The need for Financial Planning in Households - Free Essay Example

Financial planning is a must for every household. Financial planning goes beyond savings. It is an investment with a purpose. It is a plan to save and spend future income. It should be carefully budgeted. Financial Planning is the process of meeting your life goals through proper management of your finances. Life goals can include buying a house, saving for your childs higher education or planning for retirement. Today you find people living beyond their means, having credit card debt, making risky investments and doing things that are irresponsible and against the basic principles of financial planning. Further the proliferation of new and often complex financial products demands more financial expertise. Also turbulent conditions and changing tax laws compound the need for adequate financial planning. Thus it has become inevitable for all to get into financial planning and understanding financial products. Financial planning envisages both short term and long term savings. A portion of the savings is invested in certain assets. There are various investment options in the form of assets: bank d eposits, government saving schemes, shares, mutual funds, insurance, commodities, bonds, debentures, company fixed deposits etc. Financial planning isnt something that happens by itself. It requires focus and discipline. It is a six step process that helps you take a big picture look at where you are and where you want to be financially. Your Parents were right: money doesnt grow on trees. It actually grows on other money which is where we get the old saying, It takes money to make money. Money does have an amazing ability to make more money. The good news is it doesnt take much money to make this happen. SAVINGS = INVESTING Saving is what people usually do to meet short term goals. Your money is very safe in a savings account, and it is usually earning a small amount of interest. Its also easy for you to get to your money when you need. Investing means youre setting your money aside for longer term goals. Theres no guarantee that the money you invest will grow. In fact, it is normal for investments to rise and fall in value over time. But in the long run, investments can earn a lot more than you can usually make in a savings account. Why are savings and investing so important to your financial goal? For one, saving or investing money for your financial goals makes you less tempted to spend it. But the best reason for investing is that your money is actually making money for you. Any interest or investment gains get you that much closer to your financial goals. And you didnt have to do anything for it! Start saving early and youll be prepared when you need it, whether youre saving for a home, a childs education, or your retirement. If you start saving in your 20s, youll be off to a great start. If you dont, youll play catch-up for the rest of your life. Youngsters have an advantage that older people dont have: time. When they understand this concept and use time in their favour, young people have a much better chance of pursuing their dreams and reaching their financial goals. The Price of Procrastination You know that the more time you have to invest, the more money you are likely to end up having. But the flip side of that is true too. By waiting to invest, youre paying an opportunity cost. Its easy to say that you dont have enough money to start saving and investing now. Id rather wait until I have more money. But that decision probably costs you more than you think because the power of compounding works both ways. It costs you because waiting eans giving up earning compound interest from even just a small amount of money. Ask yourself the following question:- Could you spend 10 percent less than you do now, still have fun and put that money to work for your future? If you could save 10 percent of your income for future goals, what would those goals be? It takes more than luck to get what you want out of life. People need to know that by paying yourself first making saving a priority they can do more than just dream about what they want in the future. Whether ones income is small or large, setting aside some of it for investments requires selfdiscipline. By maintaining discipline to postpone buying certain things theyd like to have now they can enjoy the longer term benefits of having that money work for them through savings and investments. BUDGETING The first step in your financial planning is budgeting. Budgeting is a process for tracking, planning and controlling the inflow and outflow of income. It entails identifying all the sources of income and taking into account all current and future expenses, with an aim to meet an individuals financial goals. The primary aim of a budget planner is to ensure savings after the allocation for spending. Benefits of budgeting ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ It puts checks or balances in place in order to prevent overspending at various levels ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Takes into account the unexpected need for funds ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Helps discipline yourself ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Helps one maintain his/her standard of living post retirement Steps for budget planning:- Step 1:- Calculate your income: This should include income from all sources, including your paycheck and interest from any investment Step 2:- Determine your bill for essentials: List out your essential expenses, which may include rent, grocery, clothing, telephone and electricity bills and fuel and car maintenance. Calculate the amount spent on each. Step 3:- Note down your total debts, including interest payments on the same. Step 4:- Determine your bill for non-essentials: Your list of non essentials may include vacations, gifts and trips to restaurants. Calculate the amount spent on each. Step 5:- Calculate your savings: This is done by subtracting the figure obtained by adding steps 2, 3 and 4 from the figure obtained in step 1. Realize that unexpected things come up in life. You may have to break your budget plan, or reconstruct it, occasionally. However try to avoid debt to cover the shortage and stick to your budget as much as possible. Inflation Effects On Investments When you are planning your investment, it is critical that you take into account the effects of inflations on your investments. At its most basic level, inflation is simply a rise in prices. Over time, as the cost of goods and services increase, the value of a rupee is going to go down because you wont be able to purchase as much with those rupees as you could have in the last month or last year. How does inflation affect my investment decision? A Vada pav which used to cost Rs.2 five years back now the same costs Rs.7. The cost increase is not as a result of increase in quantity or better quality. The increase is a result of increase in prices of ingredients which have increased as a result of inflation. Change in the prices of some assets:- Assets Price then (2001- 02) Price now (2009-10) Sugar (1 kg) 46 85 Cooking Oil (5 liters) 390 500 Gold (10 grams) 17,138 37,138 Silver (1 kg) 7,868 28,345 Rice (1 kg) 30 75 Petrol (1 liter) 61.46 76.83 Diesel (1 liter) 43.88 52.74 Inflation is greatly feared by investors because it grinds away the value of your investment. Example:- If you invest Rs.1,000 in a one year fixed deposit that will return 5% over that year, you will be giving up Rs.1,000 right now for Rs.1,050 in 1 year. If over the course of that year there is an inflation rate of 6%, your expenses which were Rs.1,000 in the previous year will increase to Rs.1,060 at the end of the year. Thus even after investing your money for 1 year you are worse off compared to the previous year because the returns delivered by your investments has been below the inflation rate. What are the steps that an investor can take to avoid the adverse effects of inflation? Try to determine your real rate of return which is the return you can expect after factoring in the effects of inflation. In addition to being aware of the current rate of inflation, it is rucial to be aware of what inflation rate the experts are anticipating. Both the value of current investments and the attractiveness of future investments will change depending on the outlook for inflation. Also remember fixed income investments are particularly vulnerable to the effects of inflation. If you are locked into a particular interest rate, and inflation increases your earnings will not keep up and you will earn a negative return. Risk and Return Risk and investing go hand in hand. Risk can be defined as the chance one takes that all or part of the money put into an investment can be lost. The good news is that investing risk comes with the potential for investing reward which is what makes the whole process worthwhile. The basic thing to remember about risk is that it increases as the potential return increases. Essentially the bigger the risk is, the bigger the potential payoff. (Dont forget the two words potential payoff. There are no guarantees) Even seemingly no-risk products such as savings accounts and government bonds carry the risk of earning less than the inflation rate. If the return is less than the rate of inflation, the investment has actually lost ground because your earning arent being maximised as they might have been with a different investment vehicle. While you stay invested it is crucial you take necessary measures to manage your risk. Once you invest in any asset class you should mo nitor your investments and keep yourself updated about various market happenings to avoid any pitfalls. Always check the potential risks when quoted returns are unusually high. Power of Compounding As you pursue your financial planning, the most powerful tool for creating wealth safely and surely is the magical power of compounding. Albert Einstein had once remarked, The most powerful force in the universe is compound interest. Compounding is a simple concept that offers astounding returns: if you park your money in an investment with a given return, and then reinvest those earnings as you receive them, your investment grows exponentially over time. With simple interest, you earn interest only on the principal (that is, the amount you initially invested); with compounding, you earn interest on the principal and additionally earn interest on the interest. Consider what the power of compounding does to an investment of Rs.12,000 a year (that is, an affordable Rs.1,000 a month) in a scheme that offers a 9 per cent return, over 30 years. The total investment of Rs.3.6 lakhs (principal) grows to Rs.17.83 lakhs over that period. Compounding rewards disciplined investing and works best over long tenures. In the above example, the first 20 years yield is just Rs.6.69 lakhs. The last 10 years show the multiplier effect of the power of compounding. The longer you leave your money untouched, the faster and bigger it grows. For instance, stretching the above investment pattern to 40 years will give you Rs.44.20 lakhs. Compounding, thus, is a wonder tool that lets you make the most of small investments made over long periods of time to accumulate phenomenal wealth. It works best if you start investing early, and leave the money alone. Compounding is, in fact, the single most important reason for you to start investing right now. Every day you are invested is a day that your money is working for you, helping to ensure a financially secure and stable future. Time Value of Money As time passes you will realise that if 10 years back you could afford to purchase a full lunch for Rs.10, today you might afford to get a few pieces of vegetables only. This means that the value of a thousand rupee note would be higher today than after five years. Although the note is the same, you can do much more with the money if you have it now because over time you can earn more interest on your money. By receiving Rs.1,000 today you are poised to increase the future value of your money by investing and gaining interest over a five year period. At the most basic level the time value of money demonstrates that time literally is money the value of the money you have now is not the same as it will be in the future and vice versa. CHOOSING THE RIGHT INVESTMENT OPTIONS The choice of the best investment options will depend on personal circumstances as well as general market conditions. An investment for one objective may not suit the needs of the other. Right investment is a balance of three things: Liquidity, Safety and Return. Liquidity This will cover the ease with which the investment can be covered to cash to meet expenses. Some liquid investments are required to meet exingencies that arise in the normal course or otherwise. Safety This is about the risk factor of the investment. The worst case is losing all the invested money. The milder case is losing on the income or low income growth or investment growth. Inflation is also a risk, as the purchasing value of money reduces. Return Income generated by investments is another factor to consider. Safe investments offer steady but lower income and risky investments offer high returns or no returns at all! There are several short-term and long-term financial investment options available, some of which are given below: Thus, there is a staggering variety of investments to choose from. In the following chapters we will focus on these and explain about them. ASSET ALLOCATION STRATEGY Every Asset class has its own risk and returns. Equity Investments are considered to be risky investments as they might lead to erosion of entire capital invested, whereas government bonds are considered to be risk free as you can be confident that the government will not default on its interest payments. This is where asset allocation plays a crucial role. Asset allocation is a technique for investing your money into various asset classes that would suit your income and risk appetite. Asset allocation involves tradeoffs among three important variables: ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Your time frame ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Your risk tolerance ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Your personal circumstances Depending on your age, lifestyle and family commitments your financial goals will vary. While allocating your funds to various assets, it is important to see that you distribute your funds across various assets to benefit from diversification. Normally, in an age based asset allocation, the amount allocated to equities is based on the clients age. The premise of using this model is as the investor gets older, his portfolio should be more conservative. However, as this is just a thumb rule, an investor is the best judge of what suits him the most. SELF PORTRAIT To know exactly where you stand financially, having financial statements compiled is one of the best ways to gain this kind of insight. A key component of a financial statement is a detailed and complete accounting of assets and liabilities associated with the person. Identifying Goals The most important step in financial planning is identifying and understanding what you want to accomplish. Money is merely a tool to be used to satisfy your desires. By understanding what you truly want, it is much easier to plan for how much you need to accomplish your goals. Identifying Assets Once your goals are identified, it is time to assess what assets are available to meet them. Assets need to be categorized as to their liquidity and the stability of their long term value. The key to identifying and categorizing assets is understanding when and how they generate cash. Make a list of all your assets which include your house, investments in shares, mutual funds, fixed deposits, money lying in the savings bank account etc Identifying Liabilities Indentifying your liabilities is as important as identifying the assets available. Ideally, the assets should be more than the liabilities. Else, planning is required to invest in assets to meet the liabilities and have some assets left over for earning income and investment purposes. Likely Future Earnings When estimating your future earnings you need to make certain assumptions. Some of the safer assumptions can be as follows:- If you are a salaried employee it is safe to assume that your salary income will increase at a rate of 8% p.a till retirement. Rate of return on debt investments can be assumed as 7% p.a. and return on equity index as 12% p.a. Likely Future Expenses Here again you need to make assumption like:- Long term inflation rate of 5% p.a Household and personal living expenses (including entertainment, education, marriage etc) expenses increase at a rate of 8% p.a (3% more then the rate of inflation) Planning Matching cash inflows from assets to cash outflows from liabilities is the crux of financial planning. In financial planning, goals are considered liabilities due to the fact they generally require cash outflows. This is a multi step approach. Example:- Suppose your goal is to save enough money for your childrens higher education Step 1: Determine the no. of years till your child will require higher professional education Step 2: Determine the education cost today. This calculation usually involves taking the current price of a professional course and multiplying it against an estimated annual rate of inflation. Step 3: Suppose it costs Rs.1,00,000 today for a professional course. Rs.1,00,000 x 1.05^20= Rs.1,79,585 would be the cost 12 years from now and with an expected 5 percent annual inflation rate. Step 4: The next step is to figure out the present value of that future cash outflow. To do that you would take the future value of the money and divide it by your expected rate of return. The future value of the Rs.1,00,000 equals Rs.1,79,585 as calculated above. The present value of that future value with an estimated annual return of 8 percent for 12 years is 1,79,585 / 1.08^20, which equals Rs.71,315. So you need to put Rs.71,315 today into an asset that will earn you 8 percent annually on average to be able to pay for your childs education in 12 years that costs 100,000 in todays terms. Step 5: For every cash outflow you anticipate in the future, you need to calculate the present value of that outflow and find an asset that can be used to cover the future cost. This process need to be repeated for all your future goals. Calculate your future expenses and start saving for it today so you are in a position to meet all of them. SAVINGS INVESTMENT RELATED PRODUCTS Banks Bank deposits are safe investments as all bank deposits are insured upto a maximum of Rs.100,000 under the Deposit Insurance Credit Guarantee Scheme of India. Banks are subject to control and regulated by the Reserve Bank of India. They offer various types of deposits, depending on the needs of the customer. Bank deposits are preferred more for their liquidity and safety than for the returns thereon. It is possible to get loans up to 75 90% of the deposit amount from banks against fixed deposit receipts. TYPES OF DEPOSITS AND KEY FEATURES Savings Bank Account ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Often the first banking product people use ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Low interest. However, highly liquid ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Suitable for inculcating the habit of savings among the customers Bank Fixed Deposit (Bank FDs) ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Involves placing funds with the banks for a fixed term (not less than 30 days) for a certain stipulated amount of interest ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ The ideal investment time for bank FDs is 6 to 12 months as normally interest on bank less than 6 months bank FDs is likely to be low ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ The time frame assumes importance as early withdrawal carries a penalty Recurring Deposit Accounts ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Some fixed amount is deposited at monthly intervals for a pre-fixed term ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Earns higher interest than Savings Bank Accounts ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Helps in the saving of a fixed amount every month Special Bank Term Deposit Scheme ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ This is the only Tax Saving Scheme available with banks ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Relief under Section 80C of the Income Tax, Act available ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Term deposit of five years maturity in a scheduled bank is mandatory GOVERNMENT SCHEMES Tax Savings Schemes The Government has launched Income Tax Saving Schemes including: ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ National Savings Certificates (NSC) ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Public Provident Fund (PPF) ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Post Office Scheme (POS) Bonds A Bond is a loan given by the buyer to the issuer of the instrument, in return for interest. Bonds can be issued by companies, financial institutions, or even the Government. The buyer receives interest income from the seller and the par value of the bond is receivable by the buyer on the maturity date which is different types. Company Fixed Deposits Key Features ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Fixed deposit scheme offered by a company. Similar to a bank deposit ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Used by companies to borrow from small investors ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ The investment period must be selected carefully as most FDs are not encashable prior to their maturity ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Not as safe as a bank deposit. Company deposits are unsecured ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Offer higher returns than bank FDs, since they entail higher risks ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Rating can be guide to their safety Mutual Funds A mutual fund pools money from many investors and invests the money in stocks, bonds, short-term money-market instruments, other securities or assets, or some combination of these investments. The combined holdings the mutual fund owns are known as its portfolio. Each unit represents an investors proportionate ownership of the funds holdings and the income those holdings generate. Salient Features of Mutual Funds ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Professional Management Money is invested through fund managers ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Diversification Diversification is an investing strategy that can be neatly summed up as Dont put all your eggs in one basket. By owning shares in a mutual fund instead of owning individual stocks or bonds, the risk is spread. ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Economies of Scale Because a mutual fund buys and sells large amounts of securities at a time, its transaction costs are lower than what an individual would pay for securities transactions. ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Liquidity Just like individual shares, mutual fund units are convertible into money by way of sale in the market ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Simplicity Buying a mutual fund unit is simple. Any bank has its own line of mutual funds, and the minimum investment amount is small ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Investors should examine each of the above feat ures carefully before investing in mutual Funds. Types of Mutual Funds Each fund has a predetermined investment objective that tailors the funds assets, regions of investments and investment strategies. At the fundamental level, there are three varieties of mutual funds: ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Equity funds (stocks) ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Fixed-income funds (bonds) ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Money market funds All mutual funds are variations of these three asset classes. For example, while equity funds that invest in fast-growing companies are known as growth funds, equity funds that invest only in companies of the same sector or region are known as specialty funds. Mutual Funds can also be classified as open-ended or closed-end, depending on the maturity date of the fund. Open-ended Funds ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ An open-ended fund does not have a maturity date ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Investors can buy and sell units of an open-ended fund from / to the Asset Management Company (AMC), at the mutual fund offices or their Investor Service Centres (ISCs) or through the stock exchange. The prices at ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ which purchase and redemption transactions take place in a mutual fund are based on the net asset value (NAV) of the fund Closed-end Funds ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Closed-end funds run for a specific period ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ On the specified maturity date, all units are redeemed and the scheme comes to a close ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ The units shall be listed on a stock exchange to provide liquidity ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Investors buy and sell the units among themselves, at the price prevailing in the stock market Money Market Funds ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Invest in extremely short-term fixed income instruments ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ The returns may not be very high, but the principal is safe ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ These offer better returns than savings account but lower than fixed deposits without compromising liquidity Bond/Income Funds ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Purpose is to provide current income on a steady basis ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Invests primarily in government and corporate debt ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ While fund holdings may appreciate in value, the primary objective of these funds is to provide a steady cash flow to investors Balanced Funds ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Objective is to provide a balanced mixture of safety, income and capital appreciation ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Strategy is to invest in a combination of fixed income and equities Equity Funds ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Invest in shares and stocks ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Represent the largest category of mutual funds ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Investment objective is long-term capital growth with some income ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Many different types of equity funds because of the different types of investment objectives Foreign/International Funds ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ An international fund (or foreign fund) invests in the equity of the companies which are outside the home country Sector funds ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ These are targeted at specific sectors of the economy such as financial, technology, health, etc. Index Funds ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ This type of mutual fund replicates the performance of a broad market index such as the SENSEX or NIFTY ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ An index fund merely replicates the market return and benefits investors in the form of low fees Equity Shares A stock market is a public market for the trading of company shares at an agreed price; these are securities listed on a stock exchange. The shares are listed and traded on stock exchanges which facilitate the buying and selling of stocks in the secondary market. The prime stock exchanges in India are The Stock Exchange Mumbai, known as BSE and the National Stock Exchange known as NSE. The purpose of a stock exchange is to facilitate the trading of securities between buyers and sellers, thus providing a marketplace. Investing in equities is riskier than and definitely demands more time than other investments. There are two ways in which investment in equities can be made: ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Through the primary market (by applying for shares that are offered to the public) ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Through the secondary market (by buying shares that are listed on the stock exchanges) Having first understood the markets, it is important to know how to go about selecting a company, a stock and the right price. A little bit of research, some diversification and proper monitoring will ensure that the investor earns good returns. Depository System In order to invest in shares, it is necessary to understand the term Dematerialisation of Shares, as almost all shares now are in Demat form. Earlier, there used to be physical share certificates issued, which are now converted to Electronic form. For this, an understanding of the depository system becomes essential. A depository is an organisation which holds securities (like shares, debentures, bonds, government securities, mutual fund units etc.) of investors in electronic form at the request of the investors through a registered Depository Participant. It also provides services related to transactions in securities. It can be compared with a bank, which holds the funds for depositors. Benefits of availing depository services include: ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ A safe and convenient way to hold securities; ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Immediate transfer of securities; ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ No stamp duty on transfer of securities; ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Elimination of risks associated with physical certificates such as bad delivery, fake securities, delays, thefts etc. ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Reduction in paperwork involved in transfer of securities; ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Reduction in transaction cost; ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ No odd lot problem, even one share can be traded; ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Nomination facility; Change in address recorded ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ with DP gets registered with all companies in which investor holds securities electronically eliminating the need to correspond with each of them separately; ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Transmission of securities is done by DP eliminating c orrespondence with companies; ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Automatic credit into demat account of shares, arising out of bonus/split/consolidation/ merger etc. ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Holding investments in equity and debt instruments in a single account. Points to Remember ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Participants range from small individual stock investors to large fund traders, who can be based anywhere ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ One of the most important sources for companies to raise money ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Allows businesses to be publicly traded, or raise additional capital for expansion by selling shares of ownership of the company in a public market ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Stock market is often considered the primary indicator of a countrys economic strength and development ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Stock prices fluctuate, in marked contrast to the bank deposits or bonds ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ The reasons for investing in equity must also be reviewed periodically to ensure that they are still valid ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Sometimes the market seems to react irrationally to economic or financial news, even if that news is likely to have no real effect on the val ue of securities itself ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Over the short-term, stocks and other securities can be battered or buoyed by any number of fast market-changing events, making the stock market behaviour difficult to predict. Investment Philosophies ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Evaluate risk of every investment ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Have clarity on short term and long term needs of the family ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Decide the investment based on the needs ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Do not invest in any scheme that you do not understand ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Do not invest on trust. Have everything backed up by documents ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Take into account tax implication of every income ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Do not blindly follow market tips and rumours ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Anything that appears unnaturally high or low will have some catch disguised ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Do not follow schemes where you may protect the interest but lose the principal ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Invest with knowledge after understanding the product well PROTECTION RELATED PRODUCTS Insurance Policies Insurance, as the name suggests is an insurance against future loss. However, although life insurance is most common, there are other schemes that generate regular income and cover other types of losses. Life Insurance Life Insurance is a contract providing for payment of a sum of money to the person assured or, following him to the person entitled to receive the same, on the happening of a certain event. It is a good method to protect your family financially, in case of death, by providing funds for the loss of income. Term Life Insurance ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Gaining popularity in India ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Lump sum is paid to the designated beneficiary in case of the death of the insured ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Policies are usually for 5, 10, 15, 20 or 30 years ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Low premium compared to other insurance policies ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Does not carry any cash value Endowment Policies ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Provide for periodic payment of premiums and a lump sum amount either in the event of death of the insured or on the date of expiry of the policy, whichever occurs earlier Annuity / Pension Policies / Funds ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ No life insurance cover but only a guaranteed income either for life or a certain period ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Taken so as to get income after the retirement ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Premium can be paid as a single lump sum or through instalments paid over a certain number of years ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ The insured receives back a specific sum periodically from a specified date onwards (can be monthly, half yearly or annual) ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ In case of the death, it also offers residual benefit to the nominee. Units Linked Insurance Policy ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ A State Life is a life insurance policy which provides a combination of risk cover and investment. ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ The dynamics of the capital market have a direct bearing on the performance of the State Life Insurance Company. ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ The investment risk is generally borne by the investor ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Most insurers offer a wide range of funds to suit ones investment objectives, risk profile and time horizons. Different funds have different risk profiles. The potential for returns also varies from fund to fund ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ ULIPs offered by different insurers have varying charge structures. Broadly the different fees and charges include- Premium allocation charges, Mortality charges, fund management fees, policy/administration charges and fund switching charges Health Insurance Health Insurance policies insure you against several illnesses and guarantee you stay financially secure should you ever require treatment. They safeguard your peace of mind, eliminate all worries about treatment expenses, and allow you to focus your energy on more important things. There are several health insurance or medical insurance plans in India. These can be divided into the following categories based in the coverage offered: Comprehensive health insurance coverage: These plans provide you complete health coverage through a hospitalisation cover while at the same time also creating a health fund to cover any other healthcare expenses Hospitalisation plan: These health insurance plans cover your expenses in case you need to be hospitalised. Within this category, products may have different payout structures and limits for various heads of expenditure. The hospitalisation coverage may be reimbursement based plans or fixed benefit plans. These plans aim to cover th e more frequent medical expenses. Critical Illness Plans: These health insurance plans provide you coverage against critical illness such as heart attack, organ transplant, stroke, and kidney failure among others. These plans aim to cover infrequent and higher ticket size medical expenses. Specific Conditions Coverage: These plans are designed specifically to offer health insurance against certain complications due to diabetes or cancer. They may also include features such as disease management programs which are specific to the condition covered. BORROWING RELATED PRODUCTS With todays heightened cost of living, debts become a usual thing. A number of people apply for personal loans, car loans, mortgage loans, and a whole lot of others. There seems to be a loan for everything. Often, financial troubles begin as a result of too large debt. DIFFERENT TYPES OF LOANS AVAILABLE Personal Loans Personal loans are usually taken when you have to meet unexpected needs that are beyond a persons immediate financial means. People often get into financial trouble by taking out personal loans just for the extra money, or to purchase frivolous items, and then find that they cant make the monthly payments required. Key Features ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Be ready for high interest rates of 14-18% p.a, high fees and even higher monthly instalments ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ The application process can be time consuming, taking weeks to be approved and funds disbursed, quite impractical for those unexpected immediate needs ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Rates and terms of the personal loans can vary tremendously, careful comparison is wise, helping to ensure that the consumer does not pay more than necessary for those emergency funds ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Take your time and do the homework before taking a personal loan ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Not advisable except for emergency requirements Housing Loan A home loan is just another loan with your house as the collateral. If you are buying your first home then it is important to understand the ins and outs of home loans. There are many variations according to the economy and what the market is doing that determines things that are going to apply to your home loan. Key Features ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Banks finance 75-80% of the property value ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Banks have recently started to offer lower fixed teaser rates for a short period of time. Then after some time the interest rates jump up and become variable. Be careful to read the fine print. ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Most housing loans have a minimum lock in period of 3 years or more. ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Heavy penalty charges for pre payment ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Hidden fees include appraisal fees and other charges associated with the loan ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ If you want to sell the house the loan becomes payable immediately Reverse Mortgage The whole idea of a reverse mortgage is entirely opposite to the regular mortgage process where a person pays the bank for a mortgaged property. This concept is particularly popular in the western countries. Key Features A senior citizen who holds a ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ house property, but lacks a regular source of income can put his property on mortgage with a bank or housing finance company. The bank/ housing finance company pays the person a regular paymentÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ The good thing is that the person who reverse mortgages his property can stay in the house for his life and continue to receive the much needed regular payments. So effectively the property now pays for the owner. ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ The way this works is that the bank will have the right to sell off the property after the incumbent passes away or leaves the place, and to recover the loan. It passes on any extra amount to the legal heir Draft Guidelines of reverse mortgage in India prepared by RBI have the following salient Features: ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Any house owner over 60 years in eligible ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ The maximum loan is upto 60% of the value of residential property ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ The maximum period is 15 years ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ The borrower can opt for monthly, quarterly, annual or lump sum payments at any point, as per his discretion ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ The revaluation of the property has to be undertaken by the Bank or HFC once every 5 years. ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ The amount received through reverse mortgage is considered as loan and not income ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Reverse mortgage rates can be fixed or floating and hence will vary according to market conditions depending on the interest rate regime chosen by the borrower Loan against Securities The main purpose of taking loans against shares is to preserve investment, apart from taking care of personal needs. People also resort to such a loan to meet their contingencies and get liquidity without actually selling the shares. It is advisable to take loan against securities only when you are expecting a certain sum of money a few months down the line and you need some funds in the interim. Key Features ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ RBI allows banks to lend up to 75% of the value of demat shares and 50 per cent of the value of physical shares. However, banks can, and do, fix their own limits with respect to the extent of funding within that range ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Banks have an approved list of securities that they lend against and this list varies from one lender to the other. This list also gets revised from time to time ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Loans against mutual fund units are based on their NAV value ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ The amount of loan that you will get depends on the valuation of the security, applicable margin, your ability to service and repay the loan and other conditions ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Interest rates usually range between 14-18% ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Charges vary from bank to bank and usually include processing fees (1-1.5%) and documentation charges ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€š  ¢ Only fully paid shares are accepted ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Scrips in the name of corporate, minors, Firms, HUF, and NRIs are not eligible for finance under this scheme. Credit Card Debt Credit card debt is usually resorted to when all other option including personal loans are exhausted. Credit card debt is unsecured therefore it carries very high interest rates. A credit card gives you the power to spend money even when you dont have the funds. Lots of young people misuse it by spending on frivolous things Stay away from credit card debt: Lots of young people are having problems with credit debt. Paying only the minimum is costly and will ensure that you have debt for a long time. Try to consistently pay as much as you are able towards your debts you will be glad you did. Key Features Interest rates on credit ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ cards are probably the highest compared to other credit facilities. The interest ranges from 18-36% p.a ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Debt keeps accumulating via interest and penalties. If you are not paying off your outstanding balance before the interest free period expires then you will be paying a high interest rate. This can make it hard to reduce your credit card debt ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ As most credit card limits are low some borrowers tend to neglect the fact that the interest payment is relatively small on a month to month basis. This is a dangerous practice because the amount of interest you pay can quickly jump to exceed the value of your actual debt ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Be very careful of having multiple cards and be very careful of taking up the marketing promotions from credit card providers when they actively try and get you to increase your credit card limit Steps to Avoid Excess Debt Set debt limits ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Decide how much you can afford to be in debt. Then, make sure that your total debt is below this amount ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ You may also want to set a limit on how much money out of each paycheck you are willing to spend on debts. Having this sort of limit can be very useful in ensuring that you do not overextend your credit Shop carefully for debts ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ If you do need a loan, be sure to do your research well. Always understand how much you will pay for your loan in interest and look for the lowest interest rates and the most affordable debt you can find. This will ensure that you do not end up overspending on interest rates ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Once a year, check to make sure that you are still getting the best interest rates and best loan deals possible Dont give into temptation ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Once you show that you can handle some debt, many companies will be eager to offer you more credit. Companies may start sending you credit card offers and your lenders may offer you additional credit products ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ While it may be tempting to take out lots of new debt, you need to be wary of doing so. Only take out a loan or credit service when you really need to Automatically have money go towards your bills ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Many banks and employers will allow you to have some money automatically deducted from your paycheck ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ This can be a great way to ensure that your bills get paid promptly. Plus, since you wont even see the money, you are less likely to miss it ADVANTAGES OF FINANCIAL EDUCATION The pressing need for financial education comes from two areas. Firstly is the deterioration of personal finances. Today youngsters resort to living beyond their means, have credit card debt, and making risky investments. Second is the proliferation of new, and often complex, financial products that demand more financial expertise of consumers. Turbulent market conditions and changing tax laws compound the need for sound financial education. Even Government servants are moving from defined contribution regimes to schemes with benefits for retirement, at their option. Therefore, retirement planning becomes very important. Some Advantages Of Financial Education Are:- ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Helps build a secure financial future. Lack of financial knowledge can affect an individuals or familys ability to save for long-term goals and make them vulnerable to severe financial crisis ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Prepared for financial emergencies. By incorporating contingencies in your financial plan you are ready to face unseen circumstances head on ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ People who are financially literate are reluctant to buy financial products that they do not understand and thus do not fall for marketing gimmicks ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Feeling a sense of accomplishment. Financial education is effective at moving people closer to their goals ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Makes a more responsible individual with a disciplined approach to money. Helps people from overspending and inculcates a habit of savings and investments ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ You become more aware of questionable lending practices adopted by banks and other lenders to sell their products ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Feel like you are setting a good example for your family ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Money management skills can benefit other aspects of your life.