All thumb rules of personal finance appear to have gone for a toss in the last few months.Those who are getting rich in select businesses are growing insanely, while many struggle with payouts, unpaid EMIs, interest piling up under the moratorium.
There is a huge emphasis on health insurance and emergency fund for the next one year. Some have stopped investing in SIPs to build an emergency fund.
The one thing which seems to have taken a backseat is retirement planning. And retirement may be inching closer than you expected, with layoffs and compulsory retirement schemes.
Where do you start?
1. Check your EPF, VPF, PPF, NPS and EPS accounts.
Shed the fear, and look at account statements in the face.
Have you withdrawn from these accounts to meet some other expenses? How do you think can you compensate for the loss of amount and compounding benefits?
2. Check your loan accounts
What is the total amount of outstanding debt as of today, and how much will it grow in the next 1-2 years?
How much of savings or retirement funds will it consume, if you had to become debt free today?
Is the interest rate on loans higher or lower than what you earn on your PF or pension schemes.
3. What is the thumb rule for retirement planning?
One should save an amount equivalent to 10 years of expenditure for personal upkeep. Cost of living needs to be calculated with inflationary impact taken into account.
4. How do you get back on track?
Put the numbers on an excel sheet. Check how a gap of one year in financial planning affects the final outcome.
How much is needed to compensate for the loss?
5. Tweaking accounts
Shift all funds from mobile wallets, current accounts and low-interest savings accounts to high-yield savings accounts.
This will ensure that your emergency fund remains intact, but earns some returns too.
HIGH YIELD SAVINGS ACCOUNTS
Check out interest rates on high-yield savings accounts here.
SWEEP-IN AND FLEXI-DEPOSIT ACCOUNTS
You may consider placing money in a Flexi-deposit scheme, which transfers surplus funds from savings accounts to term deposit accounts at a higher interest rate, and allows withdrawal of required amount when needed.
Sweep-in accounts are those where your surplus money is transferred to a fixed deposit account, but there is no withdrawal allowed.
Check out the conditions of HDFC Bank
Rates of interest offered by different banks are given here. It will help you choose a bank for a sweep-in or Flexi-deposit account, if they offer it.
6. Celebrate pay hikes with savings, not acquisition of a coveted item or an expensive holiday.
Consider this. Invest 2/3 of your pay hike in the retirement planning account, and celebrate with 1/3 of the windfall.
7. Financial planning for millennials
Start saving a certain percentage of your income, say 15% or 20%. Do not set targets in absolute amounts. This will ensure that as your income increases, the savings also increases and attracts compounding benefit.
A few savings and investment options for millennials are given here
8. Credit cards are not always bad
Use the free credit provided by banks for 15-25 days, if you pay the bills on the due date.
Look at it this way. Say if you
- spend 25K in a month on your credit card
2. do not draw from the savings account
3. Your savings account is a high-yield one, offering an interest rate of 4%-6%.
The money you save every month on 25K is Rs. 1000/-. Insert this amount in a power of compounding calculator, and see the accumulated effect it gives after 5 years, 10 years or 15 years.
It is all about financial discipline. One needs to set expenditure limits and always pay the bill on or before the due date.
Avoid buying anything on EMIs like the corona virus. The interest rate charged by banks on credit cards is astronomical, in the range of 36% – 42% p.a. It will wipe out all benefits that you have accrued by using the credit card, or keeping your money in a high-yield savings account.
The best credit card options are given here
9. Understand your retirement accounts
Spend some time with your HR Partner or a financial planner. You will know exactly how much is going where and earning at what rate.
If necessary, shift money where it earns more.
Do not touch the funds where the interest rate is higher than other schemes.
Understand the ceiling on certain high-yield accounts like PPF (Rs. 1.5 lakhs per year), and the maximum amount it can yield on retirement.