Right investments make money speak

When I was young I used to think that money was the most important thing in life. Now that I am old, I know it is. — Oscar Wilde

MUMBAI: Case 1: Shashi Nair is a journalist. In recent times, like others of his ilk, he has raked in the moolah. But Nair has never been a good saver. Recently he took a loan from a bank to invest in schemes that would allow him to make deductions from his taxable income.

Case 2: Sonali Sinha has bought a flat recently. She has been paying equated monthly instalments towards the repayment of the loan but has no idea about the tax deductions she can claim for interest payment on the home loan. “I stay away from anything remotely mathematical,” she says.

Case 3: Ramesh Varma works with an FMCG major. The money he earns lies in his savings bank account throughout the year. However, every year in March, his father puts most of his savings into life insurance — an investment he feels will hold his son in good stead.

So what’s the common link in these cases? All three are middle-class Indians who put in a lot of hard work to earn the money, but do not have an idea of how to go about saving and investing that money.

There are a few basic rules that individuals should remember when it comes to the money they earn.

Letting your hard-earned money lie in a savings bank account is the worst thing that you can do. It pays an interest of just 3.5%. That’s not even good enough to beat the rate of inflation. If you are extremely lazy when it comes to investing and would rather spend your time on what you think are better things in life, then you should be ready to see that over the years, due to inflation the real value of your savings will go down.

So, knowledge about other investment avenues helps. This should be backed by a proper financial plan and the rigidity to ensure that you follow the same. This is where regular investing helps.

Instead of letting money lie idle in a savings account, individuals should keep investing it in any investment theme they are comfortable with. Through regular investing, an investor can keep investing even if he does not have a large amount of money to invest. Also, with regular investment, money that has been earmarked for investment does not go towards impulsive spending. Something that Nair should well remember.

One should also have some idea about where one’s money is going. Varma realised to his shock that his father had been investing money in an insurance scheme, which will mature only when he turns 75. Also, having some idea about the way your taxes are being calculated helps. Well, it’s your hard-earned money after all, and you should know where it’s going.

After the reform to income-tax structure in the last budget, income tax calculations are not as complicated as they used to be and can be easily understood. Knowing your taxes may also help in reducing the tax outflow. Something that Sinha should realise.

A lot of individuals prefer to approach investment experts. However, the thing to remember here is that experts may not always act in the best interest of the investor.

In their recent bestseller, Freakonomics, economist Steven Levitt and journalist Stephen Dubner point out “But experts are human, and humans respond to incentives. How any given expert treats you, therefore, will depend on how that expert’s incentives are set up.”

So having some idea of the various investment avenues always helps. It stops the investment experts from taking you for a ride. (Names have been changed to protect the identity of individuals)