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10 ways to 'LTCG': Long-term Commitment to your Goals

Here is how to make a new beginning on managing your money better in the new financial year


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Wealth creation does not happen by accident. There is some element of luck involved, but we can usually apply a simple rule to wealth creation. The rule is one of cause and effect. Wealth is created because of doing certain things systematically, over and over again. It is about being disciplined in the way you spend and invest. It is about maintaining the right behaviour towards investing, even when fear or greed overwhelm you.

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Here is how to make a new beginning on managing your money better in the new financial year.

1. Pay yourself first: Most people invest what is left of their salary after meeting expenses. If we did the reverse and paid ourselves 30% of our salary first and spent the remaining, we will grow your wealth by more than three times compared to someone who invests only 10% of their income. Over a long term, the power of compounding helps us meet our goals faster. These goals could be long-term, such as education planning, asset building or even early retirement. Over the short term, putting away money systematically ensures you have enough to meet emergencies or take an extravagant vacation.

2. Set goals: This is important because you need to know what you are saving for. Not having a goal will make you live for the moment, leading to wrong investment choices. Immediate needs will precede long-term goals, compromising financial independence as you grow older. Each goal needs to have a specific plan, and each plan needs to be systematically followed. The amount you will need to invest to meet the same goal becomes larger each year you defer planning for it. The successful execution of a financial plan is as important as creating one.

3. Take a long-term view regarding your goals: Doing so will ensure your investment behaviour is aligned to these goals, and that you don't get swayed by short-term market movements. In long-term financial planning, patience is the biggest virtue. Stock markets can be volatile in the short term, but once you learn to ride the crests and troughs of the market, you will be glad for it, as equities outperform almost all other asset classes over the long term. Your money will not only grow, it will also beat inflation over time.

4. Spread your money across and within asset classes: This helps diversify your portfolio and minimize risk. Across asset classes, diversify between financial and non-financial assets. Within equity and debt, split your assets between liquid and illiquid equity and debt. Try not to lock in your assets over long periods of time. While equity will provide the growth engine to your portfolio, debt will bring in safety, income and capital preservation.

5. Insure yourself: There is no point in planning for the future unless you have covered the downside risks in life. Statistics indicate that one in four people become bankrupt when an emergency strikes.

Often, these emergencies are related to death or medical conditions. Ensuring an adequate life and medical insurance, which covers liabilities as well as provides an income for the family for their lifetimes, is the bedrock of financial planning. It is prudent to have a private life and medical insurance in place and not depend on your organization.

6. Set aside funds for a rainy day: Always maintain an equivalent of 6 months of expenses as an emergency fund. You can build this fund through a systematic investment plan (SIP) into a liquid fund. These funds offer a higher return compared to a savings account with virtually no risk to capital. You can also use it to build a corpus to pay for annual expenses such as insurance premium payments, school fees, vacations, and others.

7. Pay down your loans: None of us like to live in debt. If you have outstanding credit card balances, car loans, personal or home loans, make a significant dent on those loans this year. You could start with the loan on which you pay the highest interest rate and get no tax benefits, such as credit card loans. Next, close any personal loans or car loans. Close your home loan or education loan the last since you get annual tax benefits on these. Start by investing a part of your income in a short-term debt fund and redeem the amount at regular intervals to bring down the loan.

8. Look for double benefit in tax saving investments: Saving tax should not be the main reason for investing. Be it equity, debt, real estate or insurance, saving tax is secondary to the main purpose that the instrument serves . If you are underexposed to equity, then invest in equity-linked savings schemes (ELSS) of mutual funds and subsequently enjoy the tax benefit. Do not invest in life insurance policies unless your family is dependent on your income. Investing in instruments just to save taxes can compromise returns or protection.

9. Take expert advice: The path to wealth creation is complex and fraught with mistakes. Financial products are complicated and most of the risks associated with these products are buried in fine print. If you really want to plan your financial freedom or attain the level of wealth creation you desire, enlist the help of a financial planner. Ensure that your planner is a person with high integrity, has your welfare in mind, and is not a product pusher.

10. Write your Will: Your Will determines how your assets will be distributed after your lifetime. In its absence, your assets will be divided according to Indian succession laws. Writing a Will gives you the liberty to divide your assets as you desire. You need to ensure that it is legally binding, so your inheritors do not run into legal issues while accessing the assets.

When you enter the new financial year, let your investment decisions not be primarily driven by short-term market movements or changes in tax rules. Hopefully, LTCG will mean more than paying additional tax. I hope it translates to 'Long Term Commitment to Goals' instead.

In arrangement with HT Syndication | MINT

Disclaimer: The views and opinions expressed here are solely those of the author and do not necessarily reflect the views held by Value Research and its employees.

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