A note on personal finance

Disclaimer:Previously published in the annual magazine “Artharth” by Finomina, The Finance Club of IIM Udaipur

A paycheck to paycheck lifestyle is where we run out of money at the end of the month and wait for a salary to meet financial obligations. Life tends to be riskier this way. We need to save money for several reasons, like for emergencies, retirement, to become financially independent, to fund children’s expenses and the list would go on. But do we save enough? It is said that a minimum of 50% of what we earn should go into savings. The savings should be planned respectively to meet each financial goal. Apart from the savings, a contingency fund of a minimum 3-month salary should be made available for emergencies. Let’s take a look at various vehicles to park our savings. Opening a savings account is a simple way to save and manage money easily and easy to liquidate. Best suited to park your emergency funds. Fixed deposits (FD) and recurring deposits (RD) offer higher interest rates than savings accounts but come with a maturity date. These are considered as a safe haven for investments due to its minimum risk profile. Recurring deposits also helps to bring about discipline in saving money every month. Banks offering higher interest rates are listed for reference.

Name	Savings Account Interest Rate (P.A. up to)	FD Interest Rate (P.A. up to)	RD Interest Rate (P.A. up to)
Axis Bank ASAP	7.10%	7%	NA
Digibank by DBS	7%	6.75%	6.75%
Kotak 811	6%	6.75%	6.75%
Equitas Small Finance Bank	7.5%	8%	7.80%
Jana Small Finance Bank	8%	8.9%	8.50%
Ujjivan Small Finance Bank	7%	8.3%	8.1%
IDFC First Bank	7%	7.5%	7.25%
Yes Bank	6%	7.85%	7.75%
IndusInd Bank	6%	7.15%	7.25%
Mahindra Finance	–	8.70%	–

A percentage of savings could be parked in FD and RD as it offers onlyminimal interest rates. Mutual Funds are an easy investment vehicle for those with risk appetite. Open-ended mutual funds offer no fixed maturity date and an investor can enter & exit at any time whereas, close-ended mutual funds have a fixed maturity date and the investor can enter during the New Fund Offer period only.

Mutual funds based on asset class
Equity	Investment in stocks High risk and high returns
Deb	Investment in fixed income securities like bonds, T-bills Low risk and better returns than FD
Hybrid	Mix of equity and debt Medium risk
Mutual funds based on investment goals
Growth Fund	Investment with long term horizon(>7 years) High return (12% to 30%)
Income Fund	Regular income, better than FD returns Low risk and best suited for investing with 2 to 3 years horizon
Liquid Funds	Tenure of up to 91 days Better way to park surplus short term fund
Tax Savings Funds	Also known as ELSS and have a lock-in period of 3 years Offers tax benefits through 80C

The investment amount can be decided based on risk appetite and investment goals. For instance, looking at a horizon of 6 years and investing monthly, one could start off with 100% equity for the 1st year, balanced for 2nd and 3rd year and debt funds for the rest three years. SIPs are better as they bring about a sense of discipline to save money every month. With the emergence of Fintech companies, it has never been easy to start investing in mutual funds with a tap on the phone. It is also common that people unknowingly, chasing high returns in short term enter into trading and investing in stock markets directly without any knowledge and face huge losses. This loss tends to make them averse to investing in mutual funds or vehicles related to stock markets in the future which tends to be a wrong move. There is never a dearth for Ponzi schemes! These are the schemes that lure people claiming impossibly high returns. The scheme leads victims to believe that profits are coming from product sales or other means, and they remain unaware that other investors are the source of funds. But when other investors stop joining/funding the scheme, the whole scheme collapses, and everyone loses their money except very few early investors. In India, it can be seen as Multi-Level Marketing in various versions like product selling, commodity/equity trading, service offerings, etc. Individuals must be wary of such scams and stay out of it. Also, the misconception of insurance products as investment vehicles needs to be avoided.

Start Investing now

In this modern lifestyle, due to improved advertising strategies through social media and apps, we are tempted to buy new things every day. This sense is further strengthened by the easy availability of credit, such as credit cards, credit is given by e-commerce platforms like Flipkart, apps like moneytap & earlysalary. Hence, it is very imperative to avoid impulse purchases and to stay away from payday loans and credit cards. Also, investing should be postponed if there are high-cost loans to repay as the interest earned on investments might be lower than the interest paid on high-cost loans.

“Do not save what is left after spending; instead spend what is left after saving”

Warren Buffett

Budgeting has become a crucial aspect of our everyday life. When we set up a budget, it increases our commitment to stay within it. Single individuals could set up a monthly budget based on their financial goals and plans. Due to the presence of digital platforms, it is now easy to track spending and plan finances with the help of mobile apps like Moneyview.

Spend Consciously:

Another aspect to be considered is beating lifestyle inflation. Lifestyle inflation is what happens when spending increases with an increase in income. It could be majorly linked to the demonstration effect where we tend to match our living standards to that of our peers. Lifestyle inflation could be reduced by defining clear financial goals, being conscious of our spending, avoiding debt, making a budget and investing. Leveraging AI and technology, many fintech companies have come up with new solutions for managing personal finances. Robo-advisors are a class of financial advisers that provide financial advice or Investment management online with minimal human intervention. They tend to provide digital financial advice based on mathematical rules or algorithms. These new-age technologies could help us to stay better invested and offer customized solutions. The importance of money education should be empathized, and children should be taught from a young age to be better money managers.

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