A few weeks back, I read an interesting report on India’s wealth landscape. This report was unique because its main premise was that the “salaried” managers and professionals are amassing significant wealth – a club that’s usually dominated by owners and inheritors of businesses.
It all boiled down to a simple mantra-
Expense = Income – Savings
Savings = Income – Expense
This is not an ingenious mathematical equation but an observation on the mindset of what’s defining today’s wealth creation. From spending first and saving later to saving before spending starts. Households, whether single or double income, need to inculcate the discipline of saving first to embark on that slow, yet steady, journey of being financially well-off.
While saving money is crucial for men and women alike, women need to be more attuned towards long-term saving. Women have higher life expectancy than men, which means they are more likely to outlive their husbands. Financial stability and independence during sunset years matter much more for women to maintain their lifestyle. Long-term saving can help women look after their parents and children alike without the “sacrifice” of their own needs and dreams – an all-pervasive Indian tendency.
Whether you are a homemaker or a working professional, you need to get more involved in financial strategy and planning of your household. Volunteer for the role of “Chief Wealth Officer” for your home. Don’t worry, you will learn on the job.
The first goal and step is to have some real savings which are only dipped into in case of utmost emergencies. When we were young, my mother used to squirrel away extra cash and change at every chance she’d get, but it would get used up much quicker than it was gathered – for things like an impromptu chat party for guests, or ‘shagun’ for a neighbor’s new daughter in law. Maybe physical cash was the problem – storing and handling it is always fraught with temptation. Having a separate bank account dedicated to savings is important. Yes, I mean separate – just primarily meant for depositing money, whose ATM card is stored away in a place too tedious to reach. With free accounts and great online banking services being provided by most banks, handling physical cash and therefore, the urge to spend can be minimized.
But, money that’s not invested anywhere but lies at home or in low-interest saving accounts is money whose value is gradually decreasing in face of rising inflation. So, the second step and goal is to invest into instruments that will give yields much better than plain saving. Here are few options that you might want to consider:
Fixed Deposits and Recurring Deposits
Bank FDs are virtually risk-free and conveniently available online by all leading banks. The rates of interest vary with the market and time period for the fixed deposit, but once locked-in the same is applicable. Current rates are at about 8.5% pa for term deposits of about a year.
But, if the total interest earned is more than 10,000 per year, Tax is deducted by the bank. To avoid that, a TDS waiver form 15G/H should be submitted if your yearly income is less than the taxable norms. I like HDFC banks fixed deposit, because they are easy to open and manage and allow instant liquidation when I need funds.
Recurring deposits also work the same as FDs, allowing you to add funds to the same deposit at periodic intervals.
I like iWish deposits from ICICI bank – These again are easy to open and manage and also helps keep a track of financial goals. Using iWish you could also ask your friends and family to contribute to your savings, a feature I have tried only with my husband.
There are another type of FDs – corporate FDs – issued by companies. These offer a higher interest rate and carry a higher risk. These cannot be bought directly from your bank online login and usually need a trading account. More information can be found here.
Mutual funds allow people to invest their money in a diversified selection of securities professionally managed by a fund manager.
A fund manager essentially chooses where money should be invested – a combination of stocks, bonds, equities etc – depending on risk profile of the fund and market conditions.
These help achieve better returns on hard-earned money, without having to study the market in detail.
Moreover, you don’t have to make a lump sum investment. SIPs or Systematic Investment Plans help making saving easy and regular. These are similar to recurring deposits where a specified amount as low as 500 rupees can be invested in mutual funds.
Mutual fund investments come with varying degree of risks, but in the long term, benefits of compounding outweigh the risks. The longer you stay invested/keep investing in funds, the better the returns. Check this easy tool at moneycontrol.com that put things into perspective
If you start investing 500 rupees every month, for a period of 10 year, when compounded at an interest rate of 10%(top mutual funds way more than this) will yield 1.06 lakh at the end of the tenure (Rs. 60,500 in principal and Rs. 45,984 as income). Increase this for just 2 more years and the investment become 1.42 lakhs (Rs. 72,500 in principal and Rs. 70,205 as income). The principal has increased just by Rs. 12,000 while the earnings have grown by Rs. 25,000. Wow!
Aditya Birla Money has launched a nice tool called ZIPSIP to help newbies get started in the MF investment journey . It asks a few basic questions about your profile and tries to evaluate your risk appetite and investment choices. It then shows an investment plan suitable for you. You would need to submit your KYC(know your customer) details that include information like name, address, phone number etc.
Visit websites like moneycontrol.com, ET portfolio and Cafemutual.com, Valueresearch.com for more information about mutual funds. I prefer ValueResearchOnline.com for their “Ask” section which allows users to ask questions that are answered by professional advisors.
Gold Monetization scheme
As per World Gold Council estimates, about 20,000 tonnes of gold is lying in Indian households. The central government introduced the gold monetisation scheme in November this year for individuals to deposit their physical gold in bank branches and earn returns from 2.20% to 2.5%.
The intent of this scheme is to use gold stowed away by indian household to strengthen the economic standing of the country as the scheme can help reduce India’s gold imports.
This is a good investment option for households having gold jewelry that they hardly ever use, gold that’s lying around in lockers – waiting to be sold when need arises. This gold can be deposited in banks to be redeemed later either as cash or metal itself as per the customers’ preference.
This is the process I understood from watching the news about the scheme, but haven’t ascertained it yet –
- Customers need to take such jewelry to a government purity testing center
- A preliminary test will tell the approx. quantity of gold in the jewelry
- The customer can now give his consent for melting the jewelry to get pure gold
- If consented, the studs, stones, meena etc is removed from the ornaments and handed to the customer
- The jewelry will then be melted and its purity ascertained and the customer can watch the entire process through a viewing gallery.
- After melting the customer is told the results, and again given a choice to either take gold bars back home(by giving a small fee) or deposit with the bank.
- Another condition here is that the gold weight should be minimum 30 gms and needs to be invested for at least an year to earn interest.
- If the customer decides to deposit the gold, the gold deposit account will be opened, with the quantity of pure gold ascertained by tests.
- This can be redeemed either in gold or cash, as opted for while depositing.
While the scheme has received a lukewarm response so far, it is a good option to use when it comes to our latent wealth like age-old gold coins, biscuits, dated jewelry with little or no emotional value.
Women have a prime role to play in gold monetization, as they are traditionally the custodians of the yellow metal in Indian households. While we still need to wait-and-watch this one, it’s an investment option we should keep our eyes and ears open for.
And whatever investment option you choose, be patient.
Savings are like plants, they need to be nurtured for long lasting rewards. The restlessness to book short term profits can stave off big returns on your investments.
I would love to hear from you as to how you manage your savings.