he key to saving is to pay yourself a fixed amount every month. So says my tax accountant.
Why? Because you will then force yourself to save, was his snappy reply.
Think about it. The first thing you do when you get your salary is to pay off your bills. Cell phone bill, rent, electricity and so on (the list never ends!). If 'you' were one of the bills, would it not force you to save?
Yesterday, we suggested some tips to double your money.
Here are some investments you can start with. All of them will force you to save a regular amount periodically.
1. Bank recurring deposit
A normal fixed deposit means that you put in an amount and, after a specific period of time, you can withdraw it. Meanwhile, you do not touch the money or add to it.
A recurring deposit works on a similar principle. The difference is, instead of putting in a bulk amount, you put in a specified amount (which you decide when you open your recurring account) every month.
This could be a small amount that will not pinch your pocket or hinder your lifestyle.
At the end of the tenure, you get a nice amount.
Starting amount: Rs 1,000.
Tenure of deposit: 3 years (36 months).
Every month, you put in Rs 1,000.
Rate of interest: 5% per annum compounded annually.
After three years, you will get Rs 40,005 on maturity.
A neat sum once you realise that all you did was sacrifice Rs 1,000 every month.
All you have to do is give your bank standing instructions that, on a particular date every month (the date after your salary is credited to your account), a fixed amount from your savings account must get automatically credited to your recurring deposit account.
2. Post office recurring deposit
This works the same way as a bank recurring deposit.
The difference is, you have to make a trip to the post office to deposit your money.
Also, the minimum tenure for a post office deposit is five years. You can choose a shorter tenure for a bank recurring deposit.
A bank deposit is more convenient but a post office recurring deposit offers a higher interest rate of 7.5% per annum. Each bank does offer a different rate, but chances are you will not get as much as 7.5%.
3. Public Provident Fund
This one does not need you to save every month (though you can) but will expect you to save every year.
You can invest up to a maximum of Rs 70,000 per annum in the PPF. The minimum you must put in every year is Rs 500.
Besides having such a huge leeway in terms of the amount of money to invest, you can invest the money in up to 12 instalments. You need not put it all in one go.
So if you want to make a monthly deposit, you are free to do so.
Each instalment can be whatever amount you want it to be in multiples of Rs 100 (though not less than Rs 500). They need not all be identical amounts.
If you do not have a PPF account but would like to open one, read How to open a PPF account.
The only problem is that a PPF account has to be maintained for 15 years.
The good news is that the rate of interest -- at 8% per annum -- is higher than other fixed income options and you also get the tax benefit under Section 80C.
All investments made under this Section are allowed for an income deduction. Let's say your taxable income is Rs 100,000 and you invest Rs 40,000 in the PPF. Your taxable income drops to Rs 60,000 (Rs 100,000 - Rs 40,000).
4. Go the mutual fund route
A Systematic Investment Plan is ideal for those who want to be more adventurous with their savings.
Mutual funds offer the SIP option which works on the same principle as regular investing. It is just like a recurring deposit with the post office or bank, where you put in a small amount every month.
The difference here is, the amount is invested in a mutual fund.
The minimum amount to be invested can be as small as Rs 500 and the frequency of investment is usually monthly or quarterly. It means you commit yourself to investing a fixed amount every month. Let's say it is Rs 1,000.
An SIP allows you to take part in the stock market without trying to second-guess its movements.
When the NAV is high, you will get fewer units. When it drops, you will get more units.
|
Date |
NAV |
Approx number of |
|
Jan 1 |
10 |
100 |
|
Feb 1 |
10.5 |
95.23 |
|
Mar 1 |
11 |
90.90 |
|
Apr 1 |
9.5 |
105.26 |
|
May 1 |
9 |
111.11 |
|
Jun 1 |
11.5 |
86.95 |
Within six months, you would have 5,894 units by investing just Rs 1,000 every month.
To find out more about SIPs, read How to invest in a mutual fund.
Unlike the others mentioned above, returns in a mutual fund are not guaranteed. Hence, it is the riskiest of the lot.
But if you do invest in a well managed equity fund that is generating good returns, you will earn much more than any of the above investments. Then again, you could not.
Illustration: Dominic Xavier
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