Update on discussion topic for coming weeks - on asset utilisation

Fixed Assets can serve a dual purpose of fulfilling our financial goals and also help in meeting our additional unplanned requirements. There is a possibility that we may have designed our financial plan well and earmarked our assets for achieving these long term goals. This is a very idealist situation. But in reality, there could be multiple goals in between which could require additional funds to be fulfilled. So how can we meet these goals? Can we earmark these long term fixed assets to help us meet the short term goals? Can we utilise their market value by temporary mortgaging them to supplement our additional goals including business expansion or dream vacations or even spending to refurbish the entire home. In our coming few posts , we would be discussing these alternatives to Personal Loan or Home Loan. Stay with us to understand more about them.

Gift a better future

The older generation now in their mid fifties or more elderly usually complain about the younger ones not being frugal in their spending nor having a say on their children's money habits. They find it many times shocking that in spite of high earning and multiple earning opportunities the younger lot is struggling to manage their home finances well. At times, the spending made on personal gifting,holidays or extravagant birthday celebrations gets a mixed reaction from the older lot. For them, the concept of savings is still at 80% of monthly total earning.

So, many times they try to enforce these simple things to get compulsive savings for the future of the their next generation. The approach remains non-interfering and easy for them to monitor.

• Gift a savings account – Create a separate savings account with joint holding with your children or grandchildren. In case of any special occasion like birthday or anniversary celebration or any other achievement, add in some money into it as your souvenir. You can even add a small amount on a monthly basis to add to the savings.
  
  

• Gift a small piece of metal – We are habituated to gift idols of God on any house warming party or even marriage ceremonies for that matter. So, if instead we contribute as per our budget a small piece of silver/ gold coin or even raw metal to the family it can be a useful investment for them. Today, the available denominations of coins are very small ( as low as half gram). So, instead of gifting loads of ceramic house decorations or expensive flowers, this can give the recipient liberty to spend it as per their preference.

• Create a demat account – If you intend to handover some kind of capital market investment to your children in future, start adding value to it by creating a demat account. On doing so, you can ensure that the wealth is in bits and pieces transferred to them as well as you can also add more value to it by purchasing time and again capital instruments to it. You can be assured of transfer of assets in your presence without any chaos or dispute.

• Contribution to expenses - This method though might be useful for a little younger aged children but it stills create great sense of responsibility among the children. It may include asking the children to contribute in home expenses or even pay rent for their stay at home although you might not need that money. The same can be then reinvested by you in their name for future growth aspects. Decide the quantam of contribution always in terms of percentage to avoid them getting into mode of numerical values calculations.

These methods are age old and can be implemented at any stage of life. For some it might sound foolish to do so considering the amount saved via this strategy. So, what we advise is to alter these techniques as your situation.It is recommended however to make a beginning.

Are you really financially prepared?

Most of us associate goal achievement with fulfilling of our family responsibilities. If we are able to meet these responsibilities then we assume we don't need any financial planning. We hear many statements from our clients mentioning that we don't need any kind of planning,we have sufficient funds in place, I have crossed the age of planning and many more such statements. As a Financial Planner when do we say that the client is completely prepared for all his financial requirements.

Simple questions to check your financial independence:

• Can you completely leave your active working life to survive the rest of your life?
• Can you bifurcate your existing assets for your different goals and achieve your goals without any further twitching?
• Have you settled all your liabilities and can still manage your goal achievement?

Myths Busters : A few myths attached with goal achievement.

• Inflation – We make certain annual calculations as per our current expenses and assume it to cover all our requirements. Like you say, I have two land properties that will grow in value terms in coming few years and it will help me to cover for my daughter's wedding expenses or my retirement. However, the biggest road block in this growth is inflation – the increasing cost of living.The average inflation increase over the past few years have been around 7-8%. This means that every year the cost of essential goods has increased by 8% per annum. So, if you have think you have saved for retirement to maintain your lifestyle as per current expenses it is not sufficient.

• Insurance Policies - Owning number of polices especially expensive endowment or whole life policies is not sufficient. Endowment policies assure good amounts on maturity including hefty bonuses however these good amounts are not sufficient to cover your life expenses. More so even the monthly pension that we receive may not be equivalent to the monthly home expenses.

• Expecting family wealth - Many times, we delay or avoid our financial planning considering that we are going to own a huge amount of family estate as lineage over the coming times. It might give us a mental satisfaction but does not assure any concrete guarantee of the amount to be received. The only possible thing is if in case the amounts are not as per your calculations, you might suffer in your sunset days. Like if you get a property out of the estate and you expect to make good profit out of selling it. It could be possible that the property market at the same time is at its bottom low and the desired price cannot be achieved.

• Fixed Asset Allocation – Allocating assets across your goal requirement or identifying which asset would help you meet your goal is better then leaving unplanned assets. However, leaving the allocation unchurned or not reviewing it is equally harmful for goal planning. Assets should be regularly reviewed and monitored to match the goal requirement. Change in policies, taxation rules could make any particular asset class less attractive. So, it is necessary to keep on reviewing it regularly.

Hence, we state that even though you own assets and have sufficient monetary cushion, it is required to continuously monitor your decisions. A plan is never perfect and it gets better with every further review.

Update on TDS on RD + Fixed Deposit

Just wanted to share an important announcement that is usually misinterpreted by many of our clients. As per the new Finance bill 2015, effective from 1^st June 2015, the interest earnings on Recurring Deposits would also be subject to TDS at the banks. This means that going forward, interest earnings for Fixed Deposit and Recurring Deposit across all the branches of the bank would be subject to TDS beyond the exemption limit. Previously, the exemption limit was made available at branch level but now the rule has been amended.

Investment avenues for special dependent

As discussed in our previous article, we need to save for the entire life of disabled dependent. It is not so different from saving for any other goal. The only difference lies in the availability and management of these savings for the sole welfare of the disabled dependent. So, in order to ensure that you plan well your investments, we should take care of following points:

• Regular Income
• Maximum Tax benefit
• Lowering investment charges
• Clear nominations
• Appointment of Guardian

For Regular Income – To ensure that you get regular income for your dependent directly credited in their bank account, investment is recommended in fixed and secured investments. It should be made irrespective of the low rate of returns. It should be made for longer duration and also preferred to be tax efficient. The quantum of this investment should be calculated by living expenses requirement. Suppose, you require Rs.60,000 per month for living, you should invest around Rs.80,00,000/- to support your lifestyle. Some of recommended asset classes would be:

• Fixed Deposit – It is simplest to operate and ensures that capital is secured.
• Real estate- It is recommended you create a real estate rental income in their name so that this income can supplement his monthly income requirement. Please ensure you nominate the dependent and let it be managed by a guardian.
• Liquid funds – These funds are to meet the emergency requirements of health. It could be possible that even though you may take some additional health cover for the dependent, it has some exclusions and gaps to be filled.
• Equity funds- Even if you favour equity based exposure; it should be ensured that it generates some regular income like dividends or high dividend yielding stocks.

For Tax benefits – Be aware of the various deductions under section 80 for the disabled dependents.

• 80U- Deduction to be claimed in case of self disability. The said definition of disabled is defined in the IT Act, 1961. Amounts amended in latest budget as Rs75,000 for person with disability and Rs.1,05,000 for person with severe disability. To avail the deduction, a certificate is required from the certifying medical authority (approved by the government).  At the time of filing return, be sure to fill the required separate forms.

• 80DD – Deduction can be claimed for dependents for expenses borne by assessee. Dependant means spouse, children, parents, brothers & sisters of the taxpayer. The expenses can be claimed for medical, nursing or rehabilitation of the dependent. As per the latest budget, the allowable deduction is for disability from 40% -80% - Rs 75,000 and beyond 80% - Rs.1,25,000.

Insure your life – Life insurance is taken to cover the life risk from any kind of untold eventualities. However, when you have a disabled dependent it is always advised to have a policy with sufficient sum insured (at least 10 years of your current annual income) in the name of earning member. There are whole life policies, which can be left as a nomination to the dependent. This will ensure lump sum payment in case of any fatality. There are even special plans, which give accumulated amounts on maturity of policy and then again, on death of insured. Although, it could be expensive investment, it can be used as a diversification tool.

Creation of trusts - The specific trust created for the welfare of dependent frees one from any kind of fear regarding the misuse of the attached assets. We just need to follow some few rules will creating a trust:

• Create a trust with exclusive purpose (specific trust) to provide regular monthly income to dependent and bear all medical contingencies.
• Attach all investments especially real estate to ensure the rental income is not misused.
• Get a well trusted person to manage the regular working of the trust. Ensure timely audit to avoid any misuse of funds. It should be created in your life time.

All the above investment avenues are to be double sure that the dependent is not left in any financial crunch after you. It is essential that the process is started at earliest. If it is not possible to fund the requirement at its fullest make the minimal investment as possible.

Financial Plan for differently abled dependents

As a family, we go through a cycle where an individual first gets married, has children, for whom we plan to provide good living and education, make them independent- both emotionally and financially and then look forward to our own sunset years with our spouse. For every stage of life we plan and try to match our income with the respective goals. However, there could be situation where an individual is incapacitated to be on his own or to lead an independent income life;thus our responsibilities do not end. The discussion in this article mainly focuses on dependency due to certain physical or mental disabilities.

As per Person with disabilities (Equal Opportunities, Protection of Rights and Full Participation) Act, 1995, a disability under the act is defined is person suffering from:

• Blindness;
• low vision;
• leprosy-cured;
• hearing impairment;
• loco motor disability;
• mental retardation;
• mental illness

When we have a dependent in our family, who suffers from this kind of disability we need to make provisions for the dependent in our working age, to ensure that they are never financially weak at any point of their life. So, when we are planning for the financial security for the dependent, we need to take care of following aspects:

·   Cash flow Amendment – When a disability is discovered at an infant stage, it is natural that as parents we want to manage all the responsibilities of your child however, as the child grows he might need external support like a medical attendant or home maid to attend to their needs. So, when we plan our expenses we need to include expenses like medical expenses, expensive treatments and external help or even consider their survival expenses as they may outlive you.

· Plan for it as immediate goal- Treating the dependency survival goal is similar to our own retirement goal, which is equally important and needs to be prioritized over any other goal planning.  

· Select a right guardian – Appoint a third person as guardian who can take decisions in absence of parents. This will create a buffer in case of any important decision to be taken if we are not around.The decision should be made legally and well documented to avoid mayhem in later life. So, if you have made provisions for the dependent you are ensured that there will be someone to execute the plan for you. It is important to note that after 18 years of age, if you need to provide for adult, you need to apply for guardianship even if you are his parents.

·  Develop a business for them- Disability doesn’t deter any human being from adapting alternative skills to sponsor their own expenses. It is recommended that you work towards developing their other sensory skills and identifying them at earlier stage. Today, there are various provisions made by government to reserve work quota or give concessional loan rates for differently abled people. It is recommended to be an active member of various self help groups of people suffering of similar disabilities and join hands to start a small venture. This will ensure that a feeling of self dependence is created in the dependent and a life time regular income is generated.

In the next article, we will discuss the various areas where an individual can invest to save for his financial dependents or possible means to secure their lives.

 

Regards,

Saarthi Financial Planners
www.saarthifp.com

Financial Planning for Irregular Income

Planning for goals is easier when you have regular source of income but could be difficult in case if you have not so regular or fluctuating income. This could include fluctuating income earnings made by professionals, artists, writers or any business owners. This could affect not only planning for your future but also the current cash flow management. So, how do such people plan for their financial goals?

Main areas of focus for financial planning for irregular income

a)Safeguard your Contingency funds – As a thumb rule, every financial plan requires the client to save for at least three months of their monthly expenses. However, for irregular income earners it is advised that you make a provision for at least a year or more to avoid any disruption in your regular family expenses. These expenses should focus on pure living expenses – including food, education, health, premiums, conveyance and tax costs. Beyond these lifestyle expenses need not be provided for a year’s time frame but around six months is sufficient.

b) Never skip your Premiums- It is essential to make sure you don’t skip or miss any of your life or general insurance premiums. As the risk insured if actually occurs could make a dent into your survival amounts.

c)Follow "Lump sum – Regular Periodic investment" mode – Invest the lump sum amount available during your income days in a earning asset for a while and then reinvest it in a systematic methodology into better yielding investments. It could get a little expensive than direct monthly investment but in long term could yield better returns. One can even manually, do the above arrangement to make the costs unaffected. It is recommended that if one is unsure of the investment avenue, he should use liquid funds to temporarily park your funds. Like if you receive Rs. 3 lakhs at any one point you can invest the same at one go in liquid fund / savings account and then invest them regularly Rs 25,000 monthly as per desired goal time frame.

d) Goal Planning- While planning the goals i.e. assigning monetary value to the goals and giving time frame to it, it is important you understand that although the goal could be years away your earning opportunities could be limited or low.  So, make the amounts desired as realistic as possible. If possible plan for essential and leave the discretionary goals for later planning.

e) Back up to irregular income – In case of irregular income, it is best to give a time frame to improved cash flow so that it helps you adjudge the situation, you cannot depend on this mode of working for a long time. The contingency funds also have a shelf life and would certainly evaporate slowly. If you don’t desire a backup income source, you need to trim down your lifestyle spending.

f) Stay debt free- It is high tendency to over spend during zero income days and then balance it out with credit facility available around you. People either ruthlessly use their credit card or personal acquaintances to fill the gap between need and funds. This is a viscous cycle and lands one in huge debt web. It could even give you a bad credit score.

g)Repay any loans – In case if you are repaying any loans taken for your asset purchase then repay at earliest or make a provision of the same in your regular living expenses. It is not wise to loose the asset midway due to unpaid installments. Try to speed the payments on receipt of any huge sums interim.