Got a question about your money? What you should or should not do with it?

Our expert Devang Shah has the answers. Got a question? Please write to us.

I'm a software engineer earning Rs 50,000 per month. I got married a year ago and my wife earns Rs 14,000 per month. Till date, I have been unable to save due to a lot of debt on my plate and also due to lack of knowledge.

Now I have planned to get my act in order. This is what I plan to do.

1. Buy an insurance policy like ICICI [Get Quote] Prudential (Rs 25,000 p.a.)
2. Invest in a pension scheme (Rs 10,000 p.a.)
3. Invest in a PPF account (Rs 25,000 p.a.)
4. National Savings Certificate (Rs 6,000 p.a.)
5. PF account (Rs 34,692)

This way, my total investment amounts to Rs 1,00,000 per annum. If I exceed this amount, I will not get any tax benefit.

I'm planning the same for my wife too. She is planning to shift her job and will probably earn a higher salary.

The problem is that I do not have proper knowledge of products available in market. For instance, I would like to invest in a pure life insurance policy but don't know which one to opt for. Ditto for a pension scheme or mutual fund.

- Arun
 

Hi Arun,

Are you investing for tax benefits or are you saving for the future?

Here's a story.

A dear friend of yours gets an offer for the same job from two different companies.

Company Smart Ltd. is willing to pay him a tax free income of Rs 40,000 per month. Company Simple Ltd. is paying him a taxable of income of Rs 80,000 a month.

As per the then existent tax laws, your friend will have to pay no taxes if he works for Smart Ltd. but will have to pay taxes of Rs 2,40,000 annually if he works for Simple Ltd.

What would be your advice to him?

It isn't a healthy mindset to make tax saving a goal or an end in itself. It worries me to note your comment 'if I save more I will not get any tax benefits'. Would you rather be little less rich than pay more taxes?

I have a suggestion that is likely to appeal to you. Look at your returns post tax. Don't worry about how much you are paying in taxes, care for what you will earn post tax payment. Keep this as your golden rule when investing.

Is there a reason for the kind of break-up you have chosen for your savings (other than tax saving)? It appears that you are putting the horse before the cart.

What insurance cover you wish to have must be more important a question than the premium you want to pay. My apologies if I am offending you but let me cite an example. Let's say a 30-year-old wants a Rs 10 lakh (Rs 1 million) term cover for 10 years. It would cost him something like Rs 4,000 to Rs 5,000 per annum.

You need to work out your insurance cover based on the number of dependants and the economic cost of the unforeseen event (in this case your death) from which you are trying to protect your beneficiary (in this case your wife/ family).

I would therefore recommend you first articulate objectives for which you want to save up. That means you need to put down on paper the amount of money you need and when and the financial objectives for which you are saving.

This is really like Alice in Wonderland. When Alice gets lost and sees a cat, she asks the cat which road she should take. The cat asks her where she wants to go. Alice was there for an adventure so she replied it didn't matter where she went. Our learning is in the reply the cat gave her, '�Then it doesn't matter which path you take�'

Where you put your money must be determined by where you want to go. What is the certainty you need to reach there and what cushions you have to overcome uncertain events, will determine the risk you take. In a couple of my earlier columns, I have outlined in detail how to determine the right asset allocation (distributing your money between various assets like equity, debt, gold, real estate) and then choose the vehicle to implement the same.

I just hope I have given you enough fodder to take the next step and not made it sound like a difficult task. For the truth is that planning isn't difficult, it is simply essential.

Got a question for Devang Shah? Please write to us.

Illustration: Dominic Xavier

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