Sunday 30 May 2010

Need for Savings


Need for Savings

First, some background info for this particular post:

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Happened to be chatting with a friend, and was suggesting that he get hold of a PAN card in the name of his HUF with a view to having an additional "taxable entity" in his family, thereby ensuring that he gets one more "exemption limit" of a couple of lakhs of rupees.

His response was a shocker. He started asking me as to how having a PAN Card for his HUF can help him reduce his taxable Salary income????

I probed further, and he mentioned that his income from all other sources such as interest, dividends, rent, capital gains, etc. were close to zilch. And he was only interesting in knowing whether the TDS on his salary income can somehow be reduced.

I was perplexed, and delved even deeper. I was curious to know as to how and why he has almost zero-income from Interest, Dividends, Capital Gains, etc. And he told me that he ends up spending almost all his salary income on either expenses or EMIs for his home loan. Thank God for small mercies - At least he had a home loan and hence was not spending ALL his income on running expenses.

And this friend of mine is an Engineer/MBA from top notch schools with a couple of decades of experience! The only saving grace was that he was not maxed out on half a dozen credit cards and that he was not in a deep hole of a debt trap!

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Now to the main post. Why should a typical salaried person with a kid or two and one or more other dependents save any money? Here is the low down to my dear friend:
  • You are not going to
    • Live forever
    • Stay healthy forever
    • Work forever
  • Some day, you'll retire and in all probability, you'll live for a few years after that. Today's life expectancy for reasonably healthy upper middle class folks is well beyond 80, and I don't expect you to work for much beyond 65
  • Your accumulated savings should keep you and your dependents going for at least 20 years after retirement. And remember, there is a good chance that your dependent may end up outliving you by 5-10 years!!! Look around you.
  • There are blocks of "Big Expenses" waiting for you in the years to come
    • Higher education of kids
    • Marriage of kids
    • At least 2 foreign holidays for the family per decade
    • At least 6 instances of multi-day hospitalisation per decade
  • You will not enjoy the idea of being a "dependent" on anyone, especially if you're used to "being the boss" and the "hand that brings the bread" all your life. Certainly, you'll not relish being financially dependent. And God forbid, what if you outlive people on whom you may be forced to be dependent, financially or otherwise????
  • You have a better standard of living today than you did around 10 years ago, 5 years ago, perhaps even in comparison to a year back. And you'll be keen on improving your standard of living in the years to come. It costs money. Just tell your dad or grandma about the price of 1 KG of your favourite vegetable or a gram of Gold or a square feet of land or your last restaurant bill and look at the looks on their faces - That will be your response for every item of expense 10 years later, 15 years later.
  • Don't believe a word of the public claims of inflation in the business papers - While they talk about 5-10% per annum, you know better. Things that you MUST BUY like rice, dal, tooth paste, shaving cream, shampoos, shoes, shirts, petrol, movie tickets, sanitary napkins, undergarments, broomsticks, floor cleaners, etc. are all becoming costlier at rates northwards of 15-20% per annum. Things that are becoming cheaper due to technological advancements like TVs, Laptops, Mobile Phones, Cameras, etc. need to be replaced ever more frequently as they become outdated. Even yester-year "once in a life time purchases" like cars are being replaced as frequently as twice a decade. All of this cost money. And loads of money. And I've not even spoken a word about so-called luxuries like jewellery, costly parties, etc.
All the above points are just a small portion of the strong reasons that exist for you to start saving money every month - right away! In case you have not been doing so already.
If you are convinced about the need to save money regularly, you are prepared to start thinking about a few other questions:
  1. How much should I save?
  2. How should I save?
  3. What should I do with my savings?
  4. Should I never take loans? Or is it OK to take some loans?
  5. How should I invest my savings?
  6. What is the meaning of
    • Financial Planning
    • Asset allocation
    • Fiscal Prudence
    • Risk Pyramid
    • Risk-adjusted returns
    • Inflation-beating returns
For answers to all such questions, do keep re-visiting this blog!

Regards,

N

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