Why financial planning needs behavioural change
We are near the end of the financial year. There is a good chance that your employer will deduct more tax than usual from your salary in February and March. That is because you could not produce proof of tax-linked investments.
Many of you would frantically look up your insurance statements, conveyance or rent receipts or loan certificates to claim tax benefits at the last minute. The rush towards the end of the year results from poor or no financial planning.
Tax planning needs to start in April of every financial year if you are serious about it. Put aside a portion of your monthly investments towards tax-saving schemes so that you do not have to put a lump sum at the end of the year.
The more you save into tax-saving instruments regularly, it is better than doing it later. There is usually a lock-in on the investment for three years. That inculcates a good investment habit. Your money needs to remain invested for as long as possible to benefit from the power of compounding.
The real issue, though, is not about tax planning. It is also about your attitude towards it. For most of you, it is a burden. There is no need to fret about it. As your income increases, taxes are a certainty. Preparing for that eventuality is better than harping on the tax burden or government’s policies. India is not a ‘tax haven’ like the Cayman Islands or those countries in the Caribbean.
There are direct taxes on the incomes of individuals and businesses. There are indirect taxes on expenditure, such as the goods and services tax or GST. As an individual and a law-abiding citizen, you must pay taxes eventually.
Once you understand that, you are ready to take financial planning seriously. There are so many surveys that show the way you plan your household asset allocation. Most of your money lies in property, gold, or fixed deposits. Financial planning needs you not merely to save but also look at investments that consistently beat inflation. Your mind is trained to believe that gold and property are real investments and financial assets like equity are not.
That is doing a lot of disservice to your financial future. For example, the BSE Sensex has grown from 100 to 3000 over 20 years to 2000. It has then moved to 65000 in 2020. By 2040, it could potentially cross 7,00,000 by conservative estimates. The profit growth leads to the rise in the index in underlying companies that make up that index. Experts manage the composition of that index by adding and deleting companies at regular intervals. Regularly investing in a Sensex exchange-traded fund would allow you to capture the gains over the next 20 years.
Your investments cannot be thought of as gambling instruments. The craze for getting rich ‘quick’ is reflected in India’s highest number of options contracts. Many of you have opened a demat account and directly chosen derivatives to make money. That shows the tendency to gamble. Speculation is suitable for hedging your existing investment. You cannot make that your source of retirement money.
Television channels and OTT platforms are full of ads encouraging people to play poker online. Applications that enable online poker have witnessed lakhs of downloads. The only way you can get rich quickly is through inheritance. Getting rich is a slow process requiring hard work to earn a decent monthly income. It also requires you to focus on financial planning that involves a disciplined approach to regular investing. It also means curbing expenditure.
If we look at the management commentary from companies that sell consumer goods to middle-class and rural-income households, we will read distress. Persistently high inflation over the past few years and low income have made things unaffordable. You must either ask for a raise or take up a part-time job besides the existing day job. You cannot invest your limited, hard-earned money into unregulated instruments. Curb your urge to spend and give your investments in equity assets at least 10-15 years to grow. Sometimes, it pays to go slow.