Irrespective of your earning capacity, spending more than earning will make you poor, for sure. Spending less than earning leave you a portion, however substantial, to do important things of life such as saving, investment etc. By spending more than earning, you are not only on your way to become poor; you are also leaving yourself with no chance of doing anything positive – the reason why this is possibly the worst mistake. There is simply no chance

#2: Not paying yourself first

 How can you pay yourself? Well not literally. You may have plans to save money or invest or pay for your retirement or anything that has to do with building a financial tree that is going to give fruits in future, you are paying yourself. If you are paying part of your earnings into your financial tree, you are not letting your money grow. Remember how compounding can create great fortunes? By breaking your plan even for one cycle can dent your final payout. Don’t believe me? Consider this.

Say you plan to invest $100 every month for next 20 years. If you did not miss any of your payment cycle, your final payout at 10% returns $76,569. Now let’s assume you missed just one payment in your first year of plan, your net payout would be $75,906 – a net loss of $663. That is, you lost more than six times the money you did not invest. You make such mistakes a few times and watch your final payout go down fast. 

#3:  Living on Future Earning

Unfortunately, this is the way financial companies have made us to live in. We buy houses, luxury cars, boats, vacations etc., all on loan. Financial companies use their financial formula to trick us into this trap. They will tell you are going to earn a lot more in a few years and would be able to make your payment faster.

This is a classical case of “living on future earnings”. It is true you may earn better in a few years, however, it is also true that you will have more liabilities in the way of marriage, children and so on. And who knows, there may be another oil shock and you may be paying three times more to fill your car tank. The point is, as you grow, your liabilities increase as well therefore it is not a good idea to but on your future earnings. And if you do succeed in getting a much higher paying job in future, you can plan on going on vacation to moon then.

#4: Spending on luxury

Usually a fall out of “living on future earning” is spending on luxury. That extra layer of leather on your car will probably not add a lot of value to your life but the extra $2000 may really have made a big difference to your investment strategy.

#5: Keeping money in idle

Idle money loses value, if at all it stays with you. Keeping cash or leaving money in savings account will really not fetch you anything. In fact, inflation may be eating some portion of value from it. Invest your money so your money can work for you and give better returns.

#6: Investing money in avenues  no one understands

Who does not want a $1,000,000 lottery? At least, we know our odds while buying the ticket (even though, I believe it is not a wise investment considering the odds you may have against you). Putting your hard earned money in an investment no one understands will most probably return in the form of heartburn. Do not jump on any investment that sounds fishy. It always is.

#7: Spend first, pay dues later

Pay your dues first. Remember, the more your delay the larger payout you need to make to settle. It is compounding working against you. If you do not pay your $1000 now, next year you will need to pay $1100 (assuming 10% interest). Two years hence, you will need to pay $1221 to settle your account. Get rid of your dues as soon as possible.

#8: Using Credit Cards

The inventor of credit card must have been a good (no, great) psychologist. After all, paying huge cash does make us feel poor for some time and most likely we will restrain ourselves from spending unless we need to. However, with credit cards, the only time you feel bad is while writing a check and that’s once a month. Since credit cards, the average household spending have gone up dramatically (no wonder world economy is growing faster).

Credit cards make us spend more. It must be used wisely.

#9: Not having enough insurance

When tough gets going, the going gets tough.  Unless you have huge pile of money ready to be spent, not having insurance is an invitation to bankruptcy. Face it, things are very expensive. If you are diagnosed with complex illness, it may cost you fortune to get treatment without insurance. Or if you do not have enough coverage on your car, you may need to settle with cash which may be huge.

Most people think insurance is unnecessary cost. It is. But we need it. Have adequate coverage.

#10: Spending on discounted products you do not need

My personal favorite. If something is available on great discount, it sure must find its way to our home. Who cares if we do not need it. After all it’s a great deal.

We make such mistakes so often. Look at your monthly shopping statement and find how many useless products have found their way to your home. You will be surprised how big the amount is. It may be better idea to buy in bulk to get discount but it not a good idea to buy discount.

1. Investing is growing money
Idle money loses its value. To grow, money needs to be invested. By investing, you are making your money “work for you” while you work to earn more. Do not keep substantial cash or money idle.

2. Avenues of investment
There are numerous investment avenues you can invest in. Popular ones are equities, mutual funds, bonds, debt securities, commodities and real estate. Each investment avenue has its own set of advantages and disadvantages. It’s important that you understand them. Timing is one of the most crucial aspects in choosing investment avenues.

3. Follow a plan
Follow the schedules of your plan. If you have planned to investment an amount every month, irrespective of your situation, do not let that plan fail. If a temporary financially tight situation does come up, make necessary arrangements outside the plan. Paying to your plans should be your first priority. This is very crucial because even a small break today could impact long term value.

4. Take advice but use your conviction
It’s good to take advice, especially from competent sources. It is not a good idea to invest on lose ideas. Understand the opportunity and check if it makes sense. Move ahead only if you are convinced.

5. Know your time line
It’s important to know the timeline of your investment. If you are long term investor, you should give more than three years time for your investment to perform. Long term investors save themselves from trauma of market fluctuations. If you are short term investors, make sure you understand your investment well. Your actions should follow accordingly.

6. Plan your exit strategy
It is a prudent investment strategy to take exit route if your investment has made expected return. A lot of times greed takes over investors’ mind and they continue with same investment only to find their profit subsidized. This strategy works well with investment avenues such as equities where returns may be achieved in short time.

7. Book some profit
Long term investors should follow their investment closely and if market performs well in short term, an effective strategy is to book (some) profit at higher levels. The cash in hand then should be used again during downturn to buy more of investment. This is true even for Systematic Investment Plans (SIP).

8. Watch out for economic indicators
Let’s face it, economy follows a cycle. What is hot today may be out of favor and what may not be high on investors’ radar could suddenly find favor among investors. The cycle typical follow economic cycle. Well informed investor can time their investment to generate more profit.

9. Keep emotion out of it
Falling in love with your investment is natural but could be harmful. It’s OK when time is good and your portfolio going up. However, if things have changed, such as economy not expected to do well or particular industry is not expected to perform well, do not wait. Take appropriate actions otherwise you will be stuck with your investment for a long time. Be informed and take intelligent decisions. Do not take emotional decisions.

10. Short term investing is not investing
It is not against short term investment strategy.  Many day traders have succeeded but in my opinion, it is not investing. If you are trading daily for living, it can consume a lot of your day time affecting your full time job. As investor, you should stay away from daily volatilities. This is especially true for equities.

1. Spend less than you earn
Irrespective of your earning capacity, spending more than earning will make you poor, for sure. Spending less than earning leave you a portion, however substantial, to do important things of life such as saving, investment etc.

2. Plan your finances
It’s always better to know where you are going. Plan your finance and stick to the plan. If you plan on making a decent retirement fund, it’s important that you stay course. If you cannot do financial planning yourself, take help of a competent financial planner. They pay their worth in gold.

3. Pay off your debt
Clear your debts as soon as you can. Debt is a reality but should not be hanging as a dagger on your head all your life. Start paying off as soon as you can. There is nothing life a debt free life.

4. Invest your savings
Do not let you hard earned saving sit idle in some savings account or in form of cash. Let it work for you. Invest in appropriate financial instruments so that it can give you return. Remember, idle money loses its value, however slowly.

5. Let time work for you
Time is equivalent of money, sometime more than what we think. Think of difference in payout for same money invested since the age 30 and the age 40. Ten years head start can pay you substantially more at your retirement, talk about compounding.

6. Be insured
Emergency situation can wreck you, financially. You saving may go away in a flash and for all practical reasons you may be in debt. Buy appropriate insurance; health, auto, accident, house etc. You pray they never kick in but if they did, at least you are safe from perpetual agony.

7. More important things first
 Do not spend on luxury or unnecessary material, however tempting they may be. You will get your fair share when time comes. For now, make sure most important things of life are taken care of; education, home or whatever is most important for you.

8. Look out for risk
All investments are not same. Some carry more risk, but offer more return. Some may not be risky at all; the payout is much less in this case. Do not put all your eggs in the same basket. Take calculated risk; at the same time make sure you have put part of your money in safe investment. In other words, balance your risk.

9. Understand financial system
There are many out there finding out ways to enjoy on your hard earned money. Some products are designed to take more from you and return substantially less. Have a basic understanding of how financial system works and take decision wisely.

10. Beware of “known-by-the-lucky-few” opportunities trap
If things sound fishy, they almost are. Do not put your money in anything you do not understand, not matter how tempting they may be. Such investment could seriously hamper your financial situation.

PPF offer the best result from tax point of view and is most popular in the middle class taxpayers especially the employees. Public Provident Fund(PPF) benefit is available not only to contribution made in the name of the assessee but also made in the name of children including married daughter and spouse of the assessee in the case where other investments like ULIP, Life Insurance etc. under section 80C of the Income Tax Act. With 15 year investment time frame and tax free return (Interest Income is exempt), the scheme merits inclusion in most portfolio but in the right allocation.

1. Who can open an account?

An Individual or Hindu Undivided Family can open a PPF Account. A Salaried can also open a PPF account though he may be a contributor to a recognised provident fund set up by the employer. Only one account can be opened by a subscriber. Another account even at another place is not allowed. Account in joint name is not allowed. An individual, in addition to opening an account in his own name, can also open an account in the name of his minor child, subject to aggregate limit of deposit in his own account and in the name of the minor.

2. Where can the account be opened?

An account may be opened in any branch of the State Bank of India or its subsidiaries at Head Post Offices, specified sub-post offices and branch of nationalised banks which are so nominated for the purpose.

3. Amount of subscription

The minimum annual subscription is Rs.500 while maximum amount is Rs.70,000/-. The subscription can be made in instalment not exceeding twelve in a year. PPF has the advantage in that the amount to be subscribed can be varied according to the convenience of the subscriber unlike insurance where prior commitment as to future payment has to be made.

4. The interest component

The interest earned is compounded. Interest rate may be varied and it is 8% w.e.f. 01.03.2003. Interest which is credited to the PPF account is completely exempts from tax upto any extent.

5. HUF

An assessee can contribute to the PPF account of the HUF of which he is a Karta or member. Contribution to the PPF account of the HUF can be made by any member thereof. An HUF can also contribute to the PPF account of any of its member subject to aggregate limit of Rs.70,000/- in a year.

6. Nomination Facility

The accountholder can nominate one or more person to receive the balance in the event of his death.

7. Withdrawal

Sometimes it is felt that it is a long term investment, where moneys are tied up for a long period since the entire balance can be withdrawn only after 15 years. The point, however to be noted is that withdrawal are possible after six year upto 50% of the balance to the credit at the end of the forth year immediately preceding the year in which the amount is withdrawn or the end of the preceding year, whichever is lower. In the event of death, the entire amount can be withdrawn before expiry on demand from the legal heirs.

8. Loans

It is also possible to take a loan in case of need, such loan amount being restricted to 25% of the balance at the end of 2nd preceding financial year and can be repaid in 36 month or less. A second loan can be taken if the first loan is fully repaid. Loan from PPF is at 2% more than the interest to which he is entitled.

9. Discontinuance of the account

PPF account can be discontinued but even such discontinuance would not disentitle the credit of interest through all other facilities like loan or withdrawn will not be allowed. Even non payment in particular year of minimum amount of Rs.500 can be regularised by depositing the same in the subsequent year with interest.

10. Premature Closure

In special cases of hardships PPF can be prematurely closed after five years with the approval of ministry of Finance as has been made clear in ministry of Finance (DEA) Letter No.F-3(8)-PD/72 dated 16/08/1972 and letter No.F-3(4)-PD-74, dated 29/09/1974

11. Growth Chart

The following table shows the growth potential of various investments. The assumed interest is @8% per annum

12. PPF Account not subject to attachment

One advantage of PPF as in the case of other provident funds is that the amount cannot be attached under degree or order of a court of law apart from income tax arrears . This has been conceded by C.B.D.T . as well in ministry of finance (DEA) Lettor No.7/21/88-2/90-SB dated 10/08/1990 as circulated by the Director General of Post’s letter No.38-2/90-SB dated 07/11/1990 . hence income-tax authorities cannot also attach PPF account

13. Wealth Tax

The amount standing to the credit of PPF account is exempt from wealth – tax , but this is of little significance now since wealth –tax is not even otherwise leviable on any deposit as it is now limited only to selected items like residential house property (more than one), jewellery, motor cars and urban land apart from other sundry items.

You pay more tax than you think. I know you would say that as salaried individual, you pay around 33%. But what about service tax, sales tax and all other taxes that you are constantly subjected to?

You pay more than you think

Our income tax is graduated. This means that tax subjected is different at different levels of income. So you say that you pay less than 10% tax if your salary is less than Rs. 2.00,000. However, note that you pay 10% flat on every rupee you earn above Rs. 1,50,000. And if your tax bracket is higher, the tax is as high as more than 33%. If you are self employed, it goes even higher.

The point is, the moment you come out of threshold earning, every rupee you earn is subjected to higher tax. And since you cannot get less than that, you pay highest tax on every rupee you earn thereafter.

So you have money to spend !!!

So after all the tax saving and recent salary hike, you find yourself amidst enough cash to spend on your favorite goods you always wanted to buy – or even classes to take. Not surprisingly, the bill that you get carefully adjusts service tax over it. And that might go as significant as 12.24%. It is a huge amount to pay. Add on top of it all other types of taxes and you find yourself paying more than you thought.

You add all the tax that is subjected to your earnings and then on the money you spend, you land up paying 50% tax or more. Yes, there goes half your money all of which was earned by you.

Save one, get two

In summary, we find that we earn Rs 2 and half of it go as tax. What is remaining is the other half. Look at this from the other side. You saved a rupee after earning two. Therefore, if you have to save a rupee, you will have to earn two of them. And that is why we say, a rupee saved is two rupees earned.

Save and get paid

Needless to say, you save one and you would have saved two in earnings. Saving is paying yourself twice. What more, if you invest your saving in a planned manner, you are actually paying yourself again by making money over it. Remember, if you blow up you earnings, you cannot save and hence you cannot get paid for it. Therefore, we can conclude that saving is not only for future, but by saving you are actually saving your “today”

How do I save?

Saving is surprisingly hard for lot of people, especially the younger ones. Yes, there is temptation to live king-size on your own money but remember, saving early gives your head start. Here are a few of many tips:

1. Pay off bad debts

Ever heard credit cards? And the rate at which they charge loans? The worst decision you can make is paying your debts through your credit cards. What worst, they are actually eating up your saved, after tax money (government does not give any tax benefit to credit card loans). Not only they eat up your money twice as fast as prevailing rate in the market, they eat up the money you will have to work twice hard to earn.

2. Buy cheaper and economical

If status symbol is not at stake, there are always cheaper version of everything: car, fridge, bike, AC. It is usually seen that a cheaper versions are economical as well. OK, at least try to find combination of both. Not only will you save during buying, you will save while maintaining as well.

3. Do not finance, pay off

The golden rule of thumb is: whatever depreciates, a wise idea is to pay off in cash, if you can afford to. Try not to finance. Now you can say why not pay off home loans. I would say yes, if you could. However, it is seen that real estate tend to gain value in most cases and get some tax benefit as well. In any case, the golden rule remains: if you could payoff, payoff. This is because the money you pay in interest can be the money saved twice.

Saving avenues are many. In every walk of life, you can save. Having a good financial advisor can save you blues. Having an efficient AC can save you on electricity bill. Shopping around can save you some bucks. And so on. The point is: every rupee you save is two rupees earned.