also determines your credit score which plays a significant role when you apply for home loans and car loans. High usage and late payments will hurt your credit worthiness.

It’s tempting to indulge in instant gratification than put that money away for the future specially with spending becoming so easy these days. Best way to avoid unnecessary expenditure is to keep money in a place without easy access. Keep a portion of your money in a bank account and don’t issue a debit card.

Bank fixed deposits is the easiest thing to do with returns upto 8%. There are FDs with lock in period upto 5 years. They have a higher interest rate compared to normal FDs though interest earned is fully taxable.

Post office monthly income plan account (MIP) is another alternative for investing your money with 8.4% returns.

Public Provident Fund (PPF) has interest rates as high as 8.7% and has a tenure of 15 years which is extendable by another 5 years. Minimum investment of INR 500 and maximum upto 1.5 lakh can be up in the account annually which can be in small instalment or a lump sum and its tax free.

National Saving Certificate (NSC) is a government saving bond. These can be purchased from any Indian post office. They have a 5 and 10 years maturity period. Though there is no upper limit for investment. Investment upto INR 1.5 lakh are eligible for tax rebate under 80C. The interest rate is 8.5%. But interest earned is fully taxable.

Kisan Vikas Patra has no maximum limit on investment and the amount invested doubles in 100 months.

Sukanya Samriddhi Account can be opened for a girl child up till the age of 10. The returns are 9.2% per annum.

Equity Linked Saving Schemes (ELSS) is a type of Equity Mutual Fund. Investment upto 1.5 lakhs can be made. As the investment is in equity or stocks the returns are as high as 14-16% and the capital gain is tax free (under section 80C of the Income Tax Act). The lock-in period is 3 years.

Systematic Investment plan (SIP) for a Mutual funds scheme is a way of investing a pre-determined fixed amount regularly with either post-dated cheques or auto credit facility. One can diversify their investment through multiple SIPs.