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Information provided on this newsletter has been independently obtained from sources believed to be reliable. However, such information may include inaccuracies, errors or omissions. lifelineexpert.com and its affiliates, information providers or content providers, shall have no liability to you or third parties for the accuracy, completeness, timeliness or correct sequencing of information available on this newsletter, or for any decision made or action taken by you in reliance upon such information, or for the delay or interruption of such information. lifelineexpert.com, its affiliates, information providers and content providers shall have no liability for investment decisions or other actions taken or made by you based on the information provided on this newsletter.
I met my ex-colleague Amit over coffee.

As we sipped coffee, I could sense that he wanted to share something with me but was holding himself back. When he called me up, he mentioned that there is something he wanted to discuss.

I started, “So, all OK with you Amit?”

He opened up. “Not really”, he replied.

“What happened?”, I was curious.

“My finances are not in the best shape. In fact, it could not be worse than this. I have too many problems”, Amit confessed reluctantly.

As far as I knew about Amit, he did not have a problem with income. In fact, he worked with a large company as a Sales Head and earned quite well. So, I was further curious to know what actually happened.

As the discussion went on we pinned down several problems, 9 to be precise. Many of these he didn’t even realize he had.

Now, these financial problems can happen to anyone. Let’s see what they are and how best to avoid or come out of them. 

Amit’s 9 Financial Problems – or yours?

Overspending

Amit got married about a year ago. In preparation, he went on a shopping spree. He bought things left, right and center, including those he did not really need. A new car, new furniture for the house and expensive crockery. He also bought a holiday time-share package, which required him to make a heavy upfront payment for 25 years of holidays. He clearly went beyond his means.

Not knowing where does the money go?

When I asked Amit what is the breakup of his monthly expenses he found it really hard to recall. Broadly, there was rent, EMIs, groceries, movies and eating out. But that did not total up. Somethings were still missing? I asked him to check his credit card statement.

Large tax deduction

When Amit saw his salary slips from January to March, a large amount being deducted towards income tax. He did not realize that he had not planned for any tax savings beyond a couple of traditional insurance and the mandatory Employee Provident Fund. It resulted in a big, unnecessary outgo, something he was just not ready for at this stage.

Underinsured

Since he mentioned insurance, I happened to ask him about his insurance cover. The only thing he remembered clearly was the amount of premium he paid and that was about Rs. 50,000 per year. These were policies that his father had got him to subscribe. It was safe to believe that they were traditional policies. Hence, insurance cover would not exceed a few lakhs of rupees – too low for his life stage and income levels.

Burdened by loans and EMIs

Amit had taken up a housing loan last year to buy an under construction property.  He recently also bought the car and a holiday time-share, both on EMI. He had made several other expenses on his credit card, which too he converted into EMIs. The EMIs totaled up to more than 70% of his take-home income. Big burden!

A low credit score

I asked Amit if he was aware of his credit score. He drew a total blank. We immediately logged onto CIBIL’s website and requested the free credit report and score. Amit’s score turned out to be 550, a low score by any standard. Ideally, a good credit score is over 750. A lot of work is required here too.

Not saving enough

This one is a foregone conclusion. The overspending and payment of all those EMIs leave very little surplus with Amit and thus he can invest very little in any future needs he has.

A 4% portfolio

If there was a surplus, it remained in the savings bank account earning a measly 4% rate of interest. In times when inflation, or the rate at which prices rise, is hovering in the range of 8 to 10%, Amit is losing the value of his money. He did a quick calculation in his mind, “I get 4% on my savings bank account while inflation is taking away 10%. Net I am losing 6%. Gosh!”

Absence of Emergency funds 

Amit is also not prepared to handle any financial emergency. For any reason, if he ceases to have a job, he cannot survive even a single month. Unless he decides to sell off the under-construction house OR borrow more money.

Amit felt exhausted after the discussion. He was wondering how did he land up in this mess of a situation.

Why is he facing so many problems with his finances that too all at once?

The root of all financial problems

As Amit raised his concerns, I said, “There is just one answer to it, which is the root of all these problems. It is ‘the lack of a financial plan.’

Let’s me give you the cliche first.

“Failing to plan is planning to fail”.

You need to put in place a plan that will enable you to put down your goals and what do you want your money to do for your – not just for now but in the foreseeable future too. It will bring in a much needed focus and help you set out an action plan to push your money in the right direction.”

“That’s all fine my friend, but how do I get out of the current situation. What should I do immediately to get out of these financial problems?”, Amit’s had a valid concern.

“Amit, yes you need to take some immediate steps. Here are they.”, I listed for him.

The Immediate Steps
1. Talk to your spouse, take her into confidence about the current situation. You both need to be on board to clear this mess.
2. Build a cash budget. Include all your income and expenses. Every single item that you can think of.
3. Next, identify and cut down all and any expenditure that is not a NECESSITY.  Stop using your Credit Card for a few months.
4. Save more and more and more.
5. Activate a sweep in Fixed Deposit with your Bank account. It will earn you slightly more interest than just 4%. Later based on the plan, you can direct your savings appropriately for an emergency fund.
6. Return or Transfer your holiday time-share. It will bring in some money.
7. If the car is not too important, you can let that go too. It will reduce not just your EMI burden but your maintenance burden as well.
8.Work towards repaying your loans as much as you can, as fast as you can.
9. Do not enquire about new loans from banks or financial institutions. For every such enquiry, they query the CIBIL database to check your credit history and that can have a negative impact on your credit score.

“While you do work on these immediate steps, start working on your long term financial plan. Preferably work with a financial advisor or planner who can guide you professionally. You will need help setting your goals and guidance on tax savings, insurance, and other investment channels.” 

Amit was glad to see the action steps and his expression suggested that he was determined to overcome his financial problems.

Source:vipinkhandelwal.com

Let’s find out whether you need to buy a separate accident insurance and critical care insurance if you already have a health insurance plan?

Here are the differences between health insurance, accident insurance, and critical care insurance:

1.Health insurance v/s accident insurance

A health insurance has a broader scope in terms of coverage as compared to an accident insurance. A health insurance is a general insurance that takes care of your medical expenses (hospitalization charges, doctor’s consultation fee, diagnostic tests, etc.) when you fall ill. While an accident insurance takes care of the complete medical and hospitalization expenses arising out of an accident.

A health insurance will also cover the medical expenses in the event of an accident but a health insurance will not pay the following:

1)Weekly or limited compensation if the accident leads to temporary disability.
2)The entire sum assured if the accident leads to permanent disability.
3)Lump sum compensation to the nominee/ family if the accident leads to the death of the insured.

Although an accident insurance will provide the above benefits, it does not cover the pre-hospitalization and post-hospitalization treatment charges that a health insurance would.

The additional benefits with a health insurance are that one can opt for free health checkups, maternity medical care coverage, etc. while broken bones cover, ambulance allowance are the extra benefits that come along with an accident insurance.  

2. Health insurance v/s critical care insurance

A health insurance covers a different range of medical expenses occurring due to accidents, hospitalization, pre-existing diseases, sickness, and maternity. A critical care insurance specifically covers illnesses that may or may not occur. These life-threatening diseases like cancer, kidney failure, heart attack, paralysis, multiple sclerosis, organ transplant, etc. may need expensive treatments.

A health insurance provides you coverage as and when your medical expenditures arise. While a critical care insurance pays you the entire tax-free amount assured in a lump sum as soon as you are diagnosed with any one of the critical illnesses covered by the plan.

The money provided by health insurance is used for pre-determined purposes like paying for checkups, tests, pharmacy bills, etc. but the cover provided by a critical care insurance can be used by the insured person as per his will. This can be for treatment, facilitating the lifestyle changes needed to cope with the illness, replenishing the income lost, etc.

A health insurance can be used multiple times till it expires. It can also be renewed while claims against a critical care insurance can be made only once.

Now that you realize that each type of insurance has its own unique purpose in providing financial security for your future, it is only wise to buy them individually for complete protection.

How to buy? Get a good agent who understands insurance, top up, super top up, …and whether the agent will run around for attending to your claims.

Source:subramoney.com

1.      Mutual funds are risky, I will lose my money
No doubt, mutual funds, especially equity funds, move with the market forces and can, therefore, be risky. But long-term equity fund data shows that the risks are evened out over the long term. In fact, over a 15-year period, chances of negative returns in the stock market are nil. That means you cannot lose money if you stay invested that long. And to top it, equity funds have delivered inflation-beating returns over the long term.

2.      Mutual funds will give too much exposure to equity markets
 Mutual funds, for most people, mean investing in equity markets. This is not true. Mutual funds offer exposure to a wide range of low-risk to medium- risk debt instruments too. They offer exposure to gold without holding them physically and even allow you to explore evolved international markets such as the U.S. Mutual funds also offer a combination of equity and debt, the equity part is either very low or reasonably high, depending on what risk you can assume. A well-diversified basket provides sufficient exposure to various asset classes using a single product called mutual fund.

  3.      Mutual funds cannot give steady returns like deposits
Yes, mutual funds cannot guarantee you returns or provide a fixed outflow of interest income like deposits. But let’s get this one straight. What is the objective behind saving for retirement?

It is to build a decent corpus until you retire. A healthy corpus can then be invested in reasonably safe investment avenues, to generate some monthly or annual income for you, to substitute the loss of salary/business income, once you retire.

This being the objective, going for regular interest payout options do not help the purpose of building wealth because chances are that you will not diligently reinvest.

Even if the option is cumulative, you run a reinvestment risk because you may end up with lower rates (when you renew your investments after they mature) than what you received earlier. Your EPF, with varying interest rate every year, assumes this risk.

Equity funds, by way of being invested in markets all the time (and taking cash positions only if warranted), do not carry such reinvestment risk.

Rules for retirement investing using mutual fundsindi
The first rule to follow in mutual fund investing, when you invest for retirement, is to hold reasonable exposure to equities in the early years and gradually reduce them by moving them to debt funds and other traditional saving options such as tax-free bonds and deposits.

The shifting process, if you have been investing for at least 15-20 years, can start even 5 years ahead of your retirement.

Most people burn their fingers simply because they take high exposure to equities just a few years ahead of retiring and expect equities to generate high returns in a short time. A down market, in such instances, can even wipe the capital.

The second rule is to rebalance your mutual fund portfolio, preferably every year. This involves bringing your portfolio to the original asset allocation if the equity, debt, gold proportion in your portfolio moves out of kilter (note that this can be done in a click with FundsIndia’s Retirement Solutions).

The third rule is that your retirement portfolio can do without any theme or fancied sector funds to pep your portfolio. If you do wish to take such exposure, limit it to 10% and ensure you exit the theme at least a few years ahead of your retirement. The last thing a retirement portfolio needs is volatility from cyclical funds.

The fourth ruleis that your retirement kitty should be a basket – EPF, PPF, mutual funds (equity and debt; with gold being optional) and other traditional debt options such as deposits.

The fifth rule is that if you have some exposure to mutual funds post retirement, don’t depend on them to declare dividends if you need monthly income, use the systematic withdrawal plan (SWP) option to create your own annuity plan. SWPs are also very tax efficient, as they enjoy capital gains indexation benefit in the case of debt funds held over a year (equity funds are exempt from capital gains tax).

Source: fundsindia.com
The most important factor in investment is the time period. You should know when and what kind of research has to be done before investing. As the idiom goes - haste makes waste - it's is better to do your homework before the taxman comes knocking at your door so that you do not end up making hasty investment decisions. 

While it is important to have adequate knowledge about the various tax-saving provisions under the Income Tax Act, it is also critical to learn about the major tax saving instruments that let you benefit from these provisions. 

Section 80C: 
One of the most important sections for tax saving is the Section 80/C of the Indian Income Tax Act. The total limit under this section is Rs 1.50 lakh from the financial year 2014-15 / Assessment Year 2015-16 onwards. Before FY 2014-15 the limit was Rs 1 lakh. One should plan to utilize this section to the fullest by investing in some of the instruments shown alongside. Do consider the factors such as your financial needs and goals, your risk appetite, etc. before making your tax saving investment choices. 

Equity Linked Savings Scheme (ELSS): 
There are some mutual fund (MF) schemes specially created for offering you tax savings, and these are called Equity Linked Savings Scheme, or ELSS. The investments that you make in ELSS are eligible for deduction under Sec 80C. It also provides an opportunity for long term capital appreciation. An ELSS fund manager invests in a diversified portfolio, predominantly consisting of equity and equity related instruments that carry high-risk and have the potential to deliver high-returns.  Since it is an equity fund, the returns from this scheme are market determined. 

Top five features of ELSS Funds 

1. Tax-saving 
2. Three-year lock-in period 
3. Can be held even after the completion of three years 
4. Offers dividend as well as growth options 
5. Tax Saving instrument 

Tax Treatment 
The returns from an ELSS fund are tax free in your hands. The long term capital gains from an ELSS are tax free as well. This is because no tax is levied on equities that are held for more than a year. Since an ELSS falls under section 80C, you can claim up to Rs 1.50 lakh from your investment as a deduction from your gross total income. 

Why prefer ELSS over other tax saving schemes 
* Shorter lock-in period: An ELSS has a lock-in period of only three years as compared to other tax saving instruments such as Tax Saving Fixed Deposit which has a lock-in period of five years and an NCS which has a lock-in for six years. 
* Long-term capital gains: Since an ELSS fund invests in equities, and is dynamically managed by a professional fund manager; it has the potential to provide long-term capital gains compared to other passively managed asset classes. 
* SIP: Systematic Investment Plan (SIP) is an investment vehicle offered by mutual funds to investors, allowing them to invest using small periodically amounts instead of lump sums. One can plan effectively and invest in ELSS through the SIP (Systematic Investments Plans) route. 

Source: timesofindia.indiatimes.com
Please do not reply back to this mail. This is sent from an unattended mail box. Please mark all your queries / responses to webmaster@sanjaysinghal.co.in.
Information provided on this newsletter has been independently obtained from sources believed to be reliable. However, such information may include inaccuracies, errors or omissions. lifelineexpert.com and its affiliates, information providers or content providers, shall have no liability to you or third parties for the accuracy, completeness, timeliness or correct sequencing of information available on this newsletter, or for any decision made or action taken by you in reliance upon such information, or for the delay or interruption of such information. lifelineexpert.com, its affiliates, information providers and content providers shall have no liability for investment decisions or other actions taken or made by you based on the information provided on this newsletter.