When to start saving for future

" I dont understand why people advice youngsters to save money for future. I never saved a single penny till i was 40. Instead of saving its better to invest in yourself, learning new skills, sharpening your tools, developing your hobbies etc."
............................................ HENRY FORD

" You should start saving as early as possible. At early age when you dont have responsibility of family you can save easily and can save more. Younger generation should understand value of money and they should buy assets in life not the liabilities"
.................................. ROBERT T. KIYOSAKI
( Author of "Rich dad poor Dad", the New york bestseller)

Great people from history have exactly contradictory views. In fact its a subjective topic that "when to start saving for future".

But here i will go with Mr. Ford. Its true that we should always keep on investing in our selves. Its very necessary that we should do some value addition to our personality year after year to survive in today's competitive environment.

Now looking from the point of view of Mr. Kiyosaki. Work hard and party harder, Har Pal yahaan ji bhar jiyo....Jo hai sama ...KAL HO NA HO.... and younger generation follow this. I am not against this philosophy of life also but saving does not mean that you are compromising on your life comfort, it is simply delaying the consumption of money. In future when you will get married, have family, your expenditure will go up suddenly but your pay cheque may not. Also in case of emergency you may need some money urgently.

Finally i will go with Mr. Kiyosaki. Now here i will show the benefit of early investing with simple case study.

Case 1 : Prem Ranjan, 23 , an Engineer earns a decent amount of money and he has a good knowledge of investing. Being from a middle class family he decided that he will save 5,000 Rupees from now onwards through out his life.

Case 2 : One of my office friend Sakshi Mehrotra,23, an Engineer Believes in " kal ho naa ho" philosophy and she had not planned anything about saving yet. She told me once that she will think about saving around 5 years down the line.

Now Prem started saving at 23. When he will retire at 60 after saving 5000 per month for 37 years, amount he will have is

Calculating for PPF savings which gives annual returns of 8.5 %.

A = .......P ( (1 + r)^t - 1)
..............________
......................r
where
r = rate of interest = 8.5 %
t= time of investment = 37 years
P= amount deposited per month = 60,000
A= final amount

A = 1,37,36,293

Now, if Sakshi will start saving at 28, 5000 per month then she will save for 32 years. When she will retire at 60 amount she will have, again calculating for same conditions

t= time of investment = 32 years

A= 88,98,820

Now difference between their savings at the time of retirement is

= 48,37472 ( Forty Eight Lacks Thirty Seven Thousand )

Ohhhhhhhh....................

Its shocking figure. Delaying your savings by 5 years can hurt you by more then 48 lacks. Here we should also appreciate the fact that to get those 48 lacks extra bucks we invested only 3 lacks in those first 5 years.

These figures could have been more surprising if saving amount is changed to 10,000 from 5000 per month. The difference at 60 years of age .............aaah

Sakshi will be poorer by around 1 crore rupees than Prem at retirement.

Just 5 years .................

So your 3 lacks saved as Early as 5 years can be as high as 48 lacks and your 6 lacks ....around a Crore.

Thats the power of early investing. Choice is yours ..........

Here it is to be noted that i have taken minimum interest rate and also calculated compounded annually to make calculations simple. Figure can be higher as normally interest on savings is calculated quarterly or half yearly. In that case interest rate could be around 8.75 %.

*Interest is calculated compounded yearly.
For any further enquiry, feedback, suggestion please contact me any time. Your feedback and suggestions will help in future improvements.

How to save tax : Investing Benefit

The new financial year is here and its time to put your finances in order. Though you have 12 months to worry about income tax, you will be better off if you take up tax planning right away.

It looks that a big part of our income is going in pockets of ITD ( Income Tax Department) of Indian government. For people having income beyond 3 lacks its more then 30 %. Oops .........its too much buddy.....

So question arises how to save tax as much as you can.

Here i will show you by a simple case study the benefits of investing and its direct effect on your income tax.

Case 1: One of my close friend Mukesh , working with leading automobile company of country got 3.5 lacks as salary during financial year 2006 -- 07. Because of lack of awareness and having little interest in financial issues, he did not save a single penny to save tax.
After a year his tax calculation were like this

Total earnings............................= 3,50,000
Tax exemptions..........................= 1,00,000

Taxable income..........................= 2,50,000

Tax calculations

0 -- 1,00,000..............................= Nil
1,00,000 -- 1,50,000...................= 5,000 ( @ 10 % )
1,50,000 -- 2,50,000...................= 20,000 ( @ 20 % )
2,50,000 -- 3,50,000...................= 30,000 ( @ 30 % )

Total tax.....................................= 55,000
Education cess...........................= 1100 ( @ 2 % )

Tax paid...........................= 56,100

Income after paying tax....= 2,93,900


Case 2 : Ram, a graduate from MNNIT, allahabad joined a MNC in Bangalore with a annual salary of 3.5 lakhs. He has a decent knowledge of finance and also very keen to learn about various investing and tax saving policies. Although he played safe at the end of financial year and got fixed deposit of 1,00,000 rupees for 5 yrs with return of 9 % ( effectively 9.4 %, compounded quarterly).
After a year his tax calculations were like this

Total earnings.........................= 3,50,000
Tax exemptions......................= 1,00,000
Savings ................................. = 1,00,000

Taxable income..................... = 1,50,000

Tax calculations

0 -- 1,00,000.......................... = Nil
1,00,000 -- 2,00,000.............. = 0 ( exemption )
2,00,000 -- 2,50,000............. = 5,000 ( @ 10 % )
2,50,000 -- 3,50,000............. = 20,000 ( @ 20 % )

Total tax .............................. = 25,000
Education cess .............................. = 500 ( @ 2 % )

Tax paid ......................... = 25,500

Returns on savings * ...... = 1,00,000 @ 9 % ( compound interest )
After 1 year ..................... = 1,09,308

Income after paying tax ................ = 3,33,808


Comparing above two cases

Mukesh's Balance after 1 year......= 2,93,900
Ram's Balance after 1 year ...........= 3,33,808

Difference in balance ..........= 39,908

Tax saved by Ram = 30,600

Now if Ram would have not saved 1,0,000 then this 1 lack would have bee
= 1,00,000 - 30,600
= 69,400

So effectively Ram invested 69,400 and he got 1,09,308 after a year. Return on his investment is around 58 % which looks shocking and unbelievable. Also this return is possible when he invested in safest policy i.e. fixed deposits.

Now let me show you some more shocking pictures

1. If Ram would have invested in Mutual funds, with most of them having returns on an average of 20 % and higher, his investment would have been 1,20,000 and return on investment is around 73 %.
2. Acting some more intelligently if after doing some study Ram would have invested in better mutual funds, few have returns as high as 40 %, his investment would have been 1,40,000 and return on investment is around 102 %.
3. If after taking some risk Ram would have invested in Share market which gave a return of 47 % in same financial year, his investment would have been 1,47,000 and return on investment around 112 %

All these figures looks shocking and acts as eye openers, our intelligent and well aware decisions related to financial issues can help us a lot in appreciating our capital in best possible way.

So friends, here i showed you one of the biggest benefits of investing. Still choice is yours................................................ Happy Investing

* To make tax calculation simple few things are eliminated here. For any queries you can always contact me and give your suggestions and feedback.

Note : All figures are in Rupees ( Indian currency ).

For further knowledge about income tax calculations and various exemptions you can visit http://incometaxindia.gov.in/ , the official website of ITD, Indian Government.