Tuesday, February 22, 2011

10 Things I am Trying to Teach My Kids About Money Before They Reach Adulthood by Frugal Dad

Referred URL: http://frugaldad.com/2011/02/21/10-things-i-want-my-kids-to-learn-about-money/

1. No one owes you a thing.
Too many people go through their entire lives with the expectation they are owed something. This is not the case, or at least it shouldn’t be. All you should ever expect is to be judged, compensated and respected based on your work ethic and your ability to create, inspire and hustle.

2. Debt is a cancer.
Debt is a cancer on our society, on households, and on us as individuals. It saps creativity. It creates pessimism. It robs your future dollars. It limits your freedom. Avoid debt like the plague. Remember the old adage:

“He who understands interest – earns it. He who doesn’t understand interest – pays it.

3. Save for emergencies…
big emergencies. When you are young and many years from considering retirement (and not earning much), it’s tough to save money. But I have discovered no softer pillow than having money in the bank for emergencies. Aim to save about a year of your basic living expenses in a simple savings account (no risky investments here). With a one-year cushion, you’ll be able to weather storms many others will not.

4. Live simply.
In 2011, life seems pretty complicated. By the time you are adults, I imagine it will be even more so. There will be new gadgets and toys and cool services and “got to haves.” The problem is, all these things compete for your earnings. I’m not advocating living like a pauper, but limit yourself to only a few of life’s luxuries.

5. Sleep on big financial decisions.
When it comes time to buy a car, or a house, or book your first major vacation as a family, sleep on the plans for a couple nights. People selling you these things want you to act immediately to lock in their commission, as I would expect them to, but remember that you are the one who has to pay the bill. Some of my biggest financial regrets came because of a knee-jerk reaction. Be slow. Be methodical. Listen to your gut.

6. Protect your credit.
Not because you hope to borrow money, but because you may find people extending a service to you may do so for less cost if they think you aren’t a big risk. And if those people don’t know you well, your credit score may be their only determining factor. It’s not necessarily fair, but it’s a part of life. Credit blemishes can hang around for a decade, so it’s best to avoid them in the first place.

7. Learn to do things yourself,
but don’t be afraid to call in the experts. You may remember the time your dad rescued a toy from the toilet trap, saving us an expensive plumbing repair bill. Or the time I climbed up in the attic to unclog the air conditioner drain. But your dad knows his limitations, and calls in the experts when necessary. That’s what emergency savings are for.

8. Shallow people judge your things
real friends judge your character. Some of the saddest, loneliest people I’ve ever known have been surrounded by the nicest things money can buy. They often acquired these things to impress people they thought mattered, and in many cases it did – temporarily. Meaningful relationships are based on things money cannot buy: trust, respect, integrity, compassion, love.

9. Don’t trade the things you care about for a big salary.
Remember what mattered to you most when you were a kid: Family, fun, dreams. These things should remain important to you as a grown-up, but often adults sacrifice these things to earn a big salary. Now, everyone has to sacrifice some to earn a living, but by learning to be content, you may be able to earn a comfortable living while still enjoying other things.

10. Start saving early.
Remember those money games we used to play when you were a kid? One of them was an attempt to get you to understand one of the great financial wonders of the world: compound interest. You see, when you save money you earn interest on it. The next month you earn interest on the money you first put in, plus the interest you earned the month before. That’s right; you earn interest on interest. Now carry out that example for many years, even decades, and you can understand how some people are able to accumulate wealth. The trick is, you have to start early.

Finally, keep in mind something your great grandfather taught your dad about finding balance. Be frugal, but remember to occasionally stop and smell the roses. Life is short, and it is meant to be enjoyed. Take an expensive vacation every now and then. Buy something of your “heart’s desire,” even if it doesn’t make sense financially. Be frugal in other areas of your life to make room for things you truly enjoy.

Tuesday, February 1, 2011

Tax Saving Tips

Referred URL :
Insurance is essential for every individual. Though it should never be bought as a tax-saving avenue alone, it can help to reduce your tax burden.

The premium paid for a life insurance policy that covers you, your spouse and dependent children is eligible for deduction of up to Rs 1 lakh under Section 80C. However, this should not prompt you to buy a money-back or endowment policy where you have to pay high premiums.
A better alternative is to opt for pure term plans, which are cheaper than traditional policies, and invest the balance money in other tax-saving avenues that deliver higher returns.

Buying a medical insurance policy will provide you peace of mind and tax savings. You can claim a deduction of up to Rs 15,000 under Section 80D for the premium paid for a health cover. You can also buy health insurance for your parents for an additional deduction of up to Rs 15,000. The limit is increased to Rs 20,000 in case of senior citizens.

Here's how expenses on your house can also help you save tax.

The rent you pay is often a big chunk of the household expenses. Most employers structure their salaries to include a house rent allowance (HRA), which is exempt from taxes if receipts are furnished.
The lowest of these three will be considered as exemption on HRA:
a) The HRA received
b) 40% of the basic pay (50% in case of metro cities)
c) The rent paid minus 10% of basic pay If your salary does not include HRA, you can still claim a deduction under Section 80GG. However, to claim this, you or your family (spouse and minor children) should not have a residential property in the place of accommodation. You should also not have a self-occupied house in any other place.

The least of the following can be claimed as a deduction: rent paid less 10 per cent of the total income, 25 per cent of the total income or Rs 2000 per month.

If you're a landlord who receives rent, you can claim a standard deduction of 30 per cent on the annual value under Section 24. You can also deduct municipal taxes from the amount of rent received.

If you have taken a loan, the EMIs you are paying will help you out of the tax quagmire. The cumulative principal amount of the EMIs paid is eligible for deduction of up to Rs 1 lakh under Section 80C. However, the deducted amount will become taxable if the property is transferred within five years of the claim. The bigger advantage is the deduction you can avail of for the interest component of the EMI. You can claim up to Rs 1.5 lakh under Section 24(B).
The benefits double if you have taken a joint loan as both co-borrowers can avail of the tax deduction separately.

Putting your money in the following financial avenues can help relieve your tax burden.

It may pinch a little to watch a part of your salary go into the employees provident fund (EPF) every month, but this can be a saving grace now. The money that has been contributed to the EPF is eligible for tax deduction of up to Rs 1 lakh under Section 80C. This benefit is available to all recognised provident funds, including the public provident fund (PPF), a favoured avenue for investors as it carries no risk and gives a return of eight per cent. In case of the PPF, the maximum deduction allowed is Rs 70,000.

Also, the 15 year lock-in period ensures that you reap the benefits of the power of compounding. However, if you need to, you can withdraw up to 50 per cent of the money in your account from the seventh year onwards.

The EPF usually gives a return of 8.5 per cent, though this year it has proposed to increased it to 9.5 per cent. Negotiations are also on to use a portion of the EPF corpus to invest in the stock market. If, and when, this does happen, you could hope to earn even higher returns. Also, you cannot withdraw the money till you retire or opt out of the job market, which means that you're also steadily building your nest egg. You can withdraw the money if you desperately need it for specific purposes.

A pension plan is an important tool that can help you build a retirement corpus. You also earn tax benefits as contributions up to Rs 1 lakh are deductible under Section 80C. You can choose from three types of pension plans - unit-linked pension plan, plans from mutual funds and the National Pension System. These are cheaper than Ulips because they do not offer life insurance.
However, on maturity, only 33 per cent of the corpus that you get will be exempt from tax. If you do not get gratuity, up to 50 per cent of the pension corpus can be commuted.

Investments in National Savings Certificates (NSCs) are as secure as those in the PPF. However, the returns earned from them are taxable, so these are less profitable. What appeals to most investors is the shorter lock-in period of six years. Another less risky instrument with a short tenure is five-year fixed deposits (FDs) with banks or the postal department. The interest rates for FDs vary each year, though they usually fall in the range of seven to eight per cent.

These bonds can help to further lessen your tax burden as investments in infra bonds can be claimed as an additional deduction up to Rs 20,000 under Section 80C, beyond the Rs 1-lakh limit. However, these may not be suitable for all investors.

The overhauling of unit-linked insurance plans (Ulips) by the Insurance Regulatory Development Authority (IRDA) has made these plans more attractive. Most people prefer to invest in Ulips as these offer a unique combination of life cover, equity exposure and tax savings. Investment in Ulips can be claimed as deductible under Section 80C up to Rs 1 lakh. Though you may only need to pay the premium for three to five years, to get the maximum benefit from your investment, it is advisable to remain invested for at least 10 years.

This scheme offers a return of nine per cent, higher than those offered by most other safe instruments. However, the income is taxable though it should not affect you much as the tax exemption limit for senior citizens is Rs 2.4 lakh per year.
Investment in this scheme is again eligible for deduction under Section 80C

ELSS have an edge over other tax-saving instruments as these have the largest equity exposure compared with others. This also ensures higher returns in the long run. Over the past year, tax-saving plans have delivered an average return of 14.5 per cent. The top ELSS over five years, Canara Robeco Equity Tax Saver, has delivered 22.26 per cent returns. However, ELSS may not be everyone's cup of tea as they are also considered more risky.

You may grumble about how expensive it is to educate your children. But this can provide a
respite when you have to save tax.

Under Section 80C, you can claim deduction of up to Rs 1 lakh for the tuition fees paid for two children. This can be availed of by both the parents, though not for the same two children. Only the tuition fees paid for full-time courses of institutions based in India are eligible. Other expenses such as transport fee, development fee and hostel charges, among others, do not qualify and neither do fees paid for coaching classes or to institutions abroad.

If you have availed of a loan for your education or that of your spouse or children, the interest paid on the amount is eligible for deduction from your income under Section 80E. This is in addition to the `1 lakh deduction allowed under Section 80C. However, you cannot claim the benefit for repayment of the principal amount.