Some Features of Certificates of Deposit

You are young and healthy. You do not worry about the future. You like splurging and partying. You want to spend today than save for tomorrow. After all, who knows what future has in store for us. It’s all fine until you realise one day that retirement is not far and you need to start saving for it.

1. NOT OPENING A PPF ACCOUNT

Public Provident Fund, or PPF, is one of the best retirement tools. It gives triple tax benefits. First, you can claim deduction under Section 80C for contributions. Second, the interest income is tax-free. Third, the lump sum received at the end of the tenure is also tax-free. There is no other financial instrument, except the employee provident fund, or EPF, that gives all these benefits. It currently offers an interest rate of 8.7 per cent.

The maximum investment is Rs 1.5 lakh in a year. By investing Rs 1.5 lakh every year, you can save Rs 46.75 lakh over a period of 15 years. In 30 years, the corpus will grow to Rs 2.10 crore (See graphic). One of the best things about PPF is that the account can be continued after 15 years till you apply for closure. You can apply for a five-year extension by submitting a letter within one year of maturity. You are free to apply for as many extensions as you want.

You can also use the PPF account to create a regular stream of income after retirement as after completing 15 years you are free to withdraw every year. The best part is that this income is not taxable. There are, however, a few points to remember. You can open an account with Rs 5 but have to deposit at least Rs 500 in a  financial year. The account also gives you liquidity options as withdrawal is permissible every year from the 7th financial year from the year the account is opened. A loan facility is also available from the 3rd  financial year. So, don’t wait, open a PPF account as soon as possible.

2. NOT BUYING TERM INSURANCE

If you have dependents, buy a term plan immediately. It is the cheapest life cover. For example, a cover of Rs 1 crore for a 25-year-old is available for Rs 8,000-10,000 a year. Other policies such as unit-linked and endowment that combine life cover and investment involve charges such as premium allocation and policy administration fees, making them costlier than pure term plans. However, in term plans, you do not get anything on maturity.

You pay premiums so that if something happens to you the insurance company pays the pre-determined sum to your family. So, while term plans provide pure protection at a very low cost, endowment plans and investment plans are basically investment avenues. But the question is, when to buy the cover? Naval Goel, Founder and Chief Executive Officer, PolicyX.com, an insurance comparison portal, says, “Generally, a person should buy a term plan at the age of 25, which is when he starts earning.

The ideal term should be 60, which is retirement age in most cases, minus the current age.” At 35, when the person is earning more, he can buy an extra cover. But which insurer should one choose? “You will be shocked to know that the premium for a similar plan, for the same sum assured, everything else such as smoking habits and age being the same, varies from Rs 5,000 to Rs 15,000 per year. That is kind of difference we are looking at. So, you can easily save up to 50 per cent on your premium if you compare plans from different com

3. NOT BUYING HEALTH INSURANCE

A sudden hospitalisation can wipe out your savings in a single blow. Medical inflation is rising faster than general inflation at 15 per cent. Advanced technology and super-specialty hospitals have also made medical care expensive like never before. Experts say the trend is likely to continue in the foreseeable future. While costs have been rising steadily, health covers are inadequate. A lot of people who have full-time jobs appear to believe that the coverage provided by their employers is enough and doesn’t need to be supplemented.

BigDecisions.com, a platform for personal finance advice, recently released its 2015 health research report that said 95 per cent middle-class Indians do not have enough insurance to cover some of the most common ailments.

Surprisingly, those above 45, who are at a higher risk of health problems and closer to retirement, are least prepared for emergencies as they are underinsured by 69 per cent on an average.

Manish Shah, Co-Founder and CEO, BigDecisions, says, “While it is no surprise that typical treatment costs in the US are sometimes more than 10 times higher than those in India, they are more than twice as much in countries closer home such as Malaysia and Thailand. This means Indians could soon be paying more.” The report says consumers are paying large sums out of pocket as a result of being under-insured. So, it is advisable to buy health insurance at a young age when premium is low. Decide the cover by looking at the size of your family, lifestyle and medical costs in your city.

4. NOT UNDERSTANDING POWER OF COMPOUNDING

We keep delaying investing thinking it won’t affect us much. This is a costly mistake. Experts say compounding grows your money much more as you earn further interest on your interest income.

Consider this: If you invest Rs 5,000 every month for 15 years your saving of Rs 9 lakh will be Rs 20 lakh at the end of the tenure assuming returns of 10 per cent. So, invest for the long term to get the benefits of compounding.

5. WRONG INVESTMENTS

We do not ask our agents the right questions at the time of investing and repent when we get to know about the high costs (such as fund management fee and agent’s commission) of the products he has sold us. For every 1 per cent extra cost you end up losing Rs 3.5 lakh on an investment of Rs 10 lakh over 30 years. It is, therefore, imperative to ask the right questions at the right time.

6. SAVING, NOT INVESTING

Many people put money in savings accounts thinking that the 4 per cent return would be enough for all future needs. This could be one of your costliest mistakes as such a low return would not be able to beat inflation. Once you are convinced about investing, the next step is choosing the product.

At this stage, most people are confused between equities and real estate. History proves that equities have outsmarted real estate over long periods.

Surya Bhatia, a New-Delhi based financial planner, says what happens in real estate eventually is that your property worth Rs 1 crore rises by 10 times. But one must look at the IRR, which is what really matters. “So, a rise of 10 times over 20 years means just 14-15 per cent returns a year. Equities, on the other hand, have given a tax free return of 17-18 per cent over long periods. That 17 per cent is tax-free while the 14 per cent is taxable. Plus, there is convenience, transparency and liquidity. A property that has gone down in value is not liquid and will not find buyers. Keeping in mind these challenges, equity has a stronger case.”

7. WITHDRAWING FROM EPF

Most of us withdraw EPF money with every job change. Companies also many times advise employees to withdraw the balance because of the long time and procedure involved in transferring money from one company to another. Well, with the government issuing universal account numbers, or UANs, to all EPF subscribers, this should not be a problem for you and your company. Unlike previously, now your PF number does not change with the change of job. The UAN is a 12-digit number allotted to each member. It has done away with the need to transfer funds. All you have to do is furnish your UAN and KYC details to the new employer.

Once the new employer verifies these, the money from the older account will get transferred to the new account. But for accounts opened before the allotment of UAN, you still have to apply either online or offline. It is a big step towards shifting EPF services online and making them more user-friendly. EPF is designed to provide financial security after retirement. It is a very useful instrument for retirement planning.

8. NOT CHANGING OLD HABITS

You should adapt new technologies to save time as well as money. For example, online insurance plans are much cheaper than the offline policies. Similarly, you can buy mutual funds online, saving money that would have otherwise gone to the agent as commission.

Similarly, you can earn reward points on bill payments through mobile wallets, which you can redeem on your next purchase. Mobile wallets work like electronic prepaid cards and can be used to pay for things from grocery to rail tickets without the need for swiping debit/credit cards. All you have to do is key in the username and password at the time of transaction. You can then load the wallet with money either through debit or credit card or net banking. After this, you can use it to transfer money, pay bills, book tickets and shop.

9. TAKING ON DEBT

Be careful while taking loans. Do not owe more than what you can pay. If you have an existing debt, pay it first. Get rid of loans on which the rate is the highest. Another reason to pay on time is that this affects your credit score. A low credit score can hit your eligibility for loans. If there is any amount outstanding against your name get rid of it immediately.

It doesn’t matter how small the amount is. Always maintain the required balance in your bank account, particularly when an EMI is due. Unpaid loans affect your credit score badly.

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