A middle-class man whose annual income is between 3 to 5 lakh often lives in the dilemma that whether savings are necessary for him?
If we talk about earlier times, our grandparents used to generally give a piggy bank gift to their grandchildren.
This tradition of offering the piggy bank indicated that they also considered the importance of savings and wanted that the child also develops a tendency to save from a very tender age.
In today's fast life, we are moving away from the habit to accumulate, and often a family does not have much savingsto face any major difficulties in future.
Generally a large part of earnings is spent in fashion and lifestyle following others.
We have to clearly understand that savings is very important and if we do not save from the beginning, what will happen to us in our old age when we will retire or not be in a position to earn?
Savings as a habit and discipline should be started as early as possible.
Now the question arises, where do you save?
I want to draw your attention to some areas of savings from my personal experience.
1. Contingent fund
First of all, every person should create acontingency fund equal to about 2 months of his earnings, which should be keep in a savings bank account.
The utility of this fund is understood when there is a medical emergency, accident or such a fierce problem for which we do not have time and often need this amount immediately.
It should be mandatory for individuals who are in job, especially for those who work in private sector, because at times it has been seen that pink slips are given in private sector at a very short notice.
2. Life Insurance
After the contingency fund, the second biggest thing a person should plan for his family’s safety is that a proper life insurance of the earner of the family is taken.
In the opinion of the experts, one must have about 10 times the insurance of hispresent annual earnings.
3. Long Term Investments
This is a very important investment because it builds your future capital and this investment should be carefully done after following the advice of a good financial adviser.
Under this, you can invest in equity mutual funds, balance mutual funds, shares etc.
In this category of investment, you should take risk (market based risk) according to your age. For example, if you are between 25 to 35years then you can invest in higher risk and equity, but if you are above 50 years then your investment should be low in equity. Under this category, you can invest in gold too.
4. Government, bank and post office savings facilities
In this category, you can save in the Provident Fund, Public Provident Fund, SukanyaSamrudhiYojana, Bank FD, Post Office Deposit Scheme, etc. In all these saving avenues you will get anassured certain return, but at the same time you have to keep in mind that your return isalways more the prevailing consumer index inflation rate.If the returns of these fixed plans are less than the prevailing inflation rate, then there will be a danger of your capital erosion in the long run.
5. Pension Plans
In this category you can invest money planningfor your retirement. Under the Pension Fund, there are variousinsurance policies but the National Pension Scheme (also known by NPS) by the Government of India, is a good plan, under which you can save money for the future. Pension plans ensure that you receive a fixed monthly amount post retirement to meet your lifestyle expenses.
6. Mediclaim Insurance, Accident Insurance, Critical Care Insurance and Other Insurance Plans
Under this, you can takemediclaimof your family (family floater plans), accident insurance cover of yourself and family, critical care insurance (under which a certain amount is given to you by the insurance company on diagnosis and surviving of certain specified life threating illnesses). There are other insurance plans that depend on your needs such as home insurance, burglary insurance, etc. Apart from this, if you have extra cash for a short period of time, then you can put it in small time fixed deposits in banks or mutual funds (either in liquid or debt schemes) depending upon the time horizon.
(The writer, Aloke Poddar, is the chief financial officer of the PrabhatKhabar group and can be contacted at email id aloke.poddar@prabhatkhabar.in )