Yes, you just might be feeling relieved now that all your tax-saving investments have been made. In fact, you might have even filed your income-tax returns. And after all this hard work, you want to take it easy for sometime.
But hold on, there is something more to be done - planning your finances for the coming year. And as they say, "A job well begun is half done".
The beginning of the financial year is an extremely important period. And doing proper financial planning in this period will ensure two things.
One, you do not end up scrambling once again to complete all those tax-saving investments at the end of the year, while putting undue stress on your finances. Two, the returns on investment earned will be maximum.
Here are some of the important things that have to be tackled at the start of the year.
A financial plan: The first thing that is required is a tangible financial plan. This is essential for individual investors to ensure that all financial activities proceed along smoothly during the year.
The plan should consist of the details regarding all the investments, tax savings, insurance and even retirement planning. So it includes everything from insurance to investment.
At first sight, this financial plan might seem like an additional cost because a professional can charge anywhere between Rs 5,000-25,000 for drawing one up. However, you can make your own plan without taking any outsider's help. The simplest way to construct such a plan would be to list out all your requirements and activities throughout the year, complete with specific dates when the investments or payments have to be made.
The benefits of this can be manifold. For example, paying insurance premium on time will ensure no late charges. More importantly, it will ensure that the cover does not expire.
Then you will be able to pay even your credit card bills on time, which will avoid all those obscene amounts of interest charges. Always keep in mind that missing out on credit card payments can set you back by Rs 300-500 for not paying just the minimum amount.
Also, if the outstanding is say, Rs 20,000, there would be an interest at the rate of 3.41 per cent. Of course, this figure will vary for each individual, but the cost can be heavy.
MAKE YOUR PPF INVESTMENT: One thing that has to be done at the very beginning of a financial year is to make an investment in the public provident fund (PPF) account before the fifth of the month. This is because the interest is paid on the invested amount only if the money is invested by the fifth.
As far as the amount goes, if you can afford to, then invest the entire Rs 70,000 (the maximum that can be invested in PPF in a year) before that date. Investing a day later would cost the investor a sum of Rs 467 per month. This amount may look small, but remember that it's these small amounts that ensure great returns when added up over time.
Start an SIP: The beginning of a financial year is a good time to start a systematic investment plan (SIP) in mutual funds. It can either be a new investment or it can be the continuation of an existing SIP that has just ended. Executing this at the beginning of a month is essential because it will ensure that the SIP payment comes earlier in the month rather than at the end of it.
Even if you are investing in a debt fund, it makes sense to invest the amount at the start of a month as this will lead to a larger accumulation. For example, a monthly investment of Rs 5,000 invested towards the end of each month and earning a return of 8 per cent per annum will result in an accumulation of Rs 1,82,945 after 10 years.
In this example, if the payment is made at the start of the month, then the accumulated sum will be higher at Rs 1,84,165. Clearly, an investor can gain much more by investing at the start of the month.
START THE TAX PROCESS: This is the most important task. Start the entire tax planning now. In the beginning of a financial year itself, human resource departments (for the employed) start making queries regarding tax-saving investments proposed for the entire year.
Accordingly, the employer deducts taxes from the monthly salary. And you do not want to fill up this form without having any idea about the investments that you will make during the year. That's because there could be serious consequences for your finances.
In case the numbers are too little, the employer will cut higher taxes, thereby reducing your salary. For instance, if investments of Rs 40,000-50,000 have to be made after the provident fund deduction, the employers will cut Rs 1,000-1,250 till they get the exact details.
Worse, if you declare a particular amount of tax investment and do not stick to it, there could be heavy cuts during the last few months of the financial year. This would stress your finances for a long period of time.
The writer is a certified financial planner.