Not long ago, I asked the WBC team to tell me what some of the issues members were facing were. I wanted to find out if readers were struggling with debt and credit problems.

A large number of members, I was stunned to hear, were struggling with debt.

Thinking over this result I came to this conclusion: WBC readers aren't immune to the debt and credit problems most of the world faces.

And that led me back to a thought I had after reading several letters from debt-strapped readers over a year ago: We have an opportunity to create added value to our business by developing a program to assist people with getting out of debt and repairing their credit ratings.

Debt Is a Serious Issue

Not all debt is bad, but all debt is serious.

In prior essays, I've explained that debt is a useful tool for building wealth when (a) it is not expensive and (b) you have a near-certain chance of using it to increase personal income and equity and/or business cash flow and long-term profits.

In future essays, I'll expand on this subject: the proper use of debt. But right now we are talking about how most people use debt - to finance lifestyles and purchase depreciating assets. Credit cards are a big part of that.

This sort of debt is bad. It is expensive. It erodes your wealth. But it also makes you poorer psychologically because it causes stress and anxiety, depletes your energy, and distracts you from profitable pursuits. This sort of debt is also the most common factor in marital problems.

Credit is related to, but different than, debt. Debt is what you owe, credit is what you can borrow.

You can be in debt and have good credit. You can also have zero debt and have bad credit.

Your creditworthiness is the measure of how likely you are to repay future debts. This is a valuable asset. You may believe you are creditworthy - and you may well be. But there are outside agencies that rate your creditworthiness… and banks and other financial institutions go to them-not to you-to determine whether they will lend you money and how much they will charge you for any loans.

Whether you know it or not, credit information bureaus (such as CIBIL, Experian, Equifax, HighMark) watch your credit behaviour quite closely and provide for a credit score which denotes our credit worthiness.

We may think this is not an issue in India yet, but it is becoming one. Lately, the Reserve Bank of India (RBI) has addressed this issue by specifically suggesting banks to use credit scores even to price loans optimally.

Credit rating agencies assess your debt and payment history and give you credit scores. A high credit score is good. A low credit score is bad.

The higher your credit score, the better. It will make it easier and quicker to borrow money if and when you want. And those loans will be cheaper.

The lower your credit score, the more difficult your financial life will be. It will mean higher monthly charges and less ability to take care of routine bills. Ultimately it may mean a downward spiral in the quality of your life.

What We Can Do to Help

I started the Wealth Builders Club to help “not-yet-wealthy” people achieve financial independence in seven years or less. Knowing that so many of our readers have debt and credit issues, we have committed to developing a comprehensive and effective coaching program to eradicate debt while simultaneously building good credit. As you know, one of my top rules for creating wealth is to become a little bit richer every year.

It's hard to do that if you have significant debt and/or credit problems. But you can do it. And you need to do three things simultaneously.

First, you must increase your income. I talk about increasing your income in my Creating Wealth essays, it gives you practical ways to make more money in the club's Extra Income Project series.

Second, you must use a good portion of that extra income to reduce your debt.

Third, you must decrease the amount of money you are spending on your current lifestyle (what we call your lifestyle burn rate).

Those will be the three key behaviors to remember while you go through our debt - and credit-coaching program.

The Benefits of Taking This Course

Here's what you can expect from this course…

We will help you address and resolve your debt problems - this is serious work. It will require some sacrifice, but it will be worth it. In the beginning, you will make progress in small degrees.

But things will speed up over time. This will be especially true if you are able to generate more income, as we will be urging you to do.

We will also talk to you to improve your credit scores… Not so you can rush out and borrow more money. But because increasing your credit scores will reduce the amount of money you need to spend on debt service every month.

The goal of this part of our coaching program is to gradually but steadily help you understand and raise your credit scores so as to qualify you for the best interest rates on your house, cars, investment real estate, and even business loans.

And you'll breathe easier anytime a situation arises for which you need good credit.

Our program will then show you how to maintain good credit scores going forward.

Know this: Reducing your debt and increasing your credit scores have similar results. They both lower the amount of money you send to other people every month. This keeps more money in your pocket. This money is what you'll use for saving, investing, and starting your own business. And that's how you're going to get richer every year.

How We've Structured the Course

This program will have two focal points.

One is a focus on debt. That's because debt is the root cause of many financial worries. By correcting your debt situation, we'll fix several financial problems at once (low credit scores and low savings rates are just two of them).

To start, we'll look at the role of debt in your life and where you are today. Then we'll give you a roadmap to help you get out of debt as quickly as possible.

We'll end our analysis of debt by covering a few instances in which debt can actually be helpful. I'll say no more about that now.

The second focus of this program will deal with credit; specifically, how to improve your credit scores… no matter what they look like today.

A company like Credit Information Bureau of India Limited (aka CIBIL) keeps all record of your borrower behaviour and will give you your credit score.

We'll work with our partners at PersonalFN to tell you the best places to get your credit reports and scores - without getting scammed or paying a fortune.

Finally, to complete the credit section, we'll give you a plan to maintain your good credit. It's important to keep scores high so that you receive the best credit rates and terms in the future. This alone can save you thousands of rupees each year.

If you follow the advice we lay out for you in this course, you'll be on your journey to getting (and staying) out of debt. And you'll be armed with the knowledge of how to achieve and maintain high credit scores.

But we realize it doesn't end there. Keeping your debts low and your credit scores high is a lifelong process.

That's why I want you to view this course as a reference manual. Come back to it and review the material over and over again as your circumstances change. This repetition will help cement the lessons.

Commit to taking action on everything we send you. Before long, you'll feel (and be) richer.

Best, Mark

P.S. I hope you're ready to commit to the action steps we'll give you. Many people think they are ready, only to find that they become discouraged and quit early in the process. After all, facing the reality of your debts can be difficult.

That's why, before you even get started, I'd like you to do a realistic assessment of your current situation: Where are you financially… and emotionally? That means thinking about your current state of indebtedness. Most people avoid thinking or talking about their debts at all, which is a major problem-it means, most likely, that they will never take the actionable steps that are required for getting out of debt.

Tell us about your issues with debt. Your responses will help us arrange this series to better meet our readers' needs.

Dear Wealth Builders Club Member,

Back in the day, Indians used to give each other blessings, 'may you always live happy,' 'may you live for a hundred years.' One of these blessings was interesting - 'may you never fall into debt'… never become a 'karzdaar'.

We were right to hate debt. Moneylenders would squeeze the lives out of us for the smallest of loans, with the cruellest of terms. It was a sure-fire way into financial hell.

Today, however, we have forgotten how evil it can be. We cavalierly pull out the little plastic moneylender from our pockets to charge every little thing in sight. But even though the credit card is more sophisticated than the local moneylender, it is as capable of gouging our eyes out.

According to a report of Dec 2014 on the National Sample Survey Organization (NSSO) survey of debt in India, nearly a third of rural households and a quarter of urban ones are indebted. The scale of indebtedness revealed is astonishing: between 2002 and 2012, the average amount owed by each family has jumped seven times in cities and more than four times in rural areas. About 22% of urban households were indebted and the average debt per family was Rs 84,625, up from Rs 11,771 in 2002.*

That's a lot of debt for us to be carrying around at any given time. That's why, before you even get started, Mark would like you to do a realistic assessment of your current situation: Where are you financially… and emotionally?

In today's essay of our new Debt and Credit Solutions series, our Partners at PersonalFN write to us about the rules to follow for healthy credit card use… and tips for maintaining a healthy credit score.

To your wealth, Anisa Virji Managing Editor, Wealth Builders Club

A couple of years ago, one of the readers of our website, Shyam, reached out to us. He wanted to meet with one of our investment consultants.

Since it was the first meeting, our investment consultant was eager to find out what his concerns were and see how we could help him deal with his finances.

The meeting started out well, the consultant started to understand Shyam's current situation, and his expectations from us. But in the course of the meeting, the consultant realised he had learned the root of Shyam's problems.

The 3 core mistakes of Shyam's financial life:

Mistake# 1: He relied too much on borrowed money

Mistake# 2: He often missed paying his dues on time

Mistake# 3: He had accumulated interest on interest, which in turn left him with a huge credit card debt

This all part of the same problem - he had borrowed too much money.

Yes, he had huge credit card debt. He received several intimations from the bank to clear his dues. The recovery team of the bank often called him for money.

The credit card is a two-faced friend - while it gives you a certain amount of freedom with your finances, and you can certainly enjoy the benefit of holding a credit card, it can easily turn around on you and put you in a financial hell.

If you choose to go down the dreaded card route, you must ensure that your increased spending is not stretching beyond your means; which, as in the case of Shyam, can jeopardize your long term financial wellbeing. He used his credit card wherever possible even if he needed to make a tiny payment at a grocery store. And things just got out of hand.

While we guided him on how he can settle his dues, we also told him about 6 rules that should be followed while using credit cards.

Rule# 1: Read all terms and conditions carefully before you opt for a credit card.

If you find anything in the terms and conditions of the credit card that was not conveyed to you, or is contrary to what was conveyed to you; seek a clarification from the bank. If you are not satisfied with the clarification, do not hesitate to cancel the card.

Rule# 2: It is important to be aware of the amount of annual fees that the bank is going to charge you each year.

This is one issue which credit card users often come across. Some banks also issue 'life time free cards' i.e. no annual fees are charged on usage of such card. However, it is best to double-check with the bank what the executive has promised. Don't go by his tall claims, which in most cases is - annual fees will be waived off, cash back offers, more reward points, etc. This will help you from any surprise in future. Do not forget, the annual fee will be levied even if you do not do a single card transaction in a year.

Rule# 3: Do not fall for minimum payment due.

Minimum amount is the amount that you need to pay for the purchases done in that month so as to not attract a penalty for default on payment of card dues. Our suggestion is that you should pay the entire sum on the due date, as carrying forward your payment to the next monthly cycle will lead to a higher amount due in your next bill due to high interest rates plus taxes levied on the credit card.

Rule# 4: Avoid payment by EMI.

Whenever you make a large purchase (usually over Rs 10,000, although the amount varies across banks) you may get an offer from your credit card issuing bank to opt for the EMI (equated monthly instalment) facility to spread your payment across several months. You should ideally give the EMI facility a miss as the interest on the EMI can be exorbitant. To put it simply, pay your credit card bill in totality before the due date in one go.

Rule# 5: Do not borrow cash.

You might have received calls from a tele-calling executive of your bank, making you aware that your credit card can not only be used for making purchases on credit but also for borrowing cash. While making purchases on your credit card (so long as you pay on time) is okay, borrowing cash on your credit card is a very expensive affair and hence must be avoided. It is a strict No-No! While the annual interest on cash borrowings may vary from bank to bank, it can be as high as 30% to 36% per annum.

Rule# 6: Miss the Insurance benefit.

Many credit cards are known to offer an insurance cover. You should ideally ignore this benefit and go for the core offering - credit card. If the card has features that suit you, then you can opt for it even if there is no insurance cover. This insurance cover is unlikely to be sufficient for you and more often than not is linked with many terms and conditions and may even be difficult to claim. Do you know, using your credit card imprudently may have a big impact on your credit score?

If you are one of the many people making use of your credit card to fund your shopping, entertainment, holiday spending, and not worrying about repayment; here are some facts to bear in mind that will keep your credit score healthy.

We will tell you how to be a smart borrower i.e. how to know your credit score, how to keep it high, or make it higher than it is, and give you 3 top tips to get out of too much debt and keep your credit score healthy.

Let's start…

But first, what is a Credit Score?

Your Credit Score is a score provided by a credit information company (for example companies such as CIBIL, Experian, Equifax, HighMark) to a prospective lending institution, that will tell the lender how good or bad a borrower you have been.

The clear indication is that the higher your credit score, the better a borrower you are. This means that you probably make your payments on time. Hence the lender who is ready to lend you money knows that he will face a lower risk of you defaulting on your payment schedules and vice versa. The lower your credit score, higher the risk that you will default.

Hence you should aim to always keep your credit score high. A lower score means that if you want a credit card or want to take a loan in future, you are probably going to face a difficult time. As the situation stands today, lenders will restrict you if your score is poor by possibly charging you a higher rate of interest on a loan, but sadly they are yet to reward those borrowers who have a high credit score.

Now how do you find out your Credit Score?

A company like Credit Information Bureau of India Limited (aka CIBIL) keeps all record of your borrower behaviour and will give you your credit score. You just have to follow the simple steps given on the CIBIL website.

There is a nominal fee of around Rs 470, which is non-refundable and you can have access to your credit report within 3 business days.

If your Credit Score is low, how do you fix it?

There's no shortcut here.

If you have a low credit score due to poor borrower behaviour in the past, you can still improve your credit score by paying your dues on time. Repay any pending dues and ensure that you do not default on any payments in the future. While this will take time, but your small steps will definitely help raise your credit score.

If you come across your credit report and find that your credit score is low, not due to past indiscipline but due to an error on the part of the lending institution or on the part of CIBIL, you should immediately notify both - the institution as well as the CIBIL.

Who can help you get out of debt and fix your Credit Score?

Some of you may not have even realised when you built up too much debt and now you don't know how to handle it. Your credit score is certainly suffering. Repaying your debt and emerging from the debt trap should be your first priority. Doing so will automatically improve your score.

You can even approach a good credit counselling organisation that can help you fix your debt situation. These organisations are typically non-profit organisations, so fees are minimal, if there are fees at all. Such credit counselling organisation can help create a debt management plan for you, help negotiate with the lender on your behalf, and even try and get you a lower rate of interest to repay your pending debt. Simply knowing that you are not alone in your struggle of repayment of debt, you will also receive some peace of mind.

You can contact a credit counselling agency you deem fit, to help you out for both situations i.e. correcting an error or getting out of a debt trap.

Now let us help you with 3 top tips we promised …

Your 3 Top Tips to Keep You Out Of Debt Trouble And Keep Your Credit Score Healthy

Tip# 1: Make your debt payments regularly and on time. This will have the most significant impact on your credit score.

Tip# 2: Try and avoid having more than two credit cards. This will ensure that you don't keep credit limits that you don't really require. Even multiple loans should be avoided.

Tip# 3: If you are planning to apply for a new credit card or a new loan, do it in a short span of time - don't drag out the process. If you stretch the process over months, it will look like you have spent a lot of your time seeking credit, which will reflect negatively in your credit report. Do your research quickly, and take the loan.

'Rather go to bed without dinner than to rise in debt.' - Benjamin Franklin

It is better to cut down on your expenses as far as possible rather than borrowing in order to pay for a kind of lifestyle that is well beyond your means. Make sure you don't take more debt than you can handle. You should have a proper financial plan in place. One of the many benefits of planning your finances is that it will show you how your cash flows are structured year on year, and accordingly you will know how much EMI you can afford to pay in the coming years.

This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm known for offering unbiased and honest opinion on investing.

The Times They Are a-Changin'

Bob Dylan called it. Things are very different today than they were a generation ago. For one, today's generation spends a lot more than what our parents and grandparents did.

The cost of living has gone up, but a culture of credit-backed consumerism has played a vital role. Walk into a mall and the picture is evident: everyone swiping credit cards and opting for easy finance options - all the fancies of life without a second thought.

Along with rise in income, our aspirations have stretched bounds. We want to live in our dream homes, drive the latest fully-loaded sedan, take exotic vacations abroad, avail the plethora of lifestyle choices… We want it all, and we want it now.

However, without much cash available in the bank account, we fund it all with loans and access to easy credit… at the risk, of course, of personal finances going awry, very awry.

We're often unaware that credit information bureaus (such as CIBIL, Experian, Equifax, HighMark) watch our credit behaviour quite closely and provide for a credit score that denotes our credit-worthiness.

Here are some of factors they take into account when assigning a credit score:

Payment history Credit usage Duration of the account Type of loans (consumer, home, etc.) Number of enquiries to avail credit

Based on these factors, they assign you a score ranging between 300 and 900.

The higher the credit score, the better a borrower you are. As a responsible individual, you should try to keep your credit score healthy. This means you should make your payments on time. This tells lenders that there is a low risk that you will default.

If you maintain a low credit score, here are a few problems you may encounter:

You may find it difficult to get a loan in future Lenders may charge you a higher rate of interest Lenders may charge a higher loan processing fee

Why? Because a low credit score means lenders are exposed to a high risk of default.

So, how do you improve your credit score?

If your credit score is low, here's what you need to do…

Pay your credit card bills on time, and ensure that the outstanding amount is paid in full
Avoid payments by Equated Monthly Instalments (EMIs) on credit cards
Avoid withdrawing cash using a credit card
Do not opt for multiple credit cards or apply for multiple loans
Use your credit cards in moderation - set a monthly limit for yourself
Do not rely too much on borrowed funds
Pay your EMIs on time for all kinds of loans

Remember, when you close your loan account(s) in full, do not forget to obtain from your lender a closure letter or No Due Certificate (NDC), statement of account(s), original documents that you may have submitted to the lender, and remove lien on assets… all this would act as evidence for you and help you elevate your credit score in the future.

Once your loan accounts are closed, enquire with your lend to ensure they inform the same to the credit bureaus. If the lender has not intimated the closure of your loan account to the credit bureau, do it yourself (by writing to them and submitting the requisite documents as proof).

If you notice that your credit score is low due to an error on the part of the lending institution or the credit bureau, you should immediately notify both, the institution as well as the credit bureau.

By maintaining a good credit score now, you keep yourself eligible for cheap finance in future, when you might really need it.

Today, barring few large banks, most of the other banks are using flat loan pricing model wherein good credit behaviour is not incentivised and neither the bad ones are penalised. In India, credit scores have so far been used only to determine whether to accept or decline the credit application of the borrower. But lately, the Reserve Bank of India (RBI) has addressed this issue by specifically suggesting banks to use credit scores even to price loans optimally.

If banks start following this practice widely, bargaining with banks for cheaper loans based on your credit score might soon become possible for borrowers.

When negotiating a loan, in addition to your credit score, banks may also consider:

Your income and occupation Your saving account history Even your income tax returns for the past few years

It may seem invasive, but banks need a fair idea of your financial behaviour to determine their lending risk.

What if you are unable to fix your credit score by yourself…

If you’ve fallen victim to the debt trap, a host of credit counselling organisations can help. They may be able to help you with a debt management plan and even negotiate a lower rate of interest with the lender on your behalf. These agencies are typically non-profit organizations, so don’t worry about fees. They are minimal. Simply knowing that you are not alone in your struggle is a great relief.

Concluding points…

Taking calculated risk can be a good way to build wealth and meet certain life goals, but overindulging in credit and debt can be hazardous to your wealth and health.
Stretch within your means, and do not take leaps so long that they could jeopardise the financial well-being of your family.
To ensure you don't take on more debt than you can handle, have a prudent financial plan in place.
Remember: if you are a safe borrower, you will score well on your credit worthiness.

This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm known for offering unbiased and honest opinion on investing.

Ask Nobel Laureate Muhammad Yunus about the positive role that credit can play in the world and he'd hasten to tell you that credit can transform lives. A Bangladeshi scholar, entrepreneur, social leader, economist, and the founder of the Grameen Bank, Yunus believes that credit is a fundamental, universal right.

Yunus pioneered the concept of micro-credit in his country and around the world. He made eradicating poverty look simple. How? Empowering the poor through credit.

But what about creditworthiness?

As Mr Yunus teaches, we must prepare even the poorest person to handle debt confidently. Let's not forget so-called creditworthy companies have caused Indian banks trouble.

State of today's banking system: Those who need loans can't get them. Lenders chase those who don't need loans. The debt-averse eschew debt-creating opportunities. The debt-addicted ruin their finances and put the entire banking system at risk.

So how does one act sensibly and build wealth with borrowed money?

Moderation is the key. Too much of anything can be bad.

Greece is bankrupt because of high levels of debt at every stage of society. People borrowed beyond their capacities. Banks lent beyond their capacities, sometimes even leveraging their own positions. The introduction of the euro suddenly raised Greek purchasing power and supported unrestrained consumerism. Productivity and export competitiveness died slowly. Easy and borrowed money created asset bubbles only to get pricked badly.

If you only considered the state of Greece, you might conclude that all debt is bad. But Mr Yunus proves that even the poorest of the poor can use moderate debt to create wealth.

Greece's bad example teaches two important lessons about debt…

#1 Don't borrow beyond your capacity to repay.

You must ensure that you don't over-borrow and put a strain on your finances. Just as countries track their debt-to-GDP ratio, there is a similar way you can check whether you are over-leveraged – your debt-to-income ratio.

Debt to income ratio = Total monthly outgoings on liabilities (EMIs) Total monthly income from fixed sources

This ratio tells you the proportion of your monthly income you spend on servicing your debts. Ideally, it should not be more than 0.35 (or 35%). The more you exceed this number, the more strain you put on your income.

So, before taking a loan, assess your monthly income and expenses to see how much additional outflow you can afford. This will help you decide how much loan you can comfortably handle.

#2 Don't borrow to fund luxuries or speculation.

Never borrow to buy luxuries such as posh cars, iPhones, or holidays. And never borrow to play a horse race or gamble in a casino or even to speculate in stock markets. If you lose money in betting, you have to service your liability without having made a single rupee.

But do not shy away from borrowing for productive purposes or to create productive assets. This is the single most important factor you must consider while borrowing: Will this debt fund productivity?

If you borrow to start a business, your business should generate cash flows and help you service your debt.

If you purchase a house with borrowed money, besides earning rents, you may also enjoy capital appreciation, which you use to pay down the debt.

Mind the cost of borrowing

Loans that don't require collateral for approval are usually costly. This is why personal loans cost 14%-16% per annum, whereas home loans, although floating, charge interest of about 10%-11% per annum.

If you are buying a house to live in, you may only bother considering the affordability of the house and your capacity to repay the loan on time. But if you want to create an asset, such as a business or a second home, you must make sure that your expected cash inflows from the asset exceeds the cost of the loan. If you can manage this, a loan becomes a powerful tool of wealth creation.

For example, if you want start a business, you must assess not only how much capital (that is, debt) you need to fund the venture but also how long it will take you to break even with the cash you generate from the business. If the gestation period of the business is short and your risk capacity is high, borrowed money may help you create wealth. On the other hand, if your potential business is going to take a long time before it pays off, borrowing too much up front may be a bad idea.

Similarly, when you buy a property with borrowed money, you must factor the scope for further appreciation in that locality and how long before tenants can occupy the space. If demand outpaces supply, your property will appreciate. And completed, ready-for-possession properties carry less risk and can generate cash inflows through rents immediately, helping you service your loans comfortably.

Now…if you have concluded that borrowing to invest in stocks to make higher gains than the interest on your debt, you are mistaken. Equities are far more volatile than the real estate, and Indian markets are largely driven by foreign investors, who aren't much different than Flamingos: They come in search of food, and when they have enough, they return home. Or a crisis back home may force them to flock back immediately.

Don't assume that just because you are borrowing in the hope of asset creation (rather than luxury) it's a good idea. Borrowing to play the stock markets is more like borrowing to bet on the horses. We're not saying you shouldn't invest in the markets or that the Indian markets don't offer great wealth creation potential. However, they are far too volatile and carry far too much risk to merit borrowing to fund your stock investments.

Are you prepared to borrow and become rich?

Mohammad Yunus and Grameen Bank changed the fate of thousands of beggars in Bangladesh by providing moderate loans to fund genuine wealth creation. Creating wealth with borrowed money is certainly possible. You won't build wealth if you borrow to fund luxury or speculation. However, moderate, mindful debt used to fund productive purposes has the power to transform the world.

This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm known for offering unbiased and honest opinion on investing.

'My life is an EMI,' said Mr Desai as he began a consultation with one of our investment advisors.

'Could you elaborate?' asked the advisor.

'Well, practically whatever I've bought for this house [where we are seated], including the house itself, I've bought on credit. This 50 inch 3D LED TV, the home theatre and sofa sets, my iPad, and many other things for my family, I've bought on instalments,' he told us as he pointed around to the various comforts he and his family enjoyed.

Our advisor looked concerned. But then Mr Desai said…

'But now I want to get my house in order for the financial well-being of my family. I have two little daughters studying in a good school, and I want to provide for their higher education in whichever stream they choose and get them married in style. I want to fulfil all my responsibilities wisely and eventually live a blissful retired life.'

Our investment consultant then provided a few wise words on financial planning, and Mr Desai decided to enrol in our personalised financial planning service to correct course before it was too late.

In our era of consumerism and competition, we all have aspirations. But we do not all realise that we might be aspiring, consuming, and competing beyond our means.

Home theatres, huge TVs, tablets, laptops, mobile phones, lavish interior decor…perhaps all of it was bought on credit. Finance options are readily available in the form of easy EMIs and credit, and they are designed to lure us into the debt trap.

It's one reason malls and electronic shops are seeing a good footfall. Customers gush over discounts, and the shops are eager to promote them. This, of course, is just another lure. The offers make us think we're saving money, but they are merely another lure designed to encourage us to exchange our long-term financial well-being for items we don't need.

'If you buy things you don't need, you will soon sell things you need.' - Warren Buffett

Credit has a way of becoming a habit, and spending can easily turn reckless. It's easy to get caught in the debt trap. But indulging in the occasional shopping spree can harm your long-term financial health. And it can derail your most important financial goals, such as your children's education, their marriage, and even your own retirement. And sadly, unlike Mr Desai, not every one realises they need to correct course before it's too late.

It is vital to ensure your spending habits do not affect your priorities. Here are some tips to avoid reckless spending…

Determine you monthly budget

To do this, you must first list your financial goals. Then determine when you want to achieve these goals and how much money it will take. Don't forget about inflation! The next step is to calculate the amount you'll need to save every month, taking into account the rate of return on investments. These figures will help you determine your monthly budget.

Plan for personal expenses

To avoid indulgent purchases, you need to account in advance for your family's personal expenses such as clothes, accessories, etc. Include these expenses in your budget, and make sure all family members stick to it. It is smart to purchase items that are on sale, but don't let these marketing strategies entice you into buying unnecessary items you didn't plan to buy. If you are having trouble saving for your financial goals, explain the situation to your family. Only when they too recognise the situation will you be able work together towards reducing your overall family expenses.

Plan for household expenses

Apart from personal expenses, your budget should also plan for all household expenditures. All shopping trips must be well planned so as to save on transportation costs. When grocery shopping, account for spoilage…and make sure your family doesn't waste food. Likewise, ensure that fans and air-conditioners are used thoughtfully. Same for mobile phones and data plans.

'Don't save what is left after spending; spend what is left after saving' - Warren Buffett

Find an alternate source of income

Sometimes reducing expenses may not be enough to correct course after years of particularly damaging spending. And so you might also need to find an additional source of income. Even if you are already working full time, you might need to take on a part-time job to make up for past recklessness. Perhaps you will need to become a dual income household with both spouses earning an income.

The idea here isn't complicated: reduce expenses and increase savings. But correcting course does require discipline. Just remember that it's all in the interest of you and your family's long-term financial well-being.

Now, if your bad spending habits have led to deep credit card debt, here is a five-point approach you could follow…

Assess all your credit card dues: The first step to eliminate your credit card debt is to evaluate all your obligations. Take note of all the credit cards you own, analyse your online accounts and paper bills, and the interest rates applicable on each card. This will help you to determine the total amount you owe and the cards that bear the highest rate of interest, which are the ones you should pay off first so as to save on interest payments.

Renegotiate the rate of interest on your credit card: You can try to reduce the interest rate you are paying on your credit card by contacting each credit card company. Even if you manage to reduce the rate by a small percentage, it can help you save a huge amount on interest payments. Your credit card companies may or may not renegotiate interest rates, but there is no harm in asking.

Create a budget to pay off your credit card dues: In addition to your budget for household and personal expenses, you will need to account for credit card debt repayments. Include in your budget the exact amounts you will pay off each month. You might need to prioritise these payments over your personal and household expenses. Meaning you may need to eliminate outings or ration your 'essentials' such as electricity and mobile use. It goes without saying, but don't add to your debt with unnecessarily credit-fuelled shopping sprees. If you have extra credit, don't give in to the temptation to use it. It will only lead to unnecessary purchases and put you back where you started.

Utilise windfall income to repay your debts: Any windfall gains, such as lawsuit judgments, inheritances, divorce settlements, insurance settlements, or retirement packages, should be used to pay down your debts. Even if you had other plans for this money, it is wise to repay your debts first if you want to boost your financial health and meet your longer-term financial goals.

Implement your debt repayment strategy: Once you have determined a method to budget your expenses and pay off your dues, you must start to implement it. Do not delay or procrastinate these payments, as the interest will only mount higher with every passing day. It is also prudent to keep a track of your progress. Revisit your finances regularly to ensure that you have not deviated from the plan.

A debt-free life is achievable. But it takes practical planning and a bit of discipline. As Dave Ramsey, a personal money management expert, likes to say, 'Live like no one else now…so that you can live like no one else later!'

If you feel yourself slipping into the debt trap, don't hesitate to seek the guidance of a financial expert or credit counsellor. Typically non-profit organisations, their fees are minimal…if any at all. And a good credit counselling agency will create a personalised debt management plan, negotiate with the credit card companies on your behalf to get you a lower rate of interest, and perhaps best of all, provide you with peace of mind knowing that you are not in it alone.

At PersonalFN, we hope that you will keep all this in mind the next time you go on that credit-fuelled shopping spree.

This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm known for offering unbiased and honest opinion on investing.

Ask your dad if, before your time, he used credit for everyday purchases and I'm sure the answer will be no. Traditionally, Indian consumers have been averse to buying on credit. But that was the past.

Today is the golden age of plastic…'plastic money'!

Now, thanks to credit, the fancies of life are available before we even earn an income. Gadgets, appliances, accessories, bikes, and more! But, as American humourist Evan Esar said, 'A batch of credit cards fattens a wallet before it thins it.' It's all fun until you have to foot the bill.

Credit cards aren't inherently bad, though. It's about how you use them. If not prudently, it's all too easy to fall into the credit card trap and ruin your financial health.

Here are some points to keep in mind when selecting the right credit card for you:

Credit limit

Your credit limit is the maximum amount you can spend on a credit card. If you are a first-time card user or an avid spender, it's better to opt for a card with a low limit, say Rs 15-20,000.

Be aware that sales personnel from banks may try to push a higher limit on you. While you may indeed deserve one, just remember that a higher limit could permit you to spend beyond your means. This is how the credit-debt trap begins.

Some lenders allow you to exceed the credit limit subject to terms and conditions, but it's best not to indulge in this unless there's a dire need.

It is possible to borrow cash from your credit card, but the interest rates are very high and can damage your financial health. It's best to avoid cash advances unless, again, the need is dire.

Interest rates

When shopping for a credit card, research the interest rate the bank charges for partial and delayed payments. Normally, the interest rate levied is 2% to 3% per month. To avoid paying higher interest and falling into the trap, it's ideal to pay your dues in full and on time every month. Also be aware of any annual fees or other fees attached to the credit card and do a comparative analysis of different banks.

Annual fees

Check if the bank levies annual fees or charges to use the card. If so, look into having them waived. It is common for banks to waive the annual fees / membership fees for the first year. In the second year, fees could be applicable. It's possible to be promised a fee waiver for the second year as well, but you must authenticate this claim with the bank directly to circumvent a 'mis-selling' trap.

Lifetime free cards

'Lifetime free credit cards' are relatively new. While there was a time when most banks charged annual fees on their credit cards, annual fees are being phased out. In effect, clients are offered 'lifetime free cards' - that is, no annual fees for life. Again, double-check any telesales personnel promises with the bank.

Grace period

Another factor to evaluate is the extra time or grace period the bank offers you to pay your outstanding dues without interest. The longer the grace period you have, the better. This can offer a cushion, though it's better to pay off the outstanding dues before you need the grace period.

Rewards and incentives

These days, most credit cards offer reward points and incentives on purchases or dining out that can be redeemed or used at a later date.

For instance, some credit cards allow you to redeem reward points at certain stores or shopping centres. If you are a frequent shopper at these outlets, then consider a card that offers rewards there. Likewise, if you are moviegoer, opt for a card that offers reward points on entertainment. Analyse your spending habits to determine which card suits your needs best.

Irrelevant benefits

Banks smartly advertise their credit cards by adding on auxiliary services and products these days, however be astute enough to assess whether this makes sense to your needs and lifestyle. It may happen that various benefits are offered, like an insurance cover coupled with the credit card, but makes little sense if you already have an insurance provider. As attractive as they might be, be wary about such offerings because the core utility you're looking for is the benefits of a credit card. If a card has features that suits you, opt for it even if there is no insurance cover or other add-ons.

Terms and conditions

Remember, the devil is in the fine print, so take the time to read the terms thoroughly. Unfamiliar terms and conditions can jeopardise your financial well-being. If you find anything, jargon or otherwise, in the terms and conditions section that was not conveyed to you or is contrary to what was conveyed to you, seek a clarification from the bank and avoid taking or using that card.

Once you begin to use the card, it is assumed that you have read the terms and conditions and have agreed to them.

Choosing the best credit card for you is just the first step. How you use this plastic money will determine your long-term financial well-being. Here are few tips to empower you:

Have a budget and spend within your means

Avoid converting large purchases to EMIs

Pay-off your credit card dues in full and on time

Claim waiver on annual fees by keeping a good repayment record

To swipe or not to swipe? That's the question. It's all very simple: Be a wise spender and use credit cards with caution. Avoid opting for many credit cards as it could cause a debt storm if you aren't careful.

PersonalFN believes that owning a credit card can be convenient as long as you have the means to pay off your dues every month.

This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm known for offering unbiased and honest opinion on investing.

A leap of faith can change one's life. But the impact of the change depends on how, when, and from where you jump.

Jumping up and down is excellent cardiovascular exercise. Jumping into a swimming pool is great fun. Bungee jumping is a real thrill. But every jump requires prudent safety measures…no matter how strong your faith. Faith and reason are not mutually exclusive.

Entrepreneurs looking to take a leap of faith in their business should also enact safety measures…no matter how confident they are about their business.

What separates a successful business from an unsuccessful one? Good judgment regarding risk. Launching a new product is as much of a risk as it is an opportunity. And taking a business loan can be a double-edged sword. If the funds are used productively and prudently, they could provide the springboard your business needs. Without careful planning, however, borrowing on a whim or during a crisis is the like bungee jumping without a harness.

Before you apply for a business loan consider:

Why you need funding How long it will take to pay it back Entrepreneurs might borrow for many reasons - from business expansion to working capital requirements. But it is best to borrow to scale up existing business activities or to start new ones. Borrowing to run an existing business should be a last resort. Ideally, a business operates on the cash it generates. Regularly borrowing to sustain your business will cause difficulties sooner or later.

That said, borrowing to expand your business does not automatically make the loan less risky. But it does give you a higher purpose.

Before you apply for a business loan, you need to know how you will earn additional profits to be able to service and retire the loan. Be clear with your business plan. Predicting future cash flows is extremely complicated. And it's not what you aim to earn; it's what your business is capable of earning, which depends on…

The economy Your industry Demand Competition Regulations Common Mistakes When a businessperson starts getting more orders, they tend to become bullish about their business and highly motivated to expand. One more product…one more store…one more market…and so they borrow - sometimes more than they should.

All-out expansion can be risky. Imagine this: After a boom in the automobile industry, a small auto-component maker thinks about doubling his capacity. His business has a reasonable surplus and little debt. He has an aggressive expansion strategy that he's confident he can implement. A bank grants him a loan. But the automobile industry enters a rough patch just as the expansion nears completion. A double whammy: The business has invested heavily in new capacity, but now even the pre-existing capacity is underutilised.

We do not wish to encourage pessimism but a 'wait and watch, slow and steady' approach.

Smart Borrowing is Simple Before you calculate how much you will borrow, you must understand industry trends and dynamics. The pricing power of producers and service providers in your industry is a good signal of the pace of activities. It's the job of the entrepreneur to judge how long that pricing power will last.

More competitors and less demand can puncture the industry wheel. Avoid borrowing when the balance sheet shows all-time high margins and revenues. That's often the end of a cycle. True, not all businesses are cyclical, but demand-supply dynamics are not constant, and no industry is immune to change.

Keep in mind that a strong business with a promising future will always be able to find a financer. If a conservative bank refuses to lend, there may be a lacuna in your analysis. Consider the bungee instructor who prohibits an obese person from jumping. Banks, prudent banks, serve a similar function. They will not let you jump to your death. It's not good for business.

So hash out the details again. But don't waste time on elaborate project reports. Coaxing a loan from a bank through affected presentation may get some success, but it's detrimental in the long run. A loan proposal that is strong at core will see the most success.

When you propose a loan to a bank, they will want to know your:

Personal credit history Trade credit history Business cash flows Collateral security Firm's net worth If you or your business score low on any of these items, a bank will be reluctant to lend you. So before you apply for a loan, take a 'business fitness test'. And don't jump unless you are fit.

Before the financial crisis in 2008, a friend of mine TD invested the bulk of his retirement money in a couple of stocks he was excited about.

One happened to be Lehman Brothers.

As you know, Lehman Brothers went bankrupt in September 2008 and sparked the onset of the financial crisis.

With a significant amount of his portfolio in Lehman, TD's portfolio was decimated. It forced him out of retirement and back to work.

Risk is an element of every business and investment transaction. But it can be managed. We've distilled the “best practices” we developed over the years for managing risk. We've narrowed them down to an essential three.

We are calling them The Wealth Builders Risk Management Strategy. Three simple protocols based on three common - but very dangerous - mistakes.

The first mistake is having too much money invested in only one or two asset classes - most commonly, stocks or bonds.

The second mistake investors make is putting too much money in only one or two investments within an asset class (as TD did when he loaded up on Lehman Brothers).

The third mistake is keeping your money in an investment as values plummet, hoping for a correction - a very common mistake that is easy to fix.

Our Risk Management Strategy has a solid and dependable solution for each of these three mistakes.

Our strategy involves asset allocation, position sizing, and exit strategies. For the purpose of simplicity, think of it as a three-legged stool of safety.

1st Leg: Asset Allocation

The most important risk-reduction strategy is diversification by asset allocation. By that, we mean dividing your investment capital into different asset classes. This way, if one asset class tumbles, you have additional money invested in other classes that may not drop as fast. Or that may hold strong. Or that may even increase in value.

To show you how important asset allocation is, let's look at what would happen to three different investors in case of a stock market crash. We'll assume each used a different allocation strategy.

First, let's look at Ravi. Like TD, Ravi invested 100% of his money in the stock market - let's say 1,000,000. In other words, he had no diversified asset allocation plan. That meant his money was wide open to stock market volatility. So if the market dropped 30% that year, Ravi lost 300,000.

Our second investor, Naina, also invested 10,00,000. But she took a more conservative approach. She followed a traditional asset allocation model - 60% in stocks and 40% in bonds. Let's look at the difference it made.

Like Ravi, Naina lost some money. But she had less money in the stock market. Therefore, she lost less than he did. That alone makes her strategy superior. But it gets better…

Bonds are typically inversely correlated to stocks. So if the stock market is plummeting, bonds might actually rise. Let's say they rose by 5%. So while 60% of Naina's money dropped 30% (the stock market losses), the other 40% of her money actually rose 5% (the bond gains). This means Naina actually lost only 20% of her money - 200,000.

This is a better result. But we have a far better way.

In our view, the two-asset class model is far from optimal. We prefer to diversify over five additional asset classes. Our Asset Allocation Model could include the following seven asset classes:

Cash Bonds Precious Metals Real Estate Options Stocks: shorter-term Stocks: longer-term

Had you diversified your portfolio this way in the face of a financial crisis, you would have had the best results of all our three scenarios.

Let's look at our third investor, Sejal. To make it simple, let's say Sejal spread her 1,000,000 equally between the above seven asset classes - about 14% in each category.

Note: Our official asset allocation model does not weight each asset class equally. Instead, we weight the asset classes based on what counts: how much money you have available to invest and how many years you have left before you want to retire. We provide different categories to fit the wide scope of our many readers' financial and retirement situations. But for simplicity in this example, we're assuming an equal weighting in each asset class.

Now assuming this is how the market moved:

For cash, the average money market fund was up 2%.

For our bond asset class, we'll use the same return from earlier - 5%.

For our precious metals/gold allocation, the price of gold rose 4%.

For real estate, a 15% appreciation.

In our options asset class., let's assume a loss of 15%.

Our asset allocation model divides the “stock” asset class into two categories: shorter - and longer-term stocks. These returns are harder to quantify.

Let's assume the two stock asset classes would have lost 25% overall.

Add up the returns of these seven different asset classes. And you'll find Sejal lost only 8% on her entire portfolio, or 80,000. That's almost 80% less than she would have lost with 100% invested in stocks. And 60% less than the second model (stocks and bonds).

The main advantage of our expanded asset-allocation strategy is obvious from this example: less downside risk.

These seven asset classes are not correlated. That is a good thing. It means less volatility and less damage when things get crazy.

Our asset allocation strategy is unique. But having seven asset classes is only one component. We also provide guidelines as to how much of your money you should have in each class which we'll discuss in the next essay. Stay tuned.

Best, Mark

In my last essay, I introduced you to our unique Risk Management Strategy. We discussed the 1st Leg of the three legged stool system: Asset Allocation - the importance of dividing your investment capital into different asset classes. Today, I will reveal to you the other two legs keeping your investments safe.

2nd Leg: Position Sizing

The second leg of the safety stool is position sizing. This is a simple strategy dressed up in a fancy name. The idea here is to limit risk by deciding you won't put more than Rs X or X% of your capital in any single investment.

Asset Allocation Whereas asset allocation reduces overall risk, position sizing reduces the risk within those asset classes. You do this by putting a limit on what you can put in any one investment.

For example, if you had Rs 7,000,000, you might put 1,000,000 in each of our seven recommended asset classes. That's asset allocation. Position sizing would determine how much of that 1,000,000 you invested within those asset classes. You might say that you'll invest no more than 70,000 in any one deal (7,000,000 x 1% = 70,000). So if that one investment of $70,000 went down to zero, your investible net worth (7,000,000) would go down by only 1%.

Position sizing is how conservative investors protect themselves from catastrophic losses. I am a strong proponents of position sizing. I recommend you pick a limit and stick to it. Especially if you find yourself wanting to “go big” on some gamble like TD did with Lehman Brothers.

And keep this very simple axiom in mind: The smaller you can make the limit, the safer you will be. Currently, my position limit is 1% of my investible net worth. But when you are starting out, it will be hard to set such a small limit. A good rule of thumb for most people is 3-5%.

Okay, we've covered two legs of our three-legged strategy. But you don't need to know much about physics to know that stools cannot stand well on two legs. For maximum safety, we recommend a third strategy. This will further protect you by limiting the amount of money you can lose on any individual investment. I'm talking about having an exit strategy or what I call a “Plan B.”

3rd Leg: Exit Strategies

I'm going to explain the exit strategy by referring to one of the asset classes we identified above: stocks that fit into your long-term portfolio.

You buy these stocks in order to outperform the stock market. When you buy stocks using our position-sizing strategy, you are protected in that you have limited your potential losses to a percentage of your portfolio (1% for me - 3-5% for you, perhaps). But you can further reduce your risk of loss by attaching a “stop loss” to each stock you buy.

A stop-loss price is simply a preset price at which you or your broker will sell the stock if its price drops that low. For example, if you set a 25% stop loss on a Rs 20 stock, you or your broker will sell it if its price drops to Rs 15.

This further reduces the risk you are taking to 25% of your position size. Getting back to our earlier example, if the position limit you set was 70,000, you would never invest more than 70,000 in any one stock. If that stock position's value dropped to 52,500, you would sell it. You would take a loss of 17,500 and no more. Thus your total loss on that investment wouldn't be Rs 70,000 - or 1% of your investible net worth - but 17,500 or only one quarter of 1%.

As you can see, stop losses keep your losses to a minimum. And you have can control what you're willing to lose.

Stop losses are very effective. They remove emotion (an investor's great enemy) from consideration when a stock, a group of stocks, or even the entire stock market is tumbling.

As you can see, when you combine stop-loss limits with position sizing, you reduce risk dramatically. To reiterate, position sizing limits the loss you will take on any one particular investment. Stop losses limit the loss you can take in that particular investment to some predetermined percentage (in our example, 25%).

One more example to make sure you get it:

Let's say you have investible assets of 1,400,000. And you divide that equally into each of our seven asset allocation models. Your risk in any particular asset class is 200,000 or about 14% of your total investible net worth.

Let's say again that you decide never to put more than 2% of that, so Rs 20,000 in any one investment position. That 20,000 is your position size.

You wake up one day and decide to add Super Stock Co. to your portfolio. You plunk down 20,000. And tell your broker to use a 25% stop loss.

You buy the stock at Rs 10. Suddenly, it goes down to Rs 7.50, setting off your stop-loss limit. You sell it, taking a Rs 5,000 loss (25% of 20,000).

Your entire loss at Rs 5,000 is only one-third of 1% of your investible net worth. Not much to fret about. Don't you agree?

Now, there is much more to tell you about how to use stop-loss limits. One thing, for example, is setting a “trailing” stop loss.

There is also much more to learn about how to allocate assets and we will bring you more in future essays.

In Summary

I believe that the first rule of wealth building is “never lose a lot of money.” The best way to follow that rule is to utilize all three of these strategies every time you invest in anything. Remember, a stool can stand very well on three legs. But fails to stand on one leg or two.

Editor's Note: I recently asked some members of the Wealth Builders Club whether they would like any tax-related information. JJ wrote saying, ‘Yes, tax related matters could be of use to most of the members.’ But tax is a broad field and to start with. Another member, SS suggested that we start with personal finance. Luckily for us, personal finance advice is easily available to us because of our partnership with PersonalFN. So here is your first essay on Tax, in our Financial Planning series.

Anisa Virji Managing Editor

*

I'm too worked up these days ­- juggling between my business and the constitutional duty of paying taxes. Now I'm rushing to my CA's office to set things right on my tax filing.

According to my CA, I'm liable to dole out a large sum as income tax, despite having made all necessary tax saving investments. I'm wondering how I can lower my tax outgo with some last minute tax planning.

- One of our clients

It's that time of the year again. As the last day to file approaches, many of you are feeling the heat and rushing to your CA's office with (or without) all the requisite documents to file your income-tax (I-T) returns.

You see, paying taxes is not only your legal, but also a moral responsibility. It earns for you the dignity of consciously contributing to the development of the nation. Not to mention that Income-Tax (I-T) returns validate your credit worthiness for financial institutions… and that can help you in accessing many financial benefits such as bank loans and much more.

Due dates for individual returns have been extended from the usual July 31 to August 31. But to avoid the rush at the end of the extension, the finance ministry has asked taxpayers to file early.

Below we've answered some of our clients' most frequently asked questions…

What if I miss the tax-filing deadline?

If you don't file your I-T returns by the due date, you can still do so before the end of the assessment year without penalty. As per Section 139(4) of the Income-Tax Act 1961, one is allowed to file his/her I-T return up to one year after the relevant assessment year or before the completion of the assessment, whichever is earlier.

For the financial year 2014-15, the relevant assessment year is 2015-16. So if you miss filing your income tax return by the due date (July 31, 2015), you can still file before the end of the assessment year (March 31, 2016). This is the latest you can file with out penalty. If you fail to file before March 31, 2016, the Assessing Office may levy a penalty of Rs 5,000.

What if don't pay my taxes on time?

If you don't pay your taxes on time, then a penalty interest of 1% per month (simple interest) will be levied on the amount of tax due or balance tax payable from the due date to the actual date of filing. However, if you are lucky enough to have no tax payable, you won't be liable to pay any interest, even if you file your return after the due date but before the end of relevant assessment year.

What is advance tax and what if I miss paying it?

If you are liable for more than Rs 10,000 in tax, then advance tax needs to be paid in three instalments. At least 30% of your tax payable is due by September 15. At least 60% is due by December 15. And 100% is due by March 15.If you defer any of these payments, then a simple interest of 1% per month penalty will be levied.

Filing your return on time comes with two major benefits:

The right to make amendments:

I-T returns aren't above human error. If you file your return by the deadline, you enjoy the right to correct any errors or make as many changes as you like before March 31 or the date your returns are assessed, whichever is earlier. You should always strive to file a complete and correct return, but if you notice a mistake or forgot to claim a significant tax-saving benefit, as long as you filed on time, you can go back and make the necessary additions or corrections.

The right to carry forward losses:

If you have a capital gains loss in your investment portfolio, the Income Tax Act allows you to carry forward losses to adjust against future gains. However, if you haven't filed your returns on or before the due date, you are disallowed from carrying forward losses. If you do file on time, you may carry forward losses for the next eight years!

On the other hand, not filing your I-T return on time can bring peril, such as:

Risk of prosecution, which may lead to imprisonment from six months to seven years, plus the fine

Difficulty in obtaining bank loans, credit cards, visa application approval, and registration of immovable property

So make sure that you file your I-T returns and pay your taxes before the due date. Even if you aren't earning income which comes under the tax bracket; it is always advantageous to file your returns. But while you do so, make sure the correct form is filed.

Recently, the Central Board of Direct Taxes (CBDT) announced a few changes in the I-T return forms, making them simpler but at the same time taking measures to curb black money. Here are the changes…

Particulars Current Forms New Forms Number of Pages Consists of 14 pages Will consist of only 3 pages, any other detail, if applicable, needs to be filled in the schedules Foreign Travel Those making foreign trips need to furnish the following information: - Details of your passport number, - Name of the place where the passport was issued, - Countries you visited during the year, - Number of times you visited foreign countries (in case you are a resident taxpayer), - Expenses you incurred during your foreign trips from your 'own sources' is required to be provided Those making foreign trips will need to furnish: Only the passport number will be needed to be provided in ITR-2 and ITR-2A Exempt income In case of an exempt income higher than Rs 5,000, ITR-2 is required to be filed In case of exempt income, of any amount, (barring agricultural income of more than Rs 5,000), ITR-1 (Sahaj) will be needed to be filed Individuals and HUFs having income from more than 1 house property ITR-2 is required to be filed by individuals and HUFs having income from more than 1 house property and capital gains Individuals and HUFs having income from more than 1 house property but not capital gains, foreign income/assets or income from business/profession; ITR-2A will be required to be filed Bank account details CBDT expects you to give the following disclosures while filing returns: - All bank accounts held during the year for which income is being reported (including addresses of banks, IFSC codes etc.) - Information about joint holders - Bank-wise closing balance in all accounts as on March 31st of the fiscal year for which income is being reported Going forward, the bank-wise closing balance in all accounts will not be required to be disclosed. Moreover, you won't have to give disclosures for dormant accounts that have not been in operation during the previous 3 years. Only the following details are required to be disclosed: - Account numbers for all the accounts (current and savings) held at any time during the 'previous year' for which income is being reported - IFSC Codes Disclosure of assets held by foreign nationals Foreign nationals who have become ordinary residents in India are required to disclose all their assets held abroad Going forward, foreign nationals who had acquired assets when they were non-residents won't be required to disclose them, as long as no income is being earned from them in the 'previous year'

Moreover, CBDT has made it mandatory for all individuals with a taxable income of over Rs 5 lacs to file their I-T returns online.

If you have an Aadhar card number and have used it to file your I-T returns, you will not need to submit the verification form in a physical form to the Central Processing Centre (CPC) in Bengaluru. An Aadhar linked Electronic Verification Code (EVC) will be used to verify returns filed online. This is how it will work…

Filing your return online with an Aadhar card

Filing your return online with an Aadhar card is hassle-free and ensures your refund won't be delayed. The card also eliminates the risks of sending physical verification forms to the CPC in Bengaluru.

Even if you do not have an Aadhar card, go ahead and file your I-T return on time and be sure to make all necessary disclosures. Don't attempt to hide your income! Not only would it be a grave injustice to your constitutional and moral duty, but the risk of getting caught and the damage that would do to you and your family simply isn't worth it.

That said, it's certainly possible to save on your taxes without violating any law. But that requires prudent tax planning from the beginning. Don't run to your CA or tax advisor at the eleventh hour. It's far too late.

PersonalFN believes that tax planning is much more than merely filing returns and paying taxes. It is a detailed process that considers your larger financial plan and accounts for your age, financial goals, risk tolerance, and investment horizon.

With proper tax planning, you take a crucial step toward meeting your financial goals and ensuring long-term wealth creation. You cannot take this step at the last minute.

This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm known for offering unbiased and honest opinion on investing.

Have you ever felt the sting of fear when trying something new? It's the fear of failure. And it comes from our past.

Every time we have a bad experience, a failure or rejection, it leaves a mark on our impressionable minds. It piles up like baggage in storage, cluttering our minds with emotions.

When making decisions, sometimes we get so influenced by our past that we can't be objective anymore. We start relying on emotions.

When it comes to trying something new, starting a business, exploring a new extra income opportunity… we can become choked by fear. To overcome this fear, we need to rely on rational thinking, risk assessment and strategic planning.

Your investment decisions are usually based on your past investment experience and your willingness to take risk. If you have had a successful investing experience, you might become too aggressive and invest only in high-risk assets. But if you have been burnt in the past by losing money in stocks, you might be too conservative and now prefer instruments that are low-risk, low-return.

This is why investment decisions should come not from past experience, but from rational and strategic asset allocation. In this series of essays, we will talk about how to design a good investment strategy.

We will answer the question: Is there a way to identify the ideal asset allocation for your financial situation?

Asset Allocation Balancing Risk and Reward

Asset allocation simply means all the asset classes where you invest your investible surplus - such as equity, debt, gold, real estate or even cash for that matter.

By allocating your portfolio across assets, you are going to balance your portfolio's risk and reward keeping in mind: your risk profile, your financial goals, and your investment time horizon.

The three most important things you need to know about Asset Classes for investment planning -

All asset classes do not move in the same direction at the same time.

This means that when one goes up, another might go down. And that, actually, is a great advantage for investors.

Because if you diversify your investment portfolio across various asset classes to correctly balance your investments - even when one asset class goes down, another will go up, making sure that you are safe and don't lose all your investments.

If stocks are witnessing a bear market, it is unlikely that other asset classes such as gold, debt instruments, real estate will also be witnessing a down-turn at the same time.

That's why you should invest in more than one type of instrument. This will help improve your chances of achieving your long-term investment goals with minimal ups and downs.

You can generate greater returns by thinking ahead, planning well, and knowing yourself

Most people just invest in whatever they like, whenever they like. But as you can imagine, investing willy-nilly in whatever catches your fancy is not the best way to invest. In fact, if you follow this method you don't even really know whether you are getting enough return on investments to achieve your financial goals.

You have to understand your own, personal risk appetite, before figuring out the best strategy for you to invest. If you are going to invest like your buddy, or your brother, that won't work. You need to invest in a way that is uniquely you, and that will give you the most financial satisfaction.

As always with investment, you have to remove yourself from your emotion just a little bit, and focus on strategy. A proper asset allocation actually meant uniquely for you will help you minimize risk and take you towards achieving your financial goals.

Taxes will eat away at your returns

The taxman, as usual, is going to come around to get his share. If you are in the highest tax slab i.e. 30% tax bracket and invest all your savings in fixed deposits (which are considered safe investments), then you are going to have to pay huge tax on your interest income.

You need to keep tax consequences in mind when planning your investment returns, looking at post-tax returns on investments rather than pre-tax returns. Proper asset allocation will help you determine the right investment products that can minimize taxes on your investments.

So turns out there are quite a few things you need to keep in mind to come up with the perfect asset allocation plan - one that will earn the best possible return, minimise risks and taxes, and take you to your financial goals.

So how should you allocate your increasing pile of investible money wisely?

7 factors to keep in mind while defining your own perfect asset allocation -

Your Age

As usual you can get away with a lot more when you are young.

If you are, say 20-30 years old, you can allocate a large chunk of your portfolio towards risky assets, such as stocks. Being young gives you the time and opportunities to recover from any possible setbacks in the value of your portfolio.

If you are middle-aged of course (30-55 years), you still have flexibility but a little prudence is called for. A moderately risky portfolio balancing risky and non-risky assets is probably best at this time.

If you are an aged investor nearing retirement (55 years & above), you might choose a more conservative approach while planning your asset allocation. As you know, Mark Ford himself doesn't believe in taking high risks - he calls himself a timid investor. You should opt for safety as well. Your preference can be debt or fixed income instruments so as to preserve your principal amount and generate regular flow of income. But to beat the inflation bug, you need to maintain a small portion of your portfolio (say 15 to 20%) inn slightly risky assets that can generate higher returns.

Your Income

The amount of income you earn helps you decide the amount you invest. If you are a salaried individual drawing a fixed salary every month, you can allocate your savings systematically to both risky and safe instruments depending on your age.

However, if you are a businessman your profits and losses are not fixed. While higher profits in a year will help you expand your business or invest in various financial instruments, a year of losses will have a direct bearing on your investment plans. So allocate your assets keeping in mind the growth potential of your future income.

Remember, a key component of the Wealth Builders Club is for you to generate extra income that you can then invest for future wealth.

Your Expenses

Living within your means and curtailing your unnecessary expenses can help you keep your financial health in pink in the long-term. While certain expenses such as loan repayments, rent, grocery bills etc. cannot be avoided; you can always streamline few of your unnecessary and extravagant expenses. This will enable you to increase the net free cash available for asset allocation, which if invested wisely in suitable asset classes can help you to create more wealth and fulfil your financial goals.

But cutting expenses doesn't mean cutting down on quality of life. The Living Rich series shows you how to live the best life possible without overspending.

Nearness to Your Financial Goal

If you are many years away from your financial goal, you can allocate a big portion towards risky asset class like equities, and less towards fixed income instruments. If you are closer, make sure your investments are liquid enough to provide for your requirements when you need them. Some investments have a lock-in period and can't be redeemed within that period.

For e.g. if you are contributing towards your Public Provident Fund or PPF account or have investments in an Equity Linked Saving Scheme (ELSS) offered by mutual funds, you cannot withdraw them before compulsory holding period.

If you are planning to invest money that you might need within a year, then these aren't the right investments for you, no matter how good these investments are. Similarly your investments in real estate are sort of illiquid in the short-term. Equities are considered very risky in the short-term while the risk moderates in the long-term. Debt is considered relatively less risky, the returns being much lower, possibly too low to beat inflation even.

It is a good idea to rebalance your portfolio as and when you reach closer to the achievement of your financial goals. And when you are less than, say 3 years, away from your financial goals, you can shift your corpus to fixed income instruments to avoid wealth erosion.

Your Risk Appetite

Your willingness to take risk which is a function of your age, income, expenses, nearness to goal, will be an important determinant while framing your financial plan.

If you are aggressive i.e. your willingness to take risk is high, you can skew your portfolio towards equities, an asset class known for compensating risk with high returns.

If you are conservative, i.e. your willingness to take risk is relatively low, your portfolio can be skewed more towards fixed income instruments.

Moderate risk takers can take a mix of equity and debt respectively.

Your Assets

When you started on your wealth building journey you made an assessment of your physical and financial assets. Analyse your existing investment portfolio before allocating your funds further. For instance, if a huge chunk of your portfolio is dominated by real estate or equities, then based on the factors we talked about before, you can diversify your assets to reduce your risk.

Your Liabilities

If you have high liabilities, your financial conditions won't let you take high risk. This would make you a risk-averse investor. Irrespective of your age, willingness to invest, nearness to your financial goals, risk tolerance or any other factor, you will be forced to only make lower return generating safer investments, as you cannot afford to let your investments suffer any setbacks from market swings.

Also, this doesn't necessitate saying, but avoid taking loans or increasing your liabilities as far as possible. Read Mark's essay on debt and credit solutions. Also never invest borrowed money in risk assets such as equities, as any losses endured here might worsen your financial situation.

So an effective asset allocation offers the following 4 benefits -

Lowers your investment risk Reduces your dependency on a single asset class Protects during turbulent times Makes timing the markets irrelevant

So here are some examples of asset distribution…

If you are a long-term investor with an aggressive risk appetite, then you can invest upto 70% in risk assets with a long-term view such as equities and real estate, around 20% in safer asset classes such as debt and cash instruments and around 10% in gold.

If you are a moderate investor aiming to provide some stability to your portfolio along with capital growth, then you should invest upto 60% in equities, around 30% in debt and cash and the remaining 10% in gold.

Conservative investors looking for protection of their capital must invest upto 70% in debt and cash, around 10% to 15% in gold, while the rest can be diversified by investing in quality equity instruments.

Asset allocation safeguards the overall value of your portfolio from the misfortune of any particular asset class. This is not a one-time process so keep reviewing your asset allocation regularly to keep it aligned with your financial goals.

This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm known for offering unbiased and honest opinion on investing.

Has crisis ever rattled your investment portfolio?

The stock market crash on August 24, 2015, wiped out almost Rs 7 lac crores of investor wealth in a single day and shattered investor sentiment across the world.

Investors were glued to their TVs and tablets as the financial experts fuelled the panic with predictions of a deep crisis ahead.

Of course, few experts thought to guide individual investors with actionable advice…

PersonalFN has years of experience educating and guiding clients and readers with their personal finances. For this reason, many people seek our counsel during extreme conditions.

As soon as he saw the BSE Sensex had shed 1,624 points, one of our clients, Mr Wilson, a 70-year-old retiree, called our investment consultant and asked him to suggest a few good equity mutual funds.

'Be fearful when others are greedy and greedy when others are fearful.' - Warren Buffett

Mr Wilson is very sensitive to his investment portfolio. He closely monitors his investments every single day, though we often tell him that it is not necessary given his well-balanced portfolio. But as a retired individual, every penny matters to him.

After seeing the markets tumble, Mr Wilson wished to invest a huge sum of money in equities to capitalise on the crash. It seemed Mr Wilson wanted to follow the advice of the world's most successful investor.

The Made in China crisis caused a huge sell-off in almost all emerging markets, including India. Everyone became fearful. According to the Sage of Omaha, it can be wise to tap opportunities during such times (especially if you have a relatively long investment horizon).

While this is true and Mr Wilson is right to want to capitalise on the crash, we always advise that risk appetite should correspond to age and financial goals.

An individual in their 30s will have much higher risk appetite vis-à-vis an individual in their late 50s and nearing retirement. Likewise, a 60-year-old retiree will likely have very little risk tolerance.

Considering Mr Wilson's age and the fact that he's retired, his appetite for risk should be lower. Going overboard with equities may not be prudent since his retirement portfolio is the only source of income to take care of his retirement needs.

PersonalFN considers asset allocation as an important element in your investment portfolio; it is crucial in the process of achieving your financial goals, particularly retirement.

By allocating investments across various asset classes, you can make a strategy to minimize risk and possibly increase gains in the long run. But you also stand to benefit from any extraordinary opportunities the market may offer. Proper asset allocation will allow you to take advantage of a crisis.

How this works is that while following an asset allocation strategy, if you see a substantial increase in exposure/profits in any asset class, say equity, then you can rebalance your portfolio, book the profits and move to other safer asset classes, say debt. This way when there is a correction in the markets, i.e. if equities show a great fall, then you can get an opportunity to buy equities again, as Mr. Wilson saw.

So how should you allocate assets in your retirement portfolio?

For individuals between 25 and 35 with a time horizon of 25 to 35 years

Life Stage - Accumulation Phase (Portfolio Type - Aggressive) Asset Allocation You are in the accumulation phase of your life. Hence you may be looking for wealth creation in the long run since you have sufficient time before you hang up your boots. Apart from retirement, you may also have financial goals in the interim such as buying a dream home and car and getting married and starting a family. You will need to prioritise each of your financial goals. Nevertheless, with a sufficient time horizon until your retirement, you can afford to take a higher risk with your retirement savings.

Therefore, there's scope to position your portfolio aggressively by allocating 65-85% of your portfolio in equities and around 5-20% in debt. Based on your preference, you may also hold a 10-15% position in gold for further diversification.

For individuals between 35 and 45 with a time horizon of 15 to 25 years

Life Stage - Mid-asset Accumulation Phase (Portfolio Type - Moderately Aggressive) Asset Allocation You are in the mid-asset accumulation phase of life. You may be planning to buy a house, a car and invest for your child's education. You need to plan your income well and streamline it towards achieving your goals and life style. With a time horizon of around 15 to 25 years on your side, you can take relatively higher risk to grow your retirement portfolio.

Hence your portfolio can be positioned in the moderately aggressive risk profile by allocating 60-70% in equity, 20-35% in debt and holding 5-15% in gold.

For individuals between 45 and 55 with a time horizon of 5 to 15 years

Life Stage - Protection Phase (Portfolio Type - Moderate) Asset Allocation You are in the protection phase of your life cycle. In this age bracket, you may still have life goals to fulfil such as your child's higher education or marriage, or you might still be dreaming of that big house. Hence this is a phase when you need to streamline your finances - both inflows as well as outflows. You need to keep aside sufficient funds for your retirement portfolio. It's still possible that you will fall short on your retirement corpus. But since you have a time horizon of 5-15 years, you can afford to take some amount of risk and not be too conservative.

Hence your portfolio can be positioned moderately by allocating 40-60% towards equity, 35-50% towards debt and 5-10% in gold to hedge the portfolio.

For i ndividuals between 55 and 60 with a time horizon of less than 5 years

Approaching Retirement (Portfolio Type - Moderately Conservative) Asset Allocation You are on the verge of retirement by now. Your regular source of income will soon stop. Hence you ought to be conservative in your asset allocation. It is not advisable to have a high exposure to equities.

You should position your portfolio such that 20-30% of your portfolio is in equity, 60-80% in debt and 5-10% in gold as a hedge.

For individuals above 60 and already retired

Life Stage - Distribution Phase (Portfolio Type - Conservative) Asset Allocation You are probably retired by now. If so, you have completed the conservation and protection phase of your life and have entered the distribution phase. You now have limited income or even no regular income. Thus, at this stage, you may need to dip into the savings and reserves you've built over the years. Hence while you invest to take care of your retirement needs, your portfolio needs to be positioned conservatively.

Around 70-80% of your portfolio should be in fixed income generating instruments to generate post tax returns of at least 7-8% per annum, assuming annual inflation expectation is at 7%. Equities should only be 10%-25% of your portfolio. And 5-10% should be in gold for a hedge.

A note on rebalancing…

Once you have defined the standard allocation to your portfolio, you ought to review your portfolio on a regular basis, say yearly, to check if it needs realignment. This is because the allocation to an asset class may drift significantly away from your initial allocation due to appreciation or depreciation.

If you notice wide deviation in your portfolio allocation due to swift rally or swift fall in any of the asset classes - say a swift fall in equities due to crisis ­- you can consider trimming around 5-10% of your exposure to other asset classes, say debt and gold, and reallocate that amount towards equity and equity mutual fund holdings.

This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm known for offering unbiased and honest opinion on investing. The images are obtained from PersonalFN research.

It's not easy to get yourself to sit down and think about what would happen if you got really sick, and were unable to make sound financial decisions. Worse, we definitely don't want to think about… being no more. Quite an unpleasant scenario.

Instead, we hide behind these thoughts…

“I am too young to prepare a will” or “I don't need to prepare a will”…

…Because it's unpleasant to think about. We know anything can happen at anytime. We know we want to protect ourselves and our loved ones. That's why we get insurance in the first place.

But we also know what we need to do.

Leaving the world intestate (without preparing a will) can lead to various complications and disagreements among your heirs. You work your entire life to build wealth and a sustainable livelihood for your family members. But you can't even imagine the mess and inconvenience that might be caused to your loved ones because of your unwillingness in not drafting a will for them.

Even if you don't have great wealth or piles of assets, that doesn't matter. You still need to figure out and take the necessary steps to ensure the smooth transfer of assets from one generation to another, also known as estate planning.

Here are some advantages of Estate Planning: You can decide who receives what share of your assets You can decide how and when your beneficiaries will receive their inheritance You can decide who will manage your estate in your absence Estate planning saves your family and loved ones from going through the additional burden of reverting to the law to distribute assets.

In fact, as soon as you start accumulating assets, start figuring out where it would go if you weren't around, and leave clear directions. You don't need to wait till you own lots of assets to transfer or till you turn 65 to create a will.

As we've told you one too many times in this guide (only because we care about you), life is unpredictable and uncertain.

If you care about the people you will be leaving behind, you will take the steps necessary to protect their quality of life when you are gone. So get planning…

The 10 points below will help you while preparing a will:

A will can be prepared by anyone who is 21 years of age, of sound mind, and free from any coercion, fraud and undue influence. With old-age come physical and mental illnesses, people become incapacitated and might even lose their ability to comprehend. A will created at such an age, when a person might not be in his or her right senses might create misunderstandings, doubts and disputes in the family later. So prepare your will while you are still young and healthy to avoid conflicts later.

You must use the title 'Last will and Testament Of (state your name here)' to make it clear that the document is your will and legal. Make sure to state your full name, current address, and the fact that you are of sound mental health and under no duress from any one to make the will.

Name an executor, a person who will carry on the tenets of the will. A trust worthy person should be named as an executor and you must seek their permission before nominating them. This is because if they refuse to become an executor later, then there might be no one to execute the will, leaving it to the court of law to appoint an executor.

A will can be handwritten or typed out. No stamp paper is necessary. You can write a will on a simple A4 size paper, sign and date it with 2 witnesses, and put it away safely. You need not register your will with the Registering Authority; but in order to avoid frauds and tampering, it is better to get it registered. If you wish to register your will then it can be done with the registrar/sub-registrar by paying a nominal registration fee. You need to be personally present at the registrar's office along with witnesses for this. Also, it is better if the witnesses signing your will are not the immediate beneficiaries of your estate or wealth. Any two people who you trust can do it. Also, it would be wise to inform the executor and family members about the whereabouts of your will in order to avoid confusion later.

If you have bequeathed your assets to any minor children, make sure you appoint a guardian for the assets till the time the said minors reach an adult age.

It is extremely important for a will to be simple, precise and clear. Otherwise some people might misconstrue your intentions and your assets might not be transferred to your choice of beneficiaries.

It is possible to make changes or minor alterations in a will if you wish to do so. If there are too many, or major changes, it is better to start over and just make a new one. Always date your will. If more than one will is made then the one having the latest date will nullify all other wills.

Each page of the will should be serially numbered and signed by the Testator (that is the person making the will) and the witnesses. This is to prevent the will being substituted, replaced, or pages being inserted by people intending to commit fraud. At the end of the will you (the Testator) should indicate the total number of pages in the will. Corrections if any should be countersigned.

While writing a will along with the laws of the country, one's religion also plays an important role. Keep that in mind while making your will. For example, in case of Hindus, any assets that you have acquired on your own can be bequeathed as per your wishes. However any property which you have inherited from your father cannot be transferred according to your whims and fancies, as the laws of inheritance will apply to them.

Although it is possible to draft a will on your own, it is always better to take the advice of a trusted lawyer or advocate while writing a will. This will reduce any chances of misinterpretation or frauds from relatives and also reduce the probability of the will being claimed as invalid in the court of law.

All of us have certain wishes about what should be done with our fortune (however big or small) after us.

Unless you appropriately document this in the form of a will, there is no certainty that the assets created by your life long efforts will be transferred to your loved ones.

The law does not know that you wished to leave a larger portion of your wealth to your financially weaker child or you wanted to leave a token of appreciation to some special friends.

There is no guarantee that your special heirlooms will be passed on to those family members who you knew would value them.

Estate planning is one of the most essential aspects of our lives and should not be put off until it's too late. It is a dynamic process, which needs to be reviewed This is an exercise you should repeat every few years, and after every major life change, including marriage, divorce, death, and birth.

This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm known for offering unbiased and honest opinion on investing.

Don't put all your eggs in one basket.

Surely you've heard this proverb before. It makes perfect sense: Carry your eggs in one basket and a single accident could destroy them all. What's more, one bad egg can rot the lot. Yet, many of us ignore this admonition and keep our “eggs” together.

We all seek convenience in our day-to-day lives. While convenience is good, we are sometimes tempted into taking the easy way out. Rather than going the prudent way, we take the shortcut. And our misdirection hinders our potential growth.

The great financial author, Robert Kiyosaki, wrote: “Your future is created by what you do today, not tomorrow.”

It's a well-stated reminder to remain undeterred by the easy way and to choose the prudent route instead.

The way to go…

In your journey to wealth, it is vital that you allocate your money wisely across asset classes.

You should base your investment decisions on your risk appetite. Conservative investors may want to invest only in fixed income instruments because they fear losing money. On the other hand, aggressive investors may want to take on high-risk, high-return investments because they are young and can afford to take chances.

Regardless of your approach, don't forget assets don't all move in the same direction. This is why it's important to diversify your portfolio across asset classes. Even if you have a high appetite for risk and look to equities for big returns, you ought to have exposure to other asset classes including debt, gold, and real estate. They will come to your rescue during a crisis.

Asset allocation is an investment strategy that will help you define a road map for your investment portfolio.

How to go about defining asset allocation…

The thumb rule for Equity: 100 minus your present age.

Say you're 30. You have the benefit of time and can take on high risk. Therefore, you can invest 70% (100-30) of your portfolio into equity and the other 30% can go into safer, income-generating debt instruments. This places you in the category of the ‘aggressive investor'.

Asset Allocation by Thumb Rule

As your age progresses - say you're now 40 - the formula calls for a less risky 60% (100-40) of your portfolio and the remainder in debt.

Asset Allocation by Thumb Rule

Now say you're 70 and already retired: A predominant portion - 70% (100-70) - of your portfolio should be in safe debt and fixed income generating instruments. That's because, assuming you have already met your major financial goals, your appetite for risk will be low. However, a small portion in equity to counter inflation is still a good idea.

Asset Allocation by Thumb Rule

On the other hand, if you are still investing to meet financial objectives, it would be better to allocate investments among different assets such as equity, debt, and gold. Your allocation should of course be based on how close you are to your goal.

For example, individuals with a 10-year financial goal should allocate a dominant portion of their portfolio towards equity (around 75%) and to the remainder to gold and debt (about 15% and 10% respectively). But as you near your financial goal, the largest portion of your portfolio should be allocated to debt. This can help not only to diversify your risk across different asset classes but also help rebalance your portfolio.

With this in mind, you must still undergo a holistic assessment considering…

Your age Your income Your expenses Your existing assets & liabilities Your risk appetite Your nearness to financial goals

We'd like to now share the examples of Mohan, Vijay, and Sanjay - clients who asked us to help chart their asset allocation. The following chart will help you understand how to ideally determine asset allocation.

Case Study Name Mohan Vijay Sanjay Age 30 45 60 Life Stage Unmarried Married with 2 Kids Retired Income Medium High Low Expenses Medium High Low Assets Low Medium High Liabilities Medium High Low Time Horizon High Medium Low Willingness towards Risk High Low Medium Overall Risk Appetite High Medium Low Our Advice for Ideal Asset Allocation Equity 80% 65% 20% Debt 15% 25% 75% Gold 5% 10% 5% (The table above is for illustration purpose only.)

Young, unmarried individuals, like Mohan, who have just started earning, may have only few assets. But their time horizon will be long (25-30 years) and their overall risk taking capability is high. So people in this situation can put a majority (around 80%) of their portfolios in equity and the rest in debt and gold. This aggressive portfolio can be expected to yield high returns in the long run. Given the financial situation and time horizon, the portfolio would have a lot more time to recover from the short term jitters of the equity markets.

As in the case of Vijay, high-income earners in the 45-50 age group will likely have dependents and liabilities. Their risk appetite would be moderate, and their time horizon may be 10-15 years. We, therefore, advise 65% of the portfolio in equity, 25% in debt, and 10% in gold. This balanced allocation may be expected to give sufficient returns to achieve future goals.

Just-retired individuals, like Sanjay, may only have a dependent spouse. No longer able to rely on income, they must rely on assets and investments for day-to-day expenses. Their time horizon is short and therefore their overall risk appetite is low. Recognising the need to preserve capital, they should have a predominant portion (around 75%) in debt and fixed income generating instruments, a slight (20%) allocation towards equity, and a small (5%) position in gold. This is low-risk, low-return portfolio, but it's ideal for capital preservation while generating a steady income.

To conclude…

Defining an optimal asset allocation is easy once you understand the basic rules. Asset allocation isn't a one-time process. It must be reviewed from time to time to ensure you achieve your financial goals. But once prudent asset allocation is in place, you can be rest assured that you will earn adequate return, minimize risk and taxes, have sufficient liquidity, and ultimately achieve your financial goals.

This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm known for offering unbiased and honest opinion on investing.

Diversify, diversify, diversify!

Financial planners are happy to remind us over and over again that diversification is vital in investment planning. However, despite the recitations, investors rarely follow a correct and complete diversification strategy.

'Stock markets are risky! I lost a lot of my wealth during Lehman crisis in 2008. I am not going to invest in stock markets again.'

'Bond markets are complex. I don't know how they work. So, I prefer to stay invested in fixed deposits. It would double my money in 8 years.'

'Gold! My wife likes to wear gold ornaments and I have bought some gold bars as an investment for my daughter's marriage.'

'There is an upcoming complex in Pune, and the builder is offering a 52 inch LED TV for free if I book within next 15 days. I am going to sell all my investments in stock markets and if need be, mortgage my wife's gold ornaments to book the flat. It will be my next investment.'

Have you heard statements like these from friends, relatives, or colleagues?

Through experience, we can say that many investors buy various stocks, mutual funds, and debt instruments on an ad-hoc basis and believe they're diversifying their portfolio.

But is that really diversification?

We believe diversification is meaningless if it does not counter market uncertainties and reduce risk. True diversification requires wise and effective asset allocation.

Each asset class commands a different risk-return relationship and behaves differently over time. When you allocate assets across the various classes - equity, debt, gold, real estate, cash - you are essentially adopting an investment strategy. Your aim should be to balance your portfolio's risk and reward in accord with your risk profile, financial goals, and investment time horizon.

Wise and effective asset allocation offers a host of benefits.

It minimises portfolio risk.

Wise asset allocation can help protect from market ups and downs. A well-diversified portfolio faces less risk. Growth prospects aren't limited by a single risky security, but spread over a basket of securities of varying risk, in addition to debt, gold, real estate, and cash.

It optimises portfolio returns.

Equity, debt, and gold do not move together. An asset class attracting investors today may be out of favour tomorrow. It is tough to predict when an asset class will perform well. Therefore, allocating your portfolio across different asset classes is a sensible investment approach.

An effective asset allocation, in addition to minimising risk, can optimise your portfolio returns. But you must not invest ad-hoc. This heightens risk and can derail your investment objective. Running behind momentum isn't likely to clock optimal returns.

It aligns investments and time horizon.

Your risk profile and your investment time horizon are crucial in deciding your asset allocation. Where you are in relation to your financial goals determines how to chart your asset allocation in equity, debt, gold, real estate, and cash.

If you have a long way to go to realise your financial goals, a large portion of your investible surplus should be skewed towards equity and less towards debt.

An investor with a shorter investment horizon, of say three years or less, should allocate more funds towards fixed income and a small portion of their portfolio to riskier assets such as gold or equity.

A medium term horizon of more than five years calls for an allocation to riskier asset classes (to take advantage of the higher risk-reward ratio) while maintaining a healthy allocation to fixed income instruments as well.

It makes market timing (almost) irrelevant.

If your asset allocation takes into account your risk profile, your financial goals, and your investment time horizon, timing the market almost becomes irrelevant. This is because your portfolio is well-aligned to your needs.

While traders may enjoy timing the market, the risk to their wealth and health is ominous. If you were invested in the Indian equity markets during the sub-prime mortgage crisis, or you've been burnt by other market downturns, you will know how painful it can be. And you will agree that a well-diversified portfolio with prudent asset allocation can offer protection, and even growth, during times of volatility.

It maintains adequate liquidity.

Liquidity is another vital consideration when making investment decisions. Some investments have a lock-in period and can't be redeemed within that time frame. For example, investments in Public Provident Fund (PPF), tax savings fixed deposits, and Equity Linked Saving Scheme (ELSS) offered by mutual funds carry a minimum lock-in period. While you might enjoy the tax benefits these instruments offer, you will have to wait to withdraw your money. Prudent asset allocation will ensure sufficient liquidity to cover financial goals and emergencies as required.

It minimises your tax outgo.

Most of us are busy making a living. We earn, pay taxes, and invest our hard earned savings. The returns we earn on our investments too are taxable. But one can avoid unnecessarily high taxation by aligning investments, financial planning, and tax planning activity wisely.

If you're in the 30% tax bracket and invest all your savings in fixed deposits to keep your investments safe, then you are making a big mistake: You are paying a huge amount in taxes that could have been saved legitimately.

Tax consequences are different for every individual. But if a prudent asset allocation plan is drawn, it will not only allow you to have the right asset mix, but also facilitate a legitimate optimal-minimal tax outgo, provided your investments are made in tax efficient instruments.

But defining asset allocation is challenging…

Yes, defining an optimal asset allocation is not easy. You must take into account a host of factors, such as:

Age Income Expenses Assets Liabilities Risk appetite Time horizon And most importantly your financial goals

Under ideal circumstances, if your broader objective is capital appreciation, and if you have an aggressive risk appetite, you can invest up to 70% of your portfolio in risky assets such as equities and related instruments and the remaining 30% in safer asset classes such as debt and cash instruments.

If you are aiming to provide some stability to your portfolio along with capital growth and have a moderate risk profile, 60% of your portfolio can be in equity and the remaining 40% in debt and cash.

If your priority is capital protection, and if you are conservative, a predominant 70% of your portfolio should be in debt and cash and the remaining (30%) can be diversified in quality equity instruments.

Please remember these are general, ideal models. You must consider your unique circumstance and goals to draw the most appropriate asset allocation for you.

Also remember you cannot set your asset allocation once and for all. You must review and rebalance based on your age and distance to your financial goals; any windfall gains, unexpected losses, or other changes to your financial circumstances; and any changes in outlook for a particular asset class.

Once you have a prudent asset allocation in place, you can be rest assured that you will earn adequate return, minimize your risk and taxes, have sufficient liquidity, and achieve your financial goals.

This article has been authored by PersonalFN, a Mumbai-based Financial Planning and Mutual Fund research firm known for offering unbiased and honest opinion on investing.

We read about these family feuds in the papers, where wealthy siblings are fighting over an estate that a parent passed on without distributing properly. And we think that it doesn't apply to non-crorepatis. It doesn't matter if I pass on without dividing my estate, because I don't really have much of an estate, you think.

But it matters more how you divide your assets if they are smaller. If a wealthy man has two houses eventually his kids will fight and end up with one each. But what will happen if you leave behind one flat without clarity? What if your children are unable to resolve this by themselves, and it breaks up your family?

The closest relatives have fallen out over money. That is the power of money - you may call it a curse - but it doesn't need to be. A little clarity is all that is needed.

Planning your estate is more than just writing a will, or gifting your assets.

Maybe you leave a will, which allows you to create clarity on who gets what when you die. But that doesn't cover everything.

Estate planning includes taking steps that ensures the quality of your life and the lives you leave behind.

Luckily, the necessary documents are easy to create, and don't cost much to put together. A lawyer can get these done for you for a few thousand rupees, or you can do it yourself. (It's safer to use a lawyer especially if you have a particularly complicated family situation in which someone might challenge your wishes.)

Here's what you need to do.

Step 1: Create a Durable Power of Attorney for Health Care

If you're suffering from an illness that incapacitates you and you can't make medical decisions for yourself, who do you want taking decisions for you? Empower someone you trust to act on your behalf, and in your best interests.

This is not only for older people. Remember, illness, accident and injury can occur at any point in your life.

Choose your decision-maker carefully…someone who can understand the complicated options available to you, make tough decisions, and follow through when others are trying to sway them. Someone who can put their own emotions aside, and act in your best interests.

Talk to this person, and discuss what you want them to do for you. Make sure that they are comfortable with your decision and the responsibility they will be taking on.

Step 2: Create a Durable Power of Attorney for Your Finances

It's possible that you trust the same person to make the best financial decisions as health decisions. But that's not necessarily so. So think about who the right person would be to manage your money, pay bills, take care of your property and so on, and make a separate power of attorney.

You can define exactly the scope of responsibility of this person - do you want them to deal with day-to-day transactions, manage your property, sell your assets and so on.

This must be someone you trust, but also someone competent in handling financial matters. Someone who can work with tax attorneys and other finance professionals to get things done.

Step 3: Create a Living Will

Even though you have empowered someone you trust to make your healthcare decisions, you should put your own medical choices down in a living will, that expressly states your wishes. A living will defines what medical procedures you do and don't want, and your decision-maker can use this as a guide to make decisions for you at the end of your life if you're not expected to recover.

Step 4: Name a Guardian for Minor Children

It is important that you decide who would raise your children in your absence, and put this down explicitly in a will. If not, the child could end up with someone you didn't choose, or worse, could lead to custody battles over the child.

If you plan ahead you can choose someone who shares your values, and will love your children like their own, ensuring that their lives will go on unharmed. Again, make sure this person is aware and willing to take this responsibility.

Now, you should also think about who will take care of the money or property that your children inherit, to create a checks-and-balances system that separates control of your children from control of their money. Your children can inherit their money as soon as they come of age, or you can create a trust for them.

Step 5: Update Beneficiaries for Life Insurance

If you have purchased a life insurance policy the sum assured will go to your beneficiary in event of your untimely demise. You need to keep your beneficiary updated. Perhaps you got the policy when you were single and now you are married, and have children. So take a minute to ensure the beneficiary for your policy is the person who you actually want to receive the money from the policy.

Step 6: Update Beneficiaries for Financial Accounts

Banks and brokerage firms also let you name a beneficiary who gets access to your account when you pass on. And in fact, those beneficiary forms override your will. So if you don't want someone to get the money from your accounts and investments, better make sure their name is not on your account.

Take the time today, and regularly, to make a list of all your accounts and review your beneficiaries. Do this every few years, and after every major life event, including marriage, divorce, death, birth, and adoption.

Sitting across one of our investment consultants in a meeting room at PersonalFN, sipping his cup of tea, Mr Sharma described himself as a spendthrift. As vice president at a reputed IT firm in Pune, he was used to a luxurious lifestyle. Thanks to his healthy pay cheque, he could afford it. Nevertheless, he was upset with his spending habits. With 15 years left till retirement, Mr Sharma was growing anxious about that phase of his life…

Mr Sharma has an 18-year-old son and a daughter who's 16. He has set aside some money in bank fixed deposits and gold for their higher education and marriages. He thought his monthly contribution in an employee provident fund (EPF) and pension plans would be sufficient to take care of his post-retirement needs, but he now knows this isn't enough.

Until now, he had never given serious thought to his own retirement.

Could he save enough for his retirement? Would he be able to maintain the same lifestyle post retirement? What uncertainties could impact his income? What if his kids do not look after his wife and him during the retirement years? Such questions bothered Mr Sharma.

It's easy to become so engrossed in our social and business obligations that we ignore the importance of planning for our future needs. To be sure, planning for your future is as important as providing for your current needs. But what future events do you need to plan for?

The obvious answers are buying a house and providing for your child's future. You may also be hoping for a holiday abroad. No doubt, these are important and must be planned, but the most important financial planning activity, and one of the most neglected, is your own retirement.

One reason for this is people believe they can rely on their savings. Perhaps you've saved a bulk of money in your bank's savings account and in fixed deposits. You might have investments in stocks and mutual funds. If you are salaried, you'll have your contribution to EPF and PPF. But even this might not be enough.

Here we have outlined five steps that can help you determine the amount that you will need to be put aside to take care of your post-retirement needs.

Step 1: Decide the age at which you wish to retire

The most common retirement age is 60, but it depends on you. You may want to work beyond 60 or you may wish to retire at 55. Estimating your retirement age is the first step. Once you retire, your regular income stream will stop or reduce considerably (in case you are eligible for pension) and you'll depend on your savings and investments to take care of your daily lifestyle needs.

Once you have zeroed in on your retirement age, deduct your current age from it to calculate how many years until your retirement. This is how much time you have to plan for your retirement.

Step 2: Determine your post-retirement expenses

It is important to make an accurate estimate of how much you will require to maintain your present lifestyle post retirement. For this, first ascertain your annual expenses at present. Then factor in inflation to calculate how much your present expenses will amount to at the time of retirement. This is the amount you will need every year to meet your post-retirement expenses.

Assume that your present annual expenses amount to Rs 120,000. If you have 25 years to retire and expect the rate of inflation to be around 7%, your annual expense then will be approximately Rs 651,292.

Step 3: Get a check on your annual savings and find their future value

How much you are able to save every year after meeting all your expenses plays a crucial role in building your retirement corpus. Your saving is the surplus after deducting your annual expenses from your net income. The ideal way is to earmark a portion of your savings for retirement. This part of your savings should be treated as sacred and should not be disturbed unless it is an emergency.

After estimating how much you will be able to save annually, the next step is to find out its future value. To determine this, you have to factor in the expected rate of return on your investment. This is the value of your savings or investments at the time of retirement.

For instance, if you are able to save Rs 100,000 annually for your retirement, and you invest this at a 10% rate of return per annum, then you will have a retirement corpus of approximately Rs 9,834,706 in 25 years.

Step 4: Find out whether your savings can cater to your post-retirement expenses

To extend the above illustration, let us assume that you invest your retirement corpus (in this case Rs 9,834,706) to generate a post-retirement income. The investment is made in an avenue that offers, say, an 8% rate of return annually (rate of return may vary depending on your choice of investment avenues). So, at the end of every year, you will earn a return of Rs 786,776. This is your post-retirement income from your investments.

If your post-retirement income is higher than your post-retirement expenses (in this case Rs 651,292, from Step 2), your savings and investments are enough to cater to your post-retirement needs. But if they are lower, then you have to make prior arrangements to plug this shortfall.

Step 5: If necessary, engage the services of an unbiased financial planner

Admittedly, the above steps are a bit confusing and complicated. An honest and competent financial planner can help. Your financial planner should be able to come up with a relatively accurate retirement corpus, which can help you plan your retirement. More importantly, the planner can advise you how to go about investing your savings based on your risk profile.

Remember that in the process of determining your retirement corpus, you have to make few crucial assumptions - such as the rate of inflation or the rate of return on your investments. These factors are not fixed and are bound to fluctuate over time (depending on how much you can save or spend in a given year).

You must regularly review your calculations to ensure that you are always on track to achieve your retirement corpus. Your financial planner should be prepared to help you with this.

Now let's see what you should do while investing in order to achieve a hassle free retirement.

Have a proper investment plan

As a mutual fund research and financial planning company, our views on the financial planning process are inherently positive.

This is because we've seen clients go through growth phases - not only financial growth, but personal growth. When clients come to us, the state of their investments ranges from the slightly unstructured to the completely messy. If you don't know where your money is, you won't know what it's doing. Our clients come to us slightly confused, unable to articulate their financial goals, and looking for financial help. They leave with a sense of empowerment, discipline, and clarity - not to mention a solid plan they can follow.

If you don't want to hire a planner or an advisor, do it yourself. Just be sure you have a proper investment plan. The plan should cover not just retirement, but for all your life goals - your child's education and marriage, your second home, foreign vacations, etc.

Diversify and rebalance your portfolio

Don't make the mistake of thinking that it's all about equity and property. Different asset classes such as debt and gold are also important.

How you allocate your money across asset classes has nothing to do with your age. But it's got everything to do with your investment time horizon.

If you have a goal that's less than 3 years away, you need to be predominantly in debt/fixed income products. This is not the time for equity. If your goal is between 3 and 5 years away, you can have part exposure to equity, up to 45%, with 15% in gold, and 40% in debt / fixed income. If your goal is more than 5 to 7 years away, you can have anywhere between 45% to 60% in equity, with 15% in gold and the rest in debt. For a goal 7-10 years away or more, you can opt for 75% in equity, 15% in gold and 10% in debt.

Remember that as your goal-time horizon changes; your asset allocation must change. Rebalance your investments to reflect the right asset allocation as per the time horizon to your financial goals.

Save Now, Spend Later

It's true.

The more you invest today, the more (much more) you'll have to spend when you're 60.

The numbers are straightforward: If you invest Rs 10,000 per month for 10 years, you will build a corpus of around Rs 23 lakhs assuming a growth rate of 12% per annum. Increase this to Rs 12,000 per month, for the same time period i.e. 10 years, and you'll build a corpus of Rs 27.60 lakhs. Increase this to Rs 15,000 per month, and you've got Rs 34.50 lakhs.

Get a grip on your spending, save more, invest more, to retire earlier and richer.

Don't spend more than you have to on the taxman

Paying taxes can sometimes leave you with a 'what a waste of money' feeling.

In order to avoid this feeling, and also to save and invest more money, go through the following little tips:

Make the most of all your deductions Save medical bills in a shoebox throughout the year and claim Rs 15,000 worth of deductions Buy medical insurance (for the medical insurance) and claim the deduction on the premium paid Claim the benefit of principal and interest repayment in case you have a home loan If you live in a rented apartment, see if you can restructure your salary to claim the maximum HRA possible Invest in PPF and don't withdraw from it until you retire

Remember, a penny saved (in this case from the tax man) is a penny earned.

Planning for your retirement might seem like a tedious task, but you need to keep it simple. Once you create your plan, you should form a habit of investing regularly. Select good mutual funds and other investment instruments, with a strong track record. Moreover don't try to time the market, or churn your portfolio unnecessarily.

Time is a valuable asset and you should make the most of it.

Sitting across one of our investment consultants in a meeting room at PersonalFN, sipping his cup of tea, Mr Sharma described himself as a spendthrift. As vice president at a reputed IT firm in Pune, he was used to a luxurious lifestyle. Thanks to his healthy pay cheque, he could afford it. Nevertheless, he was upset with his spending habits. With 15 years left till retirement, Mr Sharma was growing anxious about that phase of his life…

Mr Sharma has an 18-year-old son and a daughter who's 16. He has set aside some money in bank fixed deposits and gold for their higher education and marriages. He thought his monthly contribution in an employee provident fund (EPF) and pension plans would be sufficient to take care of his post-retirement needs, but he now knows this isn't enough.

Until now, he had never given serious thought to his own retirement.

Could he save enough for his retirement? Would he be able to maintain the same lifestyle post retirement? What uncertainties could impact his income? What if his kids do not look after his wife and him during the retirement years? Such questions bothered Mr Sharma.

It's easy to become so engrossed in our social and business obligations that we ignore the importance of planning for our future needs. To be sure, planning for your future is as important as providing for your current needs. But what future events do you need to plan for?

The obvious answers are buying a house and providing for your child's future. You may also be hoping for a holiday abroad. No doubt, these are important and must be planned, but the most important financial planning activity, and one of the most neglected, is your own retirement.

One reason for this is people believe they can rely on their savings. Perhaps you've saved a bulk of money in your bank's savings account and in fixed deposits. You might have investments in stocks and mutual funds. If you are salaried, you'll have your contribution to EPF and PPF. But even this might not be enough.

Here we have outlined five steps that can help you determine the amount that you will need to be put aside to take care of your post-retirement needs.

Step 1: Decide the age at which you wish to retire

The most common retirement age is 60, but it depends on you. You may want to work beyond 60 or you may wish to retire at 55. Estimating your retirement age is the first step. Once you retire, your regular income stream will stop or reduce considerably (in case you are eligible for pension) and you'll depend on your savings and investments to take care of your daily lifestyle needs.

Once you have zeroed in on your retirement age, deduct your current age from it to calculate how many years until your retirement. This is how much time you have to plan for your retirement.

Step 2: Determine your post-retirement expenses

It is important to make an accurate estimate of how much you will require to maintain your present lifestyle post retirement. For this, first ascertain your annual expenses at present. Then factor in inflation to calculate how much your present expenses will amount to at the time of retirement. This is the amount you will need every year to meet your post-retirement expenses.

Assume that your present annual expenses amount to Rs 120,000. If you have 25 years to retire and expect the rate of inflation to be around 7%, your annual expense then will be approximately Rs 651,292.

Step 3: Get a check on your annual savings and find their future value

How much you are able to save every year after meeting all your expenses plays a crucial role in building your retirement corpus. Your saving is the surplus after deducting your annual expenses from your net income. The ideal way is to earmark a portion of your savings for retirement. This part of your savings should be treated as sacred and should not be disturbed unless it is an emergency.

After estimating how much you will be able to save annually, the next step is to find out its future value. To determine this, you have to factor in the expected rate of return on your investment. This is the value of your savings or investments at the time of retirement.

For instance, if you are able to save Rs 100,000 annually for your retirement, and you invest this at a 10% rate of return per annum, then you will have a retirement corpus of approximately Rs 9,834,706 in 25 years.

Step 4: Find out whether your savings can cater to your post-retirement expenses

To extend the above illustration, let us assume that you invest your retirement corpus (in this case Rs 9,834,706) to generate a post-retirement income. The investment is made in an avenue that offers, say, an 8% rate of return annually (rate of return may vary depending on your choice of investment avenues). So, at the end of every year, you will earn a return of Rs 786,776. This is your post-retirement income from your investments.

If your post-retirement income is higher than your post-retirement expenses (in this case Rs 651,292, from Step 2), your savings and investments are enough to cater to your post-retirement needs. But if they are lower, then you have to make prior arrangements to plug this shortfall.

Step 5: If necessary, engage the services of an unbiased financial planner

Admittedly, the above steps are a bit confusing and complicated. An honest and competent financial planner can help. Your financial planner should be able to come up with a relatively accurate retirement corpus, which can help you plan your retirement. More importantly, the planner can advise you how to go about investing your savings based on your risk profile.

Remember that in the process of determining your retirement corpus, you have to make few crucial assumptions - such as the rate of inflation or the rate of return on your investments. These factors are not fixed and are bound to fluctuate over time (depending on how much you can save or spend in a given year).

You must regularly review your calculations to ensure that you are always on track to achieve your retirement corpus. Your financial planner should be prepared to help you with this.

Now let's see what you should do while investing in order to achieve a hassle free retirement.

Have a proper investment plan

As a mutual fund research and financial planning company, our views on the financial planning process are inherently positive.

This is because we've seen clients go through growth phases - not only financial growth, but personal growth. When clients come to us, the state of their investments ranges from the slightly unstructured to the completely messy. If you don't know where your money is, you won't know what it's doing. Our clients come to us slightly confused, unable to articulate their financial goals, and looking for financial help. They leave with a sense of empowerment, discipline, and clarity - not to mention a solid plan they can follow.

If you don't want to hire a planner or an advisor, do it yourself. Just be sure you have a proper investment plan. The plan should cover not just retirement, but for all your life goals - your child's education and marriage, your second home, foreign vacations, etc.

Diversify and rebalance your portfolio

Don't make the mistake of thinking that it's all about equity and property. Different asset classes such as debt and gold are also important.

How you allocate your money across asset classes has nothing to do with your age. But it's got everything to do with your investment time horizon.

If you have a goal that's less than 3 years away, you need to be predominantly in debt/fixed income products. This is not the time for equity. If your goal is between 3 and 5 years away, you can have part exposure to equity, up to 45%, with 15% in gold, and 40% in debt / fixed income. If your goal is more than 5 to 7 years away, you can have anywhere between 45% to 60% in equity, with 15% in gold and the rest in debt. For a goal 7-10 years away or more, you can opt for 75% in equity, 15% in gold and 10% in debt.

Remember that as your goal-time horizon changes; your asset allocation must change. Rebalance your investments to reflect the right asset allocation as per the time horizon to your financial goals.

Save Now, Spend Later

It's true.

The more you invest today, the more (much more) you'll have to spend when you're 60.

The numbers are straightforward: If you invest Rs 10,000 per month for 10 years, you will build a corpus of around Rs 23 lakhs assuming a growth rate of 12% per annum. Increase this to Rs 12,000 per month, for the same time period i.e. 10 years, and you'll build a corpus of Rs 27.60 lakhs. Increase this to Rs 15,000 per month, and you've got Rs 34.50 lakhs.

Get a grip on your spending, save more, invest more, to retire earlier and richer.

Don't spend more than you have to on the taxman

Paying taxes can sometimes leave you with a 'what a waste of money' feeling.

In order to avoid this feeling, and also to save and invest more money, go through the following little tips:

Make the most of all your deductions Save medical bills in a shoebox throughout the year and claim Rs 15,000 worth of deductions Buy medical insurance (for the medical insurance) and claim the deduction on the premium paid Claim the benefit of principal and interest repayment in case you have a home loan If you live in a rented apartment, see if you can restructure your salary to claim the maximum HRA possible Invest in PPF and don't withdraw from it until you retire

Remember, a penny saved (in this case from the tax man) is a penny earned.

Planning for your retirement might seem like a tedious task, but you need to keep it simple. Once you create your plan, you should form a habit of investing regularly. Select good mutual funds and other investment instruments, with a strong track record. Moreover don't try to time the market, or churn your portfolio unnecessarily.

Time is a valuable asset and you should make the most of it.

'…but in this world nothing can be said to be certain, except death and taxes.'

- Benjamin Franklin

Everyone engages in economic activity, and most of us work really hard to earn a living. Unfortunately, our earnings mean we have to work that much more…that is, if we want to minimise our tax burden.

Many of us think of taxes as simply a chore, something to attend to once a year. And some of us, especially the younger ones, put off tax planning till the eleventh hour.

Of course, it's never too soon to start tax planning. But it can be too late. With just a couple of months left before the close of the financial year, we at PersonalFN believe the best time to start the annual tax-planning exercise has passed.

Investments for the purpose of tax planning (the ones you can deduct from your gross total income under Section 80C) are no different from conventional investments. They require the same degree of effort and planning. Likewise, it is vital that tax-saving investments are in line with your risk profile.

And starting early gives you a sufficient amount of time to diversify your tax-saving portfolio.

To help you understand how to better allocate assets from among the gamut of tax saving instruments, we have divided the tax-paying community into three distinct age profiles.

The reason we have chosen age as the distinguishing criteria is because an individual has various life goals that needs to be planned for and attained at each stage of life. It is one's commitment level at each stage of life that would significantly impact one's appetite for risk and therefore the return expectation.

If you are 25-35…

You are in the prime of your life, probably married, and may even have children. If you are the sole breadwinner in the family, then your position in the family assumes even more importance. If you aren't insured already, then getting a life insurance cover should be of utmost priority. Buy a simple term insurance plan to get maximum life cover at a low premium. The premium you pay on your term insurance plan qualifies for deduction under section 80C.

Given that you have more years on your side, a tax-saving mutual fund (ELSS) fits well into your risk profile. You can consider investing a higher amount in ELSS.

We always recommend clients start planning for retirement at very early stages of their life. You can open a Public Provident Fund (PPF) account and start contributing small amounts to it every month. This will be over and above your monthly contribution to your Employee Provident Fund (EPF), which might be automatically deducted from your salary by your employer.

Being a young salaried individual, you might want to consider buying a house property at this stage. If you take a home loan, you can claim a tax benefit on the interest (under section 24b) as well as on your principal repayment (under section 80C). If residing in the new house immediately isn't an option just yet, you can lease it out to earn a regular secondary income.

If you are 35-45…

You may be fairly settled professionally and personally. During this phase, you need to review your insurance portfolio. You may need to consolidate your portfolio by taking on additional insurance as you move up the 'lifestyle chain' and your personal net worth witnesses a surge. With increased responsibility, the insurance cover you bought ten or even five years back might no longer be sufficient to cover your life.

At this stage, a significant exposure to ELSS can still be considered. With age on your side, ELSS is a decent option to boost your capital through equity. This can help you meet some of your long-term financial goals.

You can continue investing in your PPF and even add small amounts in avenues such as NSC (National Savings Certificates) or tax-saving bank fixed deposits for the next five years. Consider investing equally in these instruments to benefit from interest rate movements in either direction. The interest rate in NSC and tax saving bank fixed deposits is locked for five years, while the PPF interest rate is revised at regular intervals with prospective effect.

For instance, the current interest rate on five-year NSC is 8.5% per annum, while PPFs offer 8.7%. If interest rates are expected to fall over the next one year, and even if the PPF rate is revised downwards to, say, 8% per annum, your investment in NSC will continue to earn 8.5% for next five years.

However, if the scenario were to turn and rates went up, then your PPF investment would benefit as the rates could be revised upwards, whereas the NSC and tax saving bank fixed deposits rates are locked.

Moreover, if you have one to three years left before your PPF matures, you may consider increasing your PPF allocation as you would be getting your money back a lot sooner than the minimum seven years period.

If you are over 45…

Your insurance needs are probably taken care of already. If they aren't then, you can bridge the shortfall by taking some additional term insurance.

As your retirement is less than 15 years away, your investments need to be more retirement oriented towards. A mix of pension benefit and the money that you have accumulated in your PPF account are meant to take care of your retirement needs. At this stage, your PPF account is probably close to maturity; in which case, it makes more sense to increase your investments in it. You not only receive a tax benefit, but can also make withdrawals relatively sooner.

Moreover, you can invest a smaller amount in ELSS provided you aren't too close to retirement; in which case, the risk-return profile of a mutual fund scheme would work against your own.

To reiterate, while you have a host of tax-saving investment options available under Section 80C, following an asset allocation model (for your tax-planning exercise), in accordance to your age, ability to take risk, and investment horizon is going to make your tax-saving portfolio more prudent.

Model Asset Allocation while saving tax under Section 80C Age Estimated Life Insurance Premium (Rs) [only term plans] EPF/PPF/NSC/ 5-Yr Bank FDs ELSS (Rs) Total (Rs) 25-35 15,000 30,000 105,000 150,000 35-45 22,500 52,500 75,000 150,000 45-55 30,000 75,000 45,000 150,000 55 and above 30,000 90,000 30,000 150,000 Source: PersonalFN Research

As a prudent tax-planning practice, look beyond the ambit of Section 80C. You may easily exhaust the Rs 150,000 limit and still find it insufficiently reduces your tax liability. Instead, access the other deductions available under Section 80 and the exemptions too.

PersonalFN thinks that, even as you employ the assistance of a tax consultant, a self-study approach to your tax planning is necessary. You should be well versed with at least those tax provisions that will directly affect you. And on this note, we wish you all Happy Tax Planning!

Editor's Note: As you may remember the Wealth Builders Club promises to be a one-stop solution for all your wealth related ideas. In an effort to make sure every avenue of wealth is covered, we noticed that there was one prominent savings opportunity that we had not as yet addressed - and that is frequent flyer miles. These miles can essentially be a second currency if collected and used wisely. There are pitfalls that go with it, actually, just as with any kind of credit, but we will show you in our special report below that they can be quite beneficial to your bottom line.

*

We travel not to escape life, but for life not to escape us. - Anonymous

We have one life to live.

Many of us want to fly around the world, explore places, and obtain the unique experiences that come with each destination - be it the culture, cuisine, music, wildlife, and much more.

Those who've had their passport stamped will agree: travelling offers a host of benefits. You meet interesting people and make friends for life. You share special moments and amazing adventures with loved ones. You can enjoy luxurious pampering and much-needed relaxation, or you may stumble across humble towns with heart-warming locals.

But no matter what kind of travel you pursue, you learn about life through these experiences and your interactions with the people you meet along the way. But along with these benefits, one hopes you also benefit from the accumulation of frequent flyer miles (FFM)…

Whether for business or leisure, if you fly, you should consider signing up for a frequent flier account to accumulate FFM points, which you do by flying with particular airlines, using specific credit cards, and booking rooms with hotels that have partnered with the airline.

Each FFM point equals a monetary value; the more you fly, the more points you earn, and the more rewards you enjoy. You can redeem your points to save on airfare, upgrade seats, buy merchandise, and many other things.

Now, you're probably already aware of these programs, but you many not know how to best employ your FFM points.

Without further ado, here's how to get more mileage out of your frequent flyer miles:

Each airline company offers different frequent flyer programs. Whichever airline you have an account with, if you wish to utilise your miles to travel, it is always better to book redemption seats as soon as possible; as airlines allot only a few seats for redemption purposes.

Call up the airline's customer care and don't merely rely on the online portal for information, as the airline may accommodate a seat if you pursue them rightly. Spending FFM on airline tickets will be more effective if your preferred date and time of travel is not rigid, keeping in mind the limited availability of redemption seats. For domestic travel, Air India has very good availability of redemption seats, sometimes four or more economy seats in a flight.

Don't be trigger-happy when redeeming points. Check the number of points that each perk/offer will consume. If a low-grade perk requires too many points, pay with cash instead. Some airlines permit redeeming FFM for merchandise or access to airport lounges. In any case, assess the number of points that will need to be redeemed. Many of these offers simply aren't worth the points.

Be aware that, though you may redeem FFMs for free airfare, you might have to pay for airport taxes and charges. Sometimes these hidden costs are very high, turning the entire essence of using FFM for a free ticket sour.

Some airlines allow frequent flyers to accumulate points from transactions on certain credit cards used to dine out, book hotels, etc, allowing you to earn points while you make merry. Jet Airways, for instance, has partnered with credit card issuers, magazines, retail stores, hotels, and restaurants.

Some credit cards also allow you to use the credit card points to buy flight tickets. Citibank's PremierMiles credit card allows you to redeem your credit card points directly with online travel booking portals. A lot of banks - such as HDFC Bank, State Bank of India, ING, and IndusInd - have their own portals where you can redeem your points to buy flight tickets.

Several international airlines have alliances with one or more domestic airlines. Watch out for these tie-up offers to stretch your FFM. Keep this in mind the next time you book tickets for connecting flights. Though the airline you frequently fly with might not fly a particular route (for instance, from Mumbai to Bangalore), its partner or alliance airline might. Etihad is the majority owner of the Jet Airways' JetPrivilege frequent flyer program, so you could use Etihad miles to travel domestically on Jet Airways.

If the airline company permits booking another individual's ticket from your frequent flier account, club miles with your spouse or look at opening a family-pool account. JetPrivilege (the FFM for jet airways) offers you a family pool, called MyFamily+, to allow the miles of the entire family to be pooled into one account and used for redemption tickets.

Redeem FFM points before they expire. Every airline has different expiration timelines and fine print of rules and regulations. Don't hoard your FFM points, hoping to redeem them all for a ticket to your dream destination. Double check with your airline customer services department about its rules and keep track of your FFM account frequently.

All jet-setters should study airline loyalty programs like the Holy Scriptures and do the math to avoid frivolous point redemption. It can be daunting initially, but eventually you'll master the art of managing the FFM points.

“Retirement: It's nice to get out of the rat race, but you have to learn to get along with less cheese.” Gene Perret

Like most people, I began to think about retiring at about the same time as I started a family. I was relatively young - 29 at the time - and my expenses were increasing quickly. However, my income was increasing slowly, which is typical of most salaried jobs.

I knew that if I worked my way up the corporate ladder, I'd eventually be able to own my own house and give my children what they needed: food, clothing, an education, and some little comforts.

I also knew that I would not be able to afford to send them to private schools, pay for horse riding and tennis lessons, or take them on exotic vacations. That didn't matter so much. I didn't have those things when I was growing up, and I didn't miss them.

But what I couldn't adjust to was the realization that I would probably never be able to stop working. Even back then, in the mid - 1980s, when everyone in my country believed retirement was a national entitlement, a little arithmetic proved to me that it was not going to happen.

I could have induced myself to be happy with the idea of working till I keeled over. But I didn't want to. I wanted to be able to retire. And not in 40 years. I wanted to retire sooner than that. Much sooner.

So at the tender age of 29, I set a goal: to make enough money to buy a house and two cars and have a nice wad of cash sitting in the bank…as soon as possible.

In my book, Automatic Wealth, I explained how I achieved that goal. By getting serious about my income, I was able to pay off a mortgage on a $175,000 house, buy two decent cars for cash, and have something like $100,000 in my bank account.

I did it in about three years, if memory serves. And you might think that made me happy. It didn't. I felt anxious. Worried. I didn't feel rich, and I certainly didn't feel like I could retire.

That house I had worked so hard to own seemed suddenly too small. Our Hondas seemed too dull. And it was clear that a nest egg of $100,000 wasn't going to be enough to pay for college for our three kids, not to mention my retirement.

“Okay,” I thought. “I simply underestimated how much I need to retire.”

So I set a new, much more ambitious, goal. I would swap my starter home for a fancy one in an upscale neighbourhood, my starter cars for luxury vehicles, and boost my retirement savings to a cool million dollars.

Three or four years later, I hit my marks. We were living in a spacious $600,000 home in a “gated” community. We owned two Lexus sedans. And I had more than a million socked away.

I had the goodies to prove I had “made it,” and enough in the way of “liquid” assets to take care of the future. I should have been thrilled. I wasn't.

For one thing, I had bigger bills to pay. I had no mortgage, but my property taxes at $12,000 a year were equal to the mortgage payments on my first house. My kids were going to private schools - another $12,000 a year. And everything we were buying - from furniture to vacations - was more costly than what we used to buy.

So there I was, a millionaire but still worried about money. And to make matters worse, my house seemed suddenly too far from the beach and my luxury cars too commonplace.

So I upped the ante again. This time, I was going to really do it. A multimillion - dollar house, super - expensive cars, and at least $10 million in savings and investments before I reached my 39th birthday.

Once again, I hit my goal.

And so I retired. I stopped working and started living off my interest and investment income. I spent 18 months doing something I loved - writing short stories.

Some of them got published!

I won three literary prizes!

And I earned a total of $900 (barely Rs 50,000).

Meanwhile, my property taxes ballooned to $100,000 a year and upkeep on the house was another $30,000. Our $60,000 cars were very ordinary in our new neighbourhood. To impress my neighbours, I‘d have to spend much more on everything - clothing, furniture, etc., etc. That meant I had to go back to work.

I am sure this sounds disgustingly self - indulgent to you. It was. That's my point.

I finally recognized that something was seriously wrong. And it wasn't with the world. It was with me.

The secret to feeling “rich” enough to retire happily, I realized, was not just to have enough money to live comfortably. More important, it was learning to be satisfied with what you have. In other words, the trick to financial independence was to be content with some reasonable level of wealth.

It wasn't easy for me, but I forced myself to stop ratcheting up my desires. I decided I was going to be happy with what I had. And the amazing thing was that the moment I decided that, I was!

I know now that I could have been happily rich years and years ago. All I needed to do was be happy with the things I had and with what I could afford to pay for out of the money I had put aside. That way I could enjoy my life without worrying about working. In other words, I could retire.

So that is the most important thing about the retirement game: training yourself to be happy with a reasonable level of wealth.

But that raises the question: What is a reasonable level of wealth?

I answered that question in Automatic Wealth - but I made it unnecessarily complicated. I suspect lots of folks who read it thought, “This sounds good, but there's no way I'm going to do all that.”

Since then, I've simplified my answer. My current thinking is that your primary financial goal should be to (1) own your house outright, (2) have no debt, and (3) have sufficient savings to pay for your expenses.

The main factor in this equation is the house. Because the cost of your house is what determines most of your other expenses. Not only the cost of your taxes and upkeep and so on, but also, as I suggested above, the cost of the cars you are likely to buy, the amount of money you will spend on leisure - time activities and “things,” and so on.

Once you have an affordable house that makes you happy, getting completely out of debt is the next big thing. That means paying off the house as quickly as you can, as well as anything else you may have borrowed money for.

The rest of the program is to get that retirement account funded.

How much will you need in your retirement account? I've already given you a way to figure it out…

Take the cost of the house you can be happy to retire in. Multiply that by 40% to get what it will cost you, in after - tax income, to live. Given a reasonable rate of return on your investments, you can now determine how much of a nest egg you will have to have in order to generate the amount of annual, after - tax income you will need.

[For a shortcut to your retirement number, use the Retire Rich calculator]

Once you've done that, you will realize what I did when I first ran the numbers 30 years ago: With a normal income, you will never earn enough money to put that much aside.

I have made this point in every book I have written about wealth building. But none of the politically correct, bestselling authors want you to believe this. They have made their millions by convincing their readers that they can retire simply by scrimping and saving. That simply isn't true. In fact, it's a big, fat lie.

If you want to retire while you're still young enough to enjoy it, hear this: You must create an extraordinary income for yourself.

There are only two ways to create an extraordinary income: as an entrepreneur or as an intrapreneur.

I have written extensively on both of these subjects, so I won't get into them here. Suffice it to say that of the several dozen people I know who can afford to retire, about two - thirds of them are entrepreneurs and one - third are intrapreneurs. I know nobody rich enough to retire who has earned his money by being an ordinary employee.

So that's the formula:

Buy the most affordable house that will make you happy. Pay off your mortgage - and any other debts you may have - as fast as you can (and don't acquire any new debts). Get yourself on a trajectory to enjoy an extraordinary income through entrepreneurship or intrapreneurship - and start socking money away.

This is a great time to get started. Although much of the world is in financial peril, some businesses (such as information publishing) are growing in leaps and bounds. Now is the time to get in - either by creating a side business or by becoming an invaluable employee of a business someone else owns.

Get started now, and you will be able to retire in 5 to 15 years.

You may not want to retire yet. You may be having so much fun that you'll decide to keep working. But it will be your choice. And that's the idea, isn't it? To have that choice?

Nassim Taleb, author of The Black Swan, has come out with a book called Antifragile. You may have heard about it. If not, I recommend it. It's one of those rare books in which I find myself savouring every line - as much as I enjoy a dinner of macaroni and cheese.

Antifragile can be seen as a sequel to The Black Swan, which can be seen as a sequel to Fooled by Randomness.

Taleb's argument is that (a) people underestimate how much randomness there is in life (Fooled by Randomness), (b) the most important events are often unpredictable (The Black Swan), and © it is possible not just to protect yourself from such events but also to benefit from them by being antifragile.

If I hadn't read Taleb, I'm sure I would have resisted his ideas. I don't like the idea that you can't predict everything. I'd prefer to think that if you had enough data and enough computer power, you could.

But Taleb is a very seductive writer. He loves to poke fun at conventional wisdom - whether it is on the subject of health (cholesterol is bad), economics (the Fed can manage the economy), or traffic regulations (more streetlights mean more safety).

In Antifragile, he picks up on the “Black Swan” idea. He points out that there are some things in life we can predict. Others, we can't. We can predict when a comet might pass into our atmosphere. Or how fast a DC-9 plane will fall from 10,000 feet.

But try as we might, we cannot predict when an overvalued stock market will crash. Nor can we predict when the global community will lose faith in the dollar.

We can't predict “Black Swans,” Taleb argues. But what we can do is determine whether something might be destroyed by one. A glass vase, for example, is likely to be destroyed in an earthquake. A stuffed bear is more likely to survive.

So rather than spending time trying to predict the unpredictable, we should try to understand whether our practices, programs, and possessions could be destroyed by Black Swans. And if they can, we should work to change that. One thing we can do is find ways to make them more robust. More likely to survive catastrophic events. An even better thing we can do - and this is the core message of Antifragile - is to find ways to profit from Black Swans.

Robustness, Taleb says, is the quality of being able to endure ruinous events. A very healthy person, for example, is more likely to survive pneumonia than someone who is sickly.

I very much enjoy my subscription to Mark's letters. Subscriber DC. But nature has given us the ability not only to survive some stressful events but also to benefit (profit) from them. Surviving the chicken pox, for example, makes you more resilient - even sometimes immune - to a second exposure. His thesis is that, when it comes to the economy (among other things), we should do things that make us antifragile to economic disaster. This is more helpful than trying to predict catastrophes.

I'm sure you are thinking that this is just common sense. But as Taleb points out in Antifragile, this is the opposite of what many financial experts do.

Many “market experts,” for example, spend their careers trying to predict the ups and downs of the market. Most technical analysis is based on the same presumption.

It is inspiring to read tales about people who get rich by “foreseeing” a market move. But Taleb and others who have studied these stories have concluded that these are cases of luck, rather than science.

Getting back to the risk of a stock market crash or the dollar losing its global credibility: According to Taleb, we cannot predict when or even if these events will occur. But we can say that, if they happen, certain institutions and investors globally will be wiped out. In other words, we can observe who is financially fragile.

As a wealth builder, you have a choice: Adhere to the idea that markets can be timed and search out the best models for predicting them. Or accept Taleb's thesis and become an antifragile investor.

Growing to Fear Black Swans

I knew little about risk theory when, in my early 30s, I decided to become wealthy. But even then, I understood that predictions never seemed to work all the time. So, rather than trying to become an expert at stocks and bonds, I made a plan. I see now that my plan was aimed at becoming antifragile.

I bought safe bonds and index funds and real estate. I eventually bought gold too, but not as a means to make money (which happened). Instead, as a store of wealth and a hedge against inflation. I collected art for the same reason. I figured that the value of my art might go up while other assets were going down.

And all the while, I kept investing in small businesses that I understood and could control as the main shareholder. This gave me not only the chance of great future gains but also a steady flow of income. I could then devote that income to growing my passive asset holdings.

I bought gold because I had been reading Bill Bonner. This was back when gold was trading at about $450 per ounce. Bill's thoughts on the economy scared me. Without gold in my portfolio, I felt fragile. So I bought gold coins, not to profit from a price surge, but to protect myself.

Likewise, I got out of the rental real estate market when prices were getting too high. Everyone was sure prices would keep rising. I wasn't sure. But if they did crash - as some of Agora's writers were predicting - I wanted to be safe. So I got out of the market around 2006.

I got into gold and out of real estate to protect myself from a possible financial disaster. Buying gold cost me money. I saw it as an insurance premium. And a cheap one at that. Getting out of the real estate market felt like I was giving up future profits. But I considered that too a sort of premium - to protect the profits I'd already made from the properties I owned.

Using Taleb's terms, buying gold and selling real estate was a move to make myself less fragile. Getting out of real estate for two years made me robust. Buying gold made me antifragile.

Let's Look at Our Programs

I'd like to move the conversation to Common Sense Living's wealth-building programs. The question we must ask is, “Are we safe from economic and financial Black Swans?” And “Are we in a position to profit from them?”

10 Signs of Financial Fragility You are betting that the bull market will continue for years to come.

You have all of your stocks and bonds with one brokerage.

You are betting that the dollar will collapse in some number of years.

You have all of your money in stocks, bonds, gold, etc.

You have full faith in your broker/insurance agent/financial planner.

You have or are planning to given up your active income.

You don't have cash and gold set aside for unlikely financial challenges or misfortunes.

You have no tangible, portable, non-reportable assets such as gold coins, fine art, rare stamps, etc.

You have no legal and financial documents to protect your estate against legal challenges and wrongful taxation.

You don't believe you need protection against identity theft, credit card fraud, invasions of Internet privacy, etc. As you know, our strategy at the Wealth Builders Club is a multichannel approach. It involves seven investment classes (cash instruments, bonds, growth stocks, value stocks, real estate, gold, and options).

We provide specific advice in each of these areas. And we also provide asset allocation models. These correspond to how much money you have and how many years you have before you “retire.”

In every sector, we find ways to reduce risk. When buying bonds, we buy debt that seems resistant to economic downturns. When buying stocks, we favour companies that will endure even if the stock market drops. And we avoid - at all costs - speculations and investment picks that are based on predictions.

Thank you for your wonderful newsletter. It is not only educational, but also fun to read. Subscriber DI. All of these things help make us robust investors. We are protecting ourselves against the Black Swans of the future. I've been doing this for a long time, so I have more safeguards than most Wealth Builders Club readers likely do. I have, for example, more than seven streams of income from private businesses. This money flows into my bank accounts every year. Likewise, I have income from more than 30 rental real estate properties. I also have a start-over fund hidden in case I ever need it. And I hoard cash.

As I said, the program you get with Wealth Builders Club is comprehensive. If you are not yet rich and feel at risk, you should certainly check out the ideas we share in Creating Wealth and the extra programs we offer in the Wealth Builders Club.

[If you're not already a member, we are opening membership soon…]

Meanwhile, consider the following:

Best Ways to Achieve Financial Antifragility Diversify your assets into at least four and at best six of the following categories: cash, bonds, stocks, gold, options, and real estate.

Invest in both growth and value stocks. I would define a growth portfolio as robust because of the quality of the stocks and the trailing stop-loss feature. I would define value stocks as antifragile because of the long-term approach, the policy of buying more stock during downturns, and the fact that these kinds of stocks rise quickly after drops.

Create a “start-over” fund that is equal to at least six months' income. Also, have a “start-over” plan. It must be enough to cover your projected costs of starting over.

Develop your cash-producing assets (options, performance stocks, bonds, and rental real estate) so that, in time, each one will give you ample yearly income.

Don't give up your active income. If you don't have a job now, get one, even if the income is small. (For ongoing ideas on income opportunities, join the Wealth Builders Club, if you haven't already, when membership reopens soon. Pay special attention to the club's Extra Income Project series.)

Have some or all of your start-over funds hidden.

If you don't own a business, start or invest in one. Make sure it is a business that you understand and over which you can have some control.

Get insurance - but only what you really need - to protect your health, your house, and all of your other valuable possessions.

Learn about the realities of identity theft and defend yourself accordingly. (We will be publishing a report on that soon.)

Get privacy guards for all of your Internet activities.

In the mid-1980s, a few years after I “decided to get rich,” I bought my dream house. It was a 4,000-square-foot chateau-styled, custom-built, five-bedroom home in a very nice gated neighbourhood called Les Jardins in Florida.

The cost of the house was about $600,000 (almost Rs 3.6 crores) - more than I ever imagined I could afford. But thanks to the success of a business I had started, I had socked away about $125,000 (Rs 90 lakh), and that was enough to cover the down payment and closing costs.

Telling the real estate agent, 'I'll take it,' gave me a great, memorable feeling of the power of wealth. I knew, even then, that this purchase would be a milestone in my life.

What I didn't know was how many different lessons I would learn from it.

Deciding to buy my dream home was euphoric. But signing the loan documents evoked a very different emotion: an ominous weight.

The title to this magnificent house was in my name. But I owned only one-fifth of it. The real owner was the bank.

I didn't like the idea that if things went awry, I could lose “my” house to this corporation. So I decided to devote every extra dollar I made toward paying down the mortgage. I put no money away for my children's education or my retirement. I didn't even have an emergency fund. It all went toward my goal of really and truly owning my house.

What a great feeling it was when, only three years later, I handed that last payment to the bank. I would finally be rid of that burden, I thought. I would finally be master of my own domain.

But life had more lessons for me. Just a week or two after paying off the mortgage, I received my property tax assessment for the year. It was something like $22,000 (around Rs 13 lakh).

“Oh no,” I thought. “That's more than my wife and I ever paid for rent. And I've got to pay this every year, without fail, as long as I own this house.”

You and the entire staff have made a deep and provoking impact on my decisions and me. You have caused me to look in the mirror and see what can be changed and will be changed.

I am deeply thankful for your entire organization, a group that I can trust to tell the truth, the whole truth, and nothing but the truth, and that is what is important. Wealth Builders Club member JB. The next week, I received a notice about the homeowner's association fees: They would be going up to $4,000 per year (Rs 240,000). And then, the following week, I wrote checks to cover our monthly bills. These included about a half-dozen expenses that related directly to the house: electricity, gas, lawn maintenance, etc.

I realized that even after paying off a mortgage of $600,000 (3.6 cr0res), I was not in any way financially free. To possess and occupy that house was going to cost me more than $30,000 (Rs 18 lakh) per year - for as long as I “owned” it.

I learned two important lessons from this experience:

Holding title to something doesn't mean you have absolute control over it. Having paid for something doesn't mean it no longer costs you anything to use it. Later, I realized that the same rules applied to buying a car. Getting title to one doesn't mean you own it. And owning it doesn't mean your car will be cost-free.

The same is true for boats and planes and beds and exercise equipment and machinery and so on. This rule applies to about everything you buy that cannot, like food or medicine, be consumed.

Thus, my happy delusion about ownership was shattered. But it wasn't a bad thing. Not at all. It gave me a very useful insight into the cost of possessing things - an insight that has helped me make countless buying decisions since.

A New Way to Think About Ownership

Nowadays, when considering the purchase of a car or boat or a set of golf clubs, I don't pretend that I will have them forever. I take a deep breath, calm down my greedy little heart, and make a realistic estimate about how many years I will actually use this desired object. I then calculate its total cost of ownership on a yearly basis.

In other words, rather than telling myself that this car is going to cost me $25,000 (some Rs 15 lakh) - because that's the sticker price - I do a full calculation of everything I'll likely pay to own it for, say, 10 years, and arrive at what it will cost me, on an annual basis, to possess it.

I'm sure there are plenty of smart people who do the same thing. But I've never heard anyone say so. Nor have I read about it among the books on finance that I've read. So lacking a dictionary term name for this idea, let's create one. Let's call it the cost of possession.

And to reiterate: The cost of possession is the full cost of using any non-consumable good, from a house to a car to a fountain pen, over a given period of time.

I said that understanding this idea has helped me become a better consumer. Let me give you an example - an issue that comes up all the time that you may have wondered about yourself.

An Old Debate: Own or Rent?

Many people believe that owning a house is always better than renting one. They point out that when you own a house, you get the benefit of price appreciation.

“Why should I fork over several thousand dollars per month in rent if, at the end of the day, I have nothing to show for it?”

The answer to this question becomes clear once you apply the principle we've just discussed - the cost of possession - to the decision at hand.

Today, for example, I'm shopping for an apartment in New York City. K and I are looking for a pied a terre (just a fancy word for a flat) in downtown Manhattan so we can be close to two of our sons who live in New York. I could afford to buy the apartments we are looking at, but because I now think in terms of the cost of possession, I'm pretty sure that would be a bad deal.

A little bit of arithmetic will demonstrate what I mean. Let's say I want to get an apartment in Mumbai. To make calculations simple, let's assume I bought an apartment for Rs 1.5 crore and held it for 10 years. What would be the cost of possessing it on a yearly basis?

The first step is easy. We take the price and subtract it from the net price I think I'd be able to sell it for in 10 years. Assuming an annual appreciation of 4%, the apartment would be worth Rs 2.2 crore. I would stand to make a profit (a capital gain) of Rs 66 lakh.

That's an argument for ownership. But now I have to figure in the opportunity cost of plunking down Rs 1.5 crore in cash. The opportunity cost refers to the money I would have made by investing that same Rs 1.5 crore in another investment or group of investments. Assuming I could get a 4% yield on that Rs 1.5 crore, I'd turn that into Rs 22,200,000 too. At the end of the 10 years, it is a wash.

Okay, it's tied at one-to-one

Now let's look at the other costs of possession.

First, when you own real estate, you have property taxes. Let's just assume a 1.5% on the appraised value of the apartment. The appraised value would very likely be the price I paid for it. That is a cost of Rs 225,000 per year.

Then you have the association fees: The apartments I'm looking at average about Rs 3 lakh per year.

Then there is insurance, maintenance, and so on: I'm estimating that will run me two and a half lakh per year.

So the total cost of possessing that apartment on an ownership basis is Rs 8 lakh per year.

Now let's look at renting.

You would think that if the rental market were “efficient,” the rental costs would amount to about the same thing: Rs 8,00,000 per year. In fact, because of factors we don't need to discuss here, it would cost me less than that to rent these apartments. My best guess is that it would cost me Rs 50,000 per month, including fees, to rent an apartment.

The bottom line: It would be about Rs 200,000 per year cheaper to rent than to buy. Over a 10-year period, that's a savings of Rs 2,000,000.

So, in this case, renting is the better choice.

You can do the same analysis with cars. Rather than pretending that the sticker price of that Mercedes you want is the cost of owning it, consider all of the costs of possessing it, such as insurance, gas consumption, maintenance, and depreciation (i.e., cost versus resale value). Then make a realistic judgment about how many years you will keep it. And then you will have your annual cost of possession.

By approaching it this way, it will be very easy for you to compare renting versus owning. You won't make the mistake of thinking that either the sticker price or the monthly lease rate is your cost.

Understanding the cost of possession has saved me hundreds of thousands of dollars (if not millions) in these past 30-odd years. Discovering it was a big, big eye-opener. I hope this has had the same impact on you.

What I want you to take away from this essay is this: When making decisions about buying, renting, or leasing anything, always remember to include all of the costs involved. Then divide them by the number of years you expect to use the thing you are buying.

This will give you the real cost - the cost of possession. Once you get the knack for the arithmetic, it's easy to do. You will make smarter decisions and have fewer regrets. And the salespeople you deal with will begrudgingly admire you!

I'm too stressed-out these days - trying to do some last minute tax planning. The HR department of my company is sitting on my head, constantly reminding me to submit proofs for tax saving investment declaration. Almost every day I receive an email or message from them.

With a wedding in the family, honestly I've been so awkwardly placed of late that this important task has gone ignored. I'm afraid if I don't furnish the required documents on time and invest some portion of my investible surplus in tax saving instruments, a higher sum will be deducted as TDS (Tax Deduction at Source). And I don't want to carry forward the task of claiming a refund later through my CA (Chartered Accountant). It's such a hassle, you see, to get the refund on time. Hoof! - A PersonalFN client.

We're talking about that time of the year when many salaried individuals panic…and their human resources departments pester them for supporting tax documents.

Blame the stress on the human tendency to procrastinate. As a salaried individual or employee, if you want to live a financially stress-free life and honour your constitutional duty to pay taxes, it's better begin your tax planning right away. Or better yet, at the beginning of each year.

If you get a raise, you'll need to consider the tax implications. Perhaps your salary structure could be amended to include more allowances and leave you with more net take home (NTH) pay. The more allowances you have, the less tax you will pay. So discuss your salary options with your employer.

Below are some areas where salary restructuring can be done:

Basic salary: It is important that you agree on the optimal basic salary. Your basic salary constitutes 40-50% of your cost-to-company (CTC). A high basic salary will result in a higher tax liability. And it will reduce the benefits you receive, such as house rent allowance (HRA), leave travel concession (LTC), superannuation, and so on.

House Rent Allowance:Suppose you live in a rented house and your salary structure includes HRA, you can lower the tax liability by availing the HRA exemption under Section 10(13A) of the Income Tax Act, 1961. In India, if you live with senior parents in accommodation owned by them, you can contribute to their savings by paying the rent and enjoying the tax benefit for HRA too.

The table below covers the maximum HRA exemption you can enjoy:

In Chennai/ Delhi/ Kolkata/ Mumbai In other cities Least of: Least of: Actual HRA Actual HRA Rent paid in excess of 10% of salary* Rent paid in excess of 10% of salary* 50% of salary* 40% of salary* *Salary for this purpose includes basic salary + dearness allowance (if in terms of service) (Source: PersonalFN research)

Remember to submit rent receipts to your employer for the entire lease period for which you wish to claim an exemption. If you receive HRA of less than Rs 3,000 per month, a rent receipt is not required.

As per the Central Board of Direct Taxes (CBDT), if you are paying an annual rent of more than Rs 1 lakh - i.e. Rs 8,333 per month - it is mandatory to report the Permanent Account Number (PAN) of your landlord to the employer. (Earlier, one had to furnish a copy of the landlord's PAN card only if the annual rent exceeded Rs 1.80 lakh, or Rs 15,000 per month). If your landlord does not have a PAN card, you are required to file a declaration to this effect from your landlord along with their name and address.

Here's a noteworthy point from a tax-planning angle: If the rent you pay is higher than the HRA limit, it would be wise to pick a company-leased accommodation (if the company offers it). This company-leased accommodation would be considered as the perk value. Therefore, 15% of your gross income would be taxed. Wisdom says, though the perk value is taxable, it still works out to be more tax efficient than opting for an HRA that doesn't fully cover your rent.

Leave Travel Concession: During the year, if you have travelled with your family for holiday within the Indian subcontinent, avail of the LTC benefit conferred by Section 10(5) of the Income Tax Act, 1961. A tax concession is granted for the travel fare, either on your own or with family (your spouse, children, parents, brothers, and sisters who are mainly or wholly dependent on you). This exemption is limited to the LTC amount received OR the actual amount incurred, whichever is lower.

The exemption is only for two journeys in a block of four calendar years. The current block of four calendar years is from 2014 to 2017 (i.e. from January 1, 2014 to December 31, 2017); the next block will be from 2018 to 2021 (i.e. from January 1, 2018 to December 31, 2021).

If you haven't availed a leave or have travelled just once in a block of four calendar years, you are allowed to carry over the concession to the first calendar year (2018) of the next block (2018-2021), but only for one journey. This is in addition to the eligibility to travel two more times in the new block of four calendar years.

Here are the particulars:

Particulars Amount exemptible Where the journey is performed by air Amount of 'economy class' airfare of the national carrier by the shortest route to the place of destination or amount actually spent, whichever is less. Where the journey is performed by rail Amount of air-conditioned first class rail fare by the shortest route to the place of destination or amount actually spent, whichever is less. Where the places of origin of journey and destination are connected by rail and journey is performed by any mode of transport other than air. Air-conditioned first class rail fare by the shortest route to the place of destination or amount actually spent, whichever is less. Where the place of origin of journey and destination (or part thereof) are not connected by rail

Where a recognised public transport exists First class or deluxe class fare by the shortest route or the amount spent, whichever is less.
Where no recognised public transport system exists Air-conditioned first class rail fare by the shortest route (as if the journey is performed by rail) or the amount actually spent, whichever is less.

(Source: PersonalFN Research)

Use your leave smartly, and enjoy a holiday in India with your loved ones. It will not only be enjoyable, but also help reduce your tax liability. Remember to keep your travel tickets and boarding passes as you’ll need to submit them to your employer.

Education and Hostel allowance: If your salary structure includes education and hostel allowances, you can avail of the tax benefits, no matter how dismal they are. The exemption extended for education allowance is Rs 100 per month for a maximum of two children (Rs 2,400 per annum total). The hostel allowance is Rs 300 per month per child for a maximum of two children (Rs 7,200 per annum total).

Meal Allowance through Food Coupons/Food Cards: If you have the benefit of food coupons/food cards, exercise this option instead of opting for a higher NTH. Availing food coupons/food cards can help you reduce your tax liability with a maximum exemption available of up to Rs 2,500 per month (or 30,000 per annum).

Medical Reimbursement: During the year, if you or your dependents visit a doctor or buy medicine, these expenses too could help reduce your tax liability. The maximum annual deduction under the Act is Rs 15,000. Keep the medical bills, and submit them to your HR department to claim the tax benefit. If your employer pays or reimburses your medical insurance premium, it will not be subject to tax. If your company provides medical facilities in a hospital or clinic owned by them, a local authority, or the central or state government, any expenses incurred there would not be subject to tax.

In the next part of this report, which you will receive later this week, we will walk you through the different provisions of the Income Tax Act of 1961, and show you a number of legitimate ways to reduce your tax liability.

In the first part of this report, we broke down for you the structure of your salary, so you could see exactly what allowances you get and increase your net take home (NTH) pay. The more allowances you have, the less tax you will pay. Today, we will discuss other provisions of the Income Tax Act, 1961, so you can be certain to maximise your overall tax :

Section 80G: Those who do not receive HRA and are paying rent can claim a deduction if they satisfy the following conditions: 25% of your total income Rs 2,000 per month Rent paid in excess of 10% of your total income

Be sure you file a declaration under Form 10BA as per the income tax rules to claim this deduction.

Section 80C: This section offers a host of popular tax saving investment instruments such as Public Provident Fund (PPF), Employees Provided Fund, National Savings Certificate (NSC), five-year tax saving deposits, Senior Citizens Savings Schemes (SCSS), insurance plans, Equity Linked Savings Schemes (ELSS), pension funds, etc. Use these instruments to avail a maximum deduction of Rs 1.5 lakh per annum. You'll need to assess the most suitable instruments for your risk profile (aggressive, moderate, or conservative).

This section also allows you to adjust for your children's tuition fees, stamp duty and registration fees for a new home, as well as the principal repayment of a housing loan within the deduction limit of Rs 1.5 lakh per annum. So use it judiciously…and forward copies of the respective documents to your HR department.

Section 80CCD: A deduction of up to 10% of your salary can be claimed under Section 80CCD(2) if your employer contributes to the National Pension System (NPS). The deduction under Section 80CCD(2) can be claimed over and above the permissible deductions under Section 80C. So, if you alone contribute from your income towards NPS, it will be considered within the limits of Rs 1.50 lakh per annum under Section 80CCE. (As per Section 80CCE, the aggregate deduction under Section 80C, 80CCC, and 80CCD(1) cannot exceed Rs.1.50 lakh). Section 80 CCD(2) is applicable only if your employer contributes to NPS. To avail this extra tax exemption limit, convince your employer to contribute to NPS.

In the Union budget 2015-16, the government inserted a new sub-Section 80CCD(1B) that provides an additional deduction of Rs 50,000 for contributions made by an individual assesse under the NPS. (To this additional contribution, the ceiling of Rs 1.5 lakh under Section 80CCE is not applicable).

Section 80D: The premium you pay on the medical insurance policy (commonly referred to as a mediclaim policy) to cover you, your spouse, and your dependent children and parents qualifies for a deduction under Section 80D. The Union budget 2015-16 increased the maximum deduction amount allowed annually to Rs 25,000 (from Rs 15,000 earlier) for non-senior citizens paying for self, spouse, and dependent children. And for senior citizens, the maximum deduction increased to Rs 30,000 from Rs 25,000.

If you pay the medical insurance premium for your parents (whether they are dependent on you or not), you can claim an additional deduction of up to Rs 30,000 for senior parents or Rs 25,000 for non-seniors. Within this limit, a deduction of Rs 5,000 is allowed for expenses towards preventive health checkups. This means if you are paying a premium of less than Rs 10,000, you may avail this benefit to save on taxable income. Just be sure to furnish all the premium receipts and necessary documents.

Section 80G: Under the Income-tax Act, 1961, you may consider donating to certain specified funds, charitable institutions, and approved educational institutions and enjoy a tax benefit. The amount you donate will qualify for a deduction under this section. The maximum will be either 50% or 100% of the amount donated, subject to the stated limits under this section.

Section 24(b): If you've opted for a home loan to buy your house, you can claim the interest on this loan as a deduction under Section 24(b) of the Income Tax Act, 1961. The maximum you can claim, if you are occupying the house as a primary home, is Rs 2,00,000. If you lease the property, the actual interest paid is eligible for deduction, so it is not subject to a maximum limit. This applies even if you have two home loans for two different properties (one self-occupied and the other leased).

Similarly, if you have taken a loan to reconstruct, repair, or renovate the property, you can avail a deduction under Section 24(b). This is, however, restricted to Rs 30,000, irrespective of whether it is self-occupied or leased. There's more to tax planning that just Section 80C. A number of legitimate ways to reduce your tax liability are available. A holistic assessment is necessary to optimally and legitimately save on taxable income. And you need to begin your annual tax planning at the beginning of the financial year. There's no point running to your CA or tax advisor at the eleventh hour or when the financial year is drawing to a close.

So get going; save tax!

Dear Reader,

Let's face it, inflation is, and has always been one of the biggest wealth destroyers in India. Hovering at dangerously high levels year after year it corrodes away the value of the savings we so carefully build. If inflation had its way, we would never get wealthy. Thankfully, it won't have its way.

In this letter, Mark Ford answers the question 'What can you do to protect yourself from the damaging effects of the inflation we already have?'

Read on and stay protected,

Anisa

* Let's talk about “inflation” - one of the best-known but least - understood economic terms in common parlance.

Technically, inflation is “a rise in the general level of prices of goods and services in an economy over a period of time.”

Is that bad?

It's good if you have a fixed-rate mortgage or loan. It's usually good if you are in the business of selling oil and gas, timber, precious metals, etc. Inflation is usually good, too, if you own real estate, art, and other physical property.

But it's bad if you are a bondholder or own any sort of fixed-interest debt. It's bad if you run a freight company. Or if you own any sort of fuel-dependent business in an industry in which it's tough to raise rates.

And if you are like most retired people - living off a fixed income - inflation can be flat-out malicious.

Imagine, for example, that you have Rs 1 million hidden under your mattress. And let's say that the inflation rate spikes to 10%. We expect it will stay at that level for 10 years.

At the end of that period, you still have that Rs 1 million. But by then you will be able to buy only 39% of what you could have bought today.

In other words, your Rs 1 million would have depreciated by 61%.

Why Inflation Is Invisible to Some People Inflation levels are a worldwide phenomenon. Indians think they have high inflation, and the US does not. But that's not exactly true… Let me explain how.

Most North Americans don't worry about inflation. That's because (a) it's relatively modest today, compared with other times in history, and (b) because the government tells us that it is half of what it really is.

The US Bureau of Labour Statistics says the inflation rate has averaged 2.6% since 1990. In fact, it's at least twice that much. And could be four times that much.

You see, in 1990, the US government changed the way it calculates inflation. It conveniently removed certain costs from the CPI calculations. Those included the prices of fuel and other commodities.

[“CPI” stands for “Consumer Price Index.” The Bureau of Labor Statistics defines this as “the measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.”]

The government did this to fool people. It didn't want us to understand the damaging effects of putting more dollars into circulation. You see, the CPI is the most widely followed metric of inflation.

By printing or creating money, prices of everyday goods we use go up. The CPI would show large increases. This would tip people off that inflation was getting bad.

But by removing certain items or weighing them differently, the CPI can read lower than it actually is.

If you use the older, more credible government calculation, inflation for the last 20 years in the US would average 6.5% per year. And according to the American Institute for Economic Research, it is actually closer to 8%!

That sounds like a more real number here in India too, right?

An inflation rate of 8% means that 100,000 in cash today will be worth only 46,319 in 10 years, 21,455 in 20 years, and an abysmal 9,938 in 30 years.

Or to put it differently, it means that every 8-10 years, inflation cuts the wealth you have in cash by half.

Inflation may seem invisible or unimportant right now, but if you take a longer-term perspective, you can see how dangerous it really is.

What About Hyperinflation? You may have heard the term “hyperinflation.” Hyperinflation is basically inflation on steroids.

In Germany after World War I, for example, inflation hit 29,500% in October 1923. (You read that right: twenty-nine thousand five hundred percent.) This made the German currency worthless and destroyed the German economy. It also set the stage for the rise of Hitler (who believed Germany's inflation woes were due to, among other things, capitulating to Jewish bankers at the Treaty of Versailles).

I wasn't around after World War I. But I was alive from 1975-1991, when Argentina experienced soaring inflation, hitting 12,000% in 1989. As it did in Germany, hyperinflation made Argentina's peso worthless and destroyed the fortunes of tens of thousands of wealthy Argentineans.

The negative effect in Argentina is still present: If you want to buy a house there today, you will have to buy it with a suitcase full of cash. I'm not kidding.

Over the past 10 years, I've read numerous essays arguing that the U.S. is primed for a period of hyperinflation. I've found those essays to be credible, but what do I know?

And what that would to do other world economies? I can only guess that it would be a disaster.

Happily, my approach to wealth building does not require me to know what will happen in the future. What I must do is be aware of future risk and “buy” insurance against it.

Inflation in India today is definitely high enough to be a wealth destroyer. And there are many reasons it could go higher - and possibly much higher. It doesn't have to hit hyperinflation levels to destroy your future wealth. Moving up into the 15% range would be enough to make me a lot poorer.

It would be foolish to ignore this as a possibility.

The “Wall Street” Way to Protect Against Inflation What all of this means is that the question isn't 'How much inflation can we expect over the next 10-20 years?' but 'What can you do to protect yourself from the damaging effects of the inflation we already have?'

The most commonly talked-about way (i.e., the “stock market” way - what all the pundits tell you) is buying inflation-sensitive assets. These investments tend to appreciate along with rising trends of goods and services.

Hard assets are such investments. Hard (meaning tangible) assets include precious metals, real estate, and collectible art. As a Creating Wealth reader, you've read my recommendations regarding investing in gold and collectibles.

I've also said that certain stocks - such as our partners recommend in their value investing services - tend to keep pace with inflation. That's because the types of blue-chip, safe companies can usually charge more for their products as their cost of goods increase with inflation.

The stock exchange, your typical money managers, and other financial professionals will point you to investing or allocating your savings into these types of inflation hedges.

That's their answer to beating inflation.

But investing in inflation-protected assets is just one small part of a three-part strategy I'm recommending today.

Why Investing Alone Won't Protect You From Inflation When most people think about arming themselves against inflation, they think in terms of investing: investing in hard assets and value stocks, as just discussed above.

They are great inflation hedges. But will they really help you?

Sure, but not nearly as much as stockbrokers would have you think. That's because they protect only a tiny part of your overall cash flow.

Let me ask you this: What percentage of your income do you save every month?

If you are like most U.S. citizens, you save a paltry 5.8% of your income. If you are Indian, you probably save a few points more. And if you are British, you save a few points less.

When you are spending 80%-plus of your income every year, it is difficult to protect yourself against inflation. This is because investment hedges (such as the ones I described) benefit only the cash you put into them. And your savings is less than 20% of your wealth.

Let's use some numbers as an example to make the point clearer.

Say you earn Rs 100,000 of income. And let's say you're fortunate enough to save 20%. You put it in a traditional inflation hedge, such as gold or real estate.

Next, let's say inflation spikes 10% in one year. We'll assume that means your inflation hedge will increase by the same amount. If your inflation hedge rises 10%, it will increase your overall net worth only 2%.

[Rs 20,000 in an inflation hedge such as gold that goes up 10% means your investment increases by Rs 2,000. But Rs 2,000 of your overall income - Rs 100,000 - is just 2%.]

I hope you're beginning to see how the stock market's laser focus on nothing but inflation-hedge investments is incomplete. It's kind of like going to the emergency room for a broken leg, but the doctor insists everything will be okay if he just Band-Aids the scratch on your leg.

The bottom line is this: Only putting a small portion of your money in inflation hedges isn't enough to protect you from inflation. Even if we focus on investing in inflation hedges, we simply don't save enough - and therefore invest enough - to make investments alone the solution to beating inflation.

What else can you do then?

I have two strategies for you.

Anti-Inflation Strategy Part I: An Old, Ugly Secret When you first joined the Wealth Builders Club, I told you something that - at least until I said it a few years ago - I'd never heard anyone else in the investment world say.

'You cannot hope to get wealthy by investing alone.'

I said that you need to base your foundation of true wealth building on (a) increasing the proportion of your income that you save (b) and increasing your income.

These same strategies are also the solution to beating inflation.

Think about it: How can you grow wealthy when 80%-plus of your costs are going up because of inflation, yet only 10% of your income is in an inflation-protected asset? How can you grow wealthy when your boss gives you only 5% yearly cost-of-living wage increases, but inflation is rising at 7%?

The truth - the boring-yet-powerful truth - is that the two most effective ways to combat the pernicious effects of inflation are to decrease the amount of money you spend every year and to increase the amount of money you earn.

Let's talk about saving first.

Nobody talks about this. I don't know why. Perhaps it is because the financial media and investment industry know that their customers don't want to think about spending and saving. Where's the fun in that?

But we must talk about it. When it comes to inflation, it is the big, smelly elephant that we can't ignore.

Every extra Rs 1,000 that you save by spending less (in an inflation-protected investment) will give you Rs 1,000 more protection against inflation.

Spend less. Save more. There is no better strategy than that.

Practical Ways to Spend Less In order to save more, you need to spend less. It's that simple. But how do you do this, when most people spend over 80% of their income - and rightly so?

Lifestyle changes.

You must make certain lifestyle changes that will substantially reduce your need to spend money, thereby increasing your ability to save it.

But this isn't about living a lower quality of life, as you'll see. It's about increasing your quality of life while spending less.

Let me begin with the biggest and most powerful thing you can do: moving into a smaller house.

Not everyone has the option of sizing down - people with growing families, for example. But retirees usually can sell their homes and move into smaller and less expensive abodes. This will radically decrease your need to spend.

Big homes are expensive. And not just because they carry larger mortgages or rents. They're also more expensive because all the upkeep - utilities, maintenance, repairs, etc. - tend to be much more expensive.

I've discussed this in depth in my essay titled “The Cost of Possession.” You can review that here.

My second recommendation relates to the first. Consider moving to a different part of the country. Move someplace where living expenses are less costly than they are in Mumbai, Delhi, etc.

I'm spending a month in New York as I write this. My breakfast every morning costs me $15 with the tip. I get the same thing at the Green Owl, my favourite breakfast place in Delray Beach, Florida, for $8.

The difference in a meal in Mumbai and a meal in Bangalore is about the same.

[And if you do live in a less-expensive state now, you can move to a less-expensive part of the city or state. If I wanted to reduce my breakfast costs to below $8, I could do that by moving north, toward the center of Florida. You see what I mean. Read why the Subramanians moved to Coimbatore in the Top Retirement Cities in India series.]

A third strategy, if you are not yet retired, is to locate your house within a mile or two of your office. Again, many people can't do this, but many retired people can. By living close to your place of work, you can drastically reduce or even eliminate petrol expenses. You might even be able to get rid of that extra car. Or better yet, work from home. The Extra Income Opportunity series can help you identify work from home opportunities, and businesses that you can build from your kitchen.

A fourth strategy - are you ready for this? - eat less, but eat better. You'd be amazed at how you can knock down the cost of feeding yourself and your family if you restrict your caloric intake. Lower your consumption to healthy levels and make fresh vegetables a big part of your food supply.

Other strategies, depending on your circumstances, might include:

Get your clothes tailored for a fraction of the price of branded stores. Throw the TV in the garbage. Cancel your set top box contract. Use Netflix on your computer (where you can see all your favourite old black and white movies) and read. Shop around for cheaper health insurance (another big inflation item). Increase the deductible. [See PersonalFN's essay on that.] Keep the car you have for 10 years, instead of three. These are just a few ideas. Spend a few hours this week thinking about it. I'm sure you will come up with a dozen more.

Think of the difference these ideas could make…

Anti-Inflation Strategy Part II: Increase Your Income Follow me for a moment as I use an analogy: Imagine a water faucet pouring into a bucket. Your goal is to fill the bucket. But in the bottom of the bucket, there is a hole that's leaking water.

You probably know where I'm going with this. The faucet is your income - filling the bucket (your wallet) - and the hole in the bottom of the bucket is inflation - draining it.

The first strategy we just talked about - spending less and saving more - would be like trying to put duct tape over the hole in the bucket to stop the leaking. All the strategies I just gave you will help plug that hole.

But what if it's not enough? What if the bucket is still leaking too much water? What if you're still losing ground to inflation?

Then we turn to the second strategy: In our analogy, that means focusing on how much water is pouring out of the faucet.

In other words, you need to increase your active income. You need to make sure it's increasing at the same rate as the inflation rate, if not faster. For every drop of water leaking out of the hole, you need at least a drop - if not more - pouring in from the faucet.

But your boss doesn't want to protect you against inflation. That's because the only way he can do that is to give you raises every year that match or surpass the actual rate of inflation. (I'd guess that fewer than 1% of companies worldwide give their employees wage hikes that match or exceed the true inflation rates.)

If the true inflation rate is 8% and you are getting a 5% cost-of-living increase every year, you are getting 3% poorer.

You can put a sensible percentage of your savings into an inflation hedge. And it may protect those savings from the ravages of inflation. But it won't protect you from making less (in real money) every year and seeing all of your expenses continually go up.

There are two primary ways around this.

One, you become so valuable at your current job that your bosses reward you with a higher salary.

To achieve this, do everything in your power to become the most valuable person in your company. Arrive early. Work hard and work smart. Volunteer for projects. Take initiative. Become the “go-to” person for ideas and solutions. Become indispensable.

I've written about this idea several times, including here. And be sure to check out Chapter 5 of my book, Automatic Wealth. That way, your boss (or even your boss's boss) will reward you with bigger raises and compensation (pay raises that are at least as much as the annual increase in inflation).

But if increasing your salary from your primary job isn't a possibility for whatever reason, you must focus on the second way of earning more income: finding or creating a new stream of income.

There is any number of ways to generate extra income. Working a second job. Freelancing… consulting… blogging… copywriting… the possibilities abound.

As I have explained many times, 'There is no faster or surer way to become wealthy than by creating extra income and allocating it toward one's investments.' And that's why, for you as a Wealth Builders Club member, we've designed a unique program, the Extra Income Project.

How You Can Start Fighting Inflation Right Now Wall Street declares that you can beat inflation by simply investing in the right kind of assets. And yes, while that is important, that strategy alone will not beat inflation.

The best way to combat and beat inflation is to spend less and earn more.

Here's what I want you to do right now to tackle this problem.

First, sit down with your bank and credit card statements. Look at what you're spending your money on. Identify ways you can cut back. Come up with 10 ways to spend less right now, and start doing them immediately.

Second, think hard about your job. What could you do that would set you apart from the other employees? What could you do that would truly add value for your boss or the company? What actions could you take today that will get you noticed as valuable and irreplaceable?

I'll give you a hint. Your job is to produce long-term profits. In other words, your job is to help your company make more money.

The secret to getting above-average raises each year is to accept that as your fundamental responsibility - and to transform the work you are doing now in such a way that it will produce those long-term profits. The better you can do it, the more money you will make. It's as simple as that.

Third, consider new ways to create extra income. As I wrote above, there are countless possibilities. But the key is to begin looking right now. Start a Google search. Make a phone call to ask questions. Set up an informational interview to learn more about a possibility. The point is, take action. And read the Lost Principles of Creating Wealth.

If the idea of thinking about spending less or acquiring extra income is depressing, please make sure you go back and reread the Living Rich essays we've sent you, or reread the cash flow ideas I've collected in the Extra Income Project series.

I can promise you this: A month after you start implementing these three strategies, you will feel much better about the threat of inflation. And as time passes, you will be able to sleep comfortably at night. You'll know that you are immune to inflation's malicious effects.

Can a corporation take its customers for granted?

Not anymore. Consumers have become savvier and more brazen, and brand loyalty has gone out the window. The smartphone generation keenly experiments with options. Sometimes it works; sometimes it doesn't, but this doesn't discourage new-age buyers from changing their buying patterns and choices, posing several challenges to sales personnel.

Until recently, business was based on relationships, and brand value played an important role. But today, especially in the personal finance sector, maintaining good relationships with clients is just the beginning. If the services, products, and deals aren't pro-customer, the client will leave without a second thought. And who can blame them?

Shopping for alternatives can save a lot of money. You should always be on the lookout for better products, better services, and better deals…always keeping in mind the ultimate goal - wealth creation.

Sudip and Manasi took a giant step forward in their journey of wealth creation a week ago. Check out their story below. We think it might encourage you to move closer to your wealth creation goals.

Get to know them better… Mr Sudip Chatterjee and his wife Manasi have a two-year old son who recently started attending a play group. Sudip works for a reputable multinational software company. Manasi, a pharmacologist, works for a big pharma company in Mumbai.

As consumers, Sudip and Manasi are modern but don't follow fads. They spend a good deal of money but aren't impulsive buyers. They experiment with available options and don't waste any opportunity to save money.

Three years ago, they moved from Calcutta to Mumbai and rented until they saved enough to make a 20% down payment on a home of their own. They wanted to buy an apartment that was ready to move into in a plush locality. About one year ago, when Manasi resumed her job after maternal leave, they felt they had enough money to make the move. They opted for a home loan with the large private-sector bank where Sudip holds his salary account.

Acquiring the loan was a breeze. Their total income was approximately Rs 18 lakh post tax. Apart from a credit card each, Manasi and Sudip hadn't taken out any other credit assistance. They saved first, and spent on improving their lifestyle later. This made the lender comfortable enough to offer them a loan of 80% of the cost of the property.

For a year, Sudip and Manasi have been paying an EMI of Rs 86,852 (Rs 1,042,223 per year).

Loan repayment schedule Loan repayment schedule A U-turn Sudip takes an interest in investing and finance. One day, he reads about the RBI's monetary policy, and he learns how banks are stubbornly hiking up lending rates. The RBI had been slashing interest rates aggressively, but his bank wasn't passing any of the cuts on to borrowers like him. The article also mentioned that many lenders aren't transparent in their dealings with borrowers and depositors.

Negotiations and offers… Since he avails of various services from the bank, Sudip enjoys being a valued customer. His bank relationship manager visits to share new loan and investment proposals. He remembers their birthdays and anniversary and even sends them gifts at Diwali.

Last month, during the relationship manager's visit about a car loan at a subsidised rate under a new scheme, Sudip requested him to consider slashing the interest rate on the home loan.

The discussion ended with Sudip foreclosing the loan from the bank and transferring it to another bank. The relationship manager couldn't believe. He never expected Sudip to ‘switch his loyalty' for 0.50% in interest. He tried his best to convince Sudip that he was making the wrong decision…

But it wasn't an impulsive decision… After Sudip read about the banks not extending rate-cut benefits to borrowers, he decided to look into alternatives. Any deal offered by a bank hungry for new business was out. He'd read about malpractice at these banks, the most prevalent being hidden charges; Sudip knows the devil's in the fine print.

Finding the best… The couple stayed with Sudip's bank until they could find a good substitute.

Manasi has a salary account in a smaller but still credible bank. When they enquired, the bank was happy to refinance the couple's home loan. Sudip took some time on a Saturday afternoon to work out the math. His calculations revealed that his existing bank was costing him 0.5% more.

Like any loyal customer, he first decided to bargain with the bank before leaving. It wasn't long before he realised his efforts were in vain, and he foreclosed the loan.

Now, Sudip was under the impression that the new bank would take over his outstanding loan balance for the remainder of his repayment schedule. But to his surprise, the new bank offered him two options:

Start a new 20-year loan with the outstanding loan value Opt for shorter tenure of 15 years Unlike the previous relationship manager, the executive of the new bank suggested the right option. When he learned Sudip and Manasi could afford a higher EMI, he suggested they opt for 15 years at a rate of 9.5%.

Savings! Savings! Savings! Savings! Savings! Savings! Let's compare options… Option I If the couple opted for a new 20-year loan of Rs 8,851,074 at 9.5% interest, their total savings would be Rs 52,175 over 19 years (they can delay payment for one year with the new loan). If they invested the difference in a fixed deposit fetching post-tax returns of 8.0%, it would earn Rs 21.62 lakh.

Sure, this rate is not fixed; it will go up and down. But the point is to show the potential worth of a 0.5% difference on a home loan. Don't forget you can refinance other loans too.

Option II The new 15-year loan at 9.5% for the Rs 8,851,074 is the best option for Sudip and Mansi, as it saves them Rs 31.65 lakh over the next 15 years. (Refer to the last column of the table given above and compare row 1 and row 3).

Sudip did his homework and took a smart decision.

Before you contact your relationship manager to bargain for a better loan, take some time to read what the RBI has to say on the subject at its first bi-monthly policy meeting for FY 2014-15: Consumer protection is an integral aspect of financial inclusion. The Reserve Bank proposes to frame comprehensive consumer protection regulations based on domestic experience and global best practices. In the interest of their consumers, banks should consider allowing their borrowers the possibility of prepaying floating rate term loans without any penalty. Banks should also not take undue advantage of customer difficulty or inattention.

Furthermore, in a notification issued on 7 May 2014, the RBI asked banks not to impose foreclosure charges and pre-payment penalties on all floating rate term loans for individual borrowers, with immediate effect.

Moral of the story… Never underestimate the impact of a decision, even if it seems petty on the surface Always hunt for better deals Better deals do not mean cheaper deals Opt for shorter tenure loans if possible We encourage you to revisit your home loan schedule straight away, by using PersonalFN's online calculator.

Many commonly accepted 'facts' about wealth building are, in fact, fallacies.

Take these six as examples:

'Risk and reward are inversely correlated. If you want to acquire great wealth, you have to be willing to take great risk.'

'Wealthy people are stingy for a reason. Pinching pennies is a necessary part of building wealth.'

'The most important factor in building wealth is ROI - the rate of return you get on your investments. When investing in stocks and bonds, therefore, look for high ROIs.'

'A well-balanced investment portfolio is comprised primarily (80% to 90%) of stocks and bonds, with the rest (10% to 20%) in cash or cash equivalents.'

'The surest way to acquire enough money to retire is to buy the most expensive house you can afford and gradually pay off the mortgage.'

'Asset allocation is the single most important factor in building wealth.' Those are the fallacies. Here are the facts:

Fact No. 1: The intelligent wealth builder takes advantage of safe bets and avoids risky ones. He does this as an employee, a business owner, and an investor. He understands that smart financial decisions are cautious decisions. When he must take a risk, he does so with some sort of loss limit in place. He never loses more than he is comfortable losing.

Fact No. 2: Spending money prudently is an economic virtue, but being stingy - i.e., paying less than market value for goods or services simply because you can - is a flaw. The rich man who undertips does so not because he has learned the value of money, but because he is simply a cheapskate. It's as simple as that.

Fact No. 3: The most important factor in wealth building is not ROI but the accumulation of net investible assets, the amount of money you're able to devote to investing after you've paid for all your regular expenses - car, home, debts, and loans. Plus, individual investors, chasing yield, typically get ROIs that are less than half those of market averages. This is why the intelligent wealth builder devotes the lion's share of his wealth-building time to increasing his income and setting realistic goals for his stock and bond portfolios. By 'reasonable,' I mean market averages plus or minus 10%.

Fact No. 4: The typical portfolio of stocks, bonds, and cash - however allocated - is an inadequate approach to building and safeguarding wealth. The intelligent wealth builder will also include other assets, such as income-producing real estate, tangible assets, alternative fixed-income investments, and direct investments in cash-generating private businesses.

Fact No. 5: Buying a more expensive home every time you get a big raise is a great way to ensure that you will never get rich. What you want to do is find the least expensive house you can “love long time” and keep it. The longer you keep it, the more net investible income you will have to invest in income-producing assets that will eventually make you rich.

Fact No. 6: Asset allocation is indeed very important, but it is only one-third of a larger strategy that truly is most important. I'm talking about risk management. Risk management has three parts: asset allocation, position sizing, and loss limitation. The intelligent investor pays equal attention to all three.

Four More Facts Okay, those are six facts that dispel the common fallacies. Got a few minutes more? Here are four more facts, some of which are very basic but often ignored.

Bonus Fact No. 1: The biggest mistake retirees make is giving up their active income.

Yes, I know that's exactly what you hope to do. But to keep your wealth for a lifetime, you need multiple streams of passive income. Your goal should be to build each stream of income to a level where you can live on that and that alone.

Bonus Fact No. 2: The 'miracle of compound interest' applies not just to money but also to skill and to knowledge. If you want to get rich and stay rich, you need to invest as much of your spare time as possible in acquiring financially valuable skills and learning about your business.

As a general rule, buying makes you poorer, whereas selling makes you richer. If you want to develop a wealth builder's mindset, develop the habit of asking yourself every time you buy or sell anything: Is this making me richer or poorer?

Bonus Fact No. 3: Every type of financial asset has its own unique characteristics in terms of growth potential, income potential, and risk. Expecting more growth or less risk than 'normal' from any investment is a bad idea. And that is why 90% of ordinary investors have results that are far poorer than market averages.

Bonus Fact No. 4: There are two ways investments can build wealth. One is by generating income. The other is through appreciation - an increase in the value of the underlying asset. Asset classes are inherently structured to increase value, preserve value, or do both. Investments that provide both income and appreciation are generally superior to investments that provide only income or only appreciation. But in developing an overall strategy of wealth building, the prudent investor will incorporate all three types of investments.

You may find some of these facts instantly sensible. Others you may disagree with, be confused by, or see as unimportant. But don't just read them and dismiss them, please. Give yourself a bit of time to think about them. For me, they are useful and important because they worked for me and for people I mentored - and they worked over and over again. Which means, of course, that they might work for you.

There is a misconception that is prevalent in our society that every individual needs insurance.

This is not true.

Neither is it true that every earning individual, a subset of the former category, needs insurance.

Insurance is needed in some cases: If you have financial dependents, and you need to plan and provide for their life goals; or if you have liabilities such as a car loan, home loan or any other loan, and you do not want this loan to devolve onto your financial dependents in case of uncertainty. In these circumstances, you do need adequate insurance.

In fact, because insurance is so important, it should be one of the primary aspects addressed in one's financial plan.

While your life is definitely priceless to your loved ones, it is however important to put an actual number on the value of the breadwinner in the family, so that you know how much insurance you actually require. This way, in case of any unfortunate circumstance, your loved ones might have some income that they will receive, which can help them meet their financial needs.

These days, with greater awareness due to more advertising, more and more people are wondering whether they are adequately insured or not.

But the first question they should be asking themselves is…

Do I need life insurance at all? Contrary to popular belief, while most people do need life insurance, this need doesn't apply to everyone.

Let's see why…

Life insurance, and by this we mean pure-term insurance, makes a one-time lump sum payout on the death of the policy holder, to the beneficiary or nominee registered with the insurance company.

What purpose does this serve?

The Sum Assured is meant to replace the income of the life insured; so that in absence of the breadwinner, the dependents don't suffer financially, and don't have to compromise on their standard of living.

Alternatively, one's death should not financially hurt his loved ones.

This implies 2 things:

If you want to insure your life, you are doing it for the benefit of your financial dependents. If you have a liability of any kind, you should insure yourself at least to the extent of the liability, so that in case of uncertainty, it does not devolve on to your loved ones. Keep in mind that situations change constantly. While you may have no dependents and no liabilities today, tomorrow you may be the sole breadwinner, with kids and a home loan. In this situation, life insurance is not just required, but it is vital.

Similarly, today you may be the sole breadwinner and have dependents and liabilities, i.e. kids and a home loan. But tomorrow, your kids will grow up and become independent and you might have even paid off your home loan. In this case, once you have completed your role of a breadwinner, life insurance may not be required.

Hence, if you are on the verge of your retirement and you have no financial dependents and you have no loans, you don't actually need life insurance.

How much life insurance do I need? In the case you do need life insurance, the first step is to check how much life insurance you need.

As you know, insurance in its purest sense is protection against a financial loss/uncertainty which includes the risk of illness, disability, damage to property, and the most final of them all - one's demise.

The value of your loved one's life is a very sensitive issue as your loved ones are priceless.

But it becomes necessary to evaluate a human life in terms of money, in order to safeguard from problems caused by under-insurance.

The amount of insurance you require can be calculated in a few different ways - but a comprehensive method of calculating this is the Human Life Value (HLV) method. HLV of an earning member in the family could be defined as the amount that the family would require to retain the same standard of living in the absence of the earning member. This would be the maximum amount for which a person can seek insurance protection.

How to calculate Human Life Value (HLV) Mr. Saxena, aged 40 years, earns Rs 1,500,000 per year. Of that he spends Rs 450,000 per year on himself. The rest, a net income of Rs 1,050,000 p.a. goes towards his family. Therefore, as income replacement, his family would require Rs 1,050,000 p.a. for 1 year of life expenses. Each year, with inflation, the family's expenses would proportionately increase, which must also be taken into account.

To calculate HLV, first determine this number, the 'family spend' amount - the amount the family uses annually (excluding the person's own expenses).

Next, add specific goal-related needs.

For example, if Mr. Saxena has a son and a daughter both of whom would require Rs 10 lakh for their educations, i.e. a total of Rs 20 lakh. In Mr. Saxena's absence, this amount is still required such that his children's educations do not suffer. Plus their weddings would be another big goal for Mr. Saxena. This goal amount can be added to the financial value of Mr. Saxena's life.

Mr Saxena should also consider his liabilities i.e. the outstanding loan amount. No one will want to pass on their liabilities to their loved ones. The motive of having adequate insurance should be to avoid any financial burden on the family members in your absence.

HLV = Family Spends + Goal Needs + Liabilities

You can find Personal FN's HLV calculator here. How to choose the right insurance Once you have an approximate HLV figure, and it might be larger than you anticipate, the next step is to choose the appropriate insurance product to cover your needs. There are a number of insurance products available in the market today - from term plans to ULIPs to endowment plans, money-back policies and so on. It is important to assess the available products and select the right insurance for your needs.

You should ideally opt for a straightforward term insurance plan.

A term plan is a simple pure life insurance plan which provides a sum assured in case of the policy holder's unfortunate demise. However, most people are not in favour of a term policy, as there is only a death benefit. Also, it is believed that since insurance is available only for a particular term after which there is no cover, it is not a comprehensive policy.

But the reality is that term policies are the purest form of insurance available today. They are very cheap compared to other insurance policies.

You should try and stay away from other kinds of life insurance, such as endowment policies, money back policies, and ULIPs. There are many policies available, which merge insurance with investments. We always advise our clients to keep their insurance and investments separate.

Common Mistakes You Should Avoid While Buying Life Insurance Insurance products are sold very aggressively during tax-planning season. And that is a huge problem. Insurance products are largely sold (not bought) for the tax benefits they offer. For those of you who may not be aware, contributions towards life insurance premium are eligible for deduction from gross total income under Section 80C of the Income Tax Act.

The 'insurance' aspect itself is often overlooked or just incidental. This is a huge mistake. When buying insurance, do not get swayed by the tax issue… carefully consider why you need insurance.

The primary purpose of insurance is to indemnify the insured's dependents from loss of income, in the event of the insured's demise. Your decision to buy insurance should be solely based on your needs for protection. The tax benefits must be treated as incidental. Insurance must find a place in your portfolio irrespective of the tax or any other issues such as those below…

The insurance rush Waiting for the end of the financial year and then making a hasty investment decision is not a good idea. Insurance should be bought when the need arises and not simply because it's tax-planning season. Furthermore, buying insurance in a rushed manner at the end of the year might deprive you of the opportunity to conduct a thorough evaluation of the available options. By opting for the wrong policy, you run the risk of not only buying the wrong thing, but still being underinsured.

The 'ignore insurance' approach Many people tend to ignore buying insurance altogether. Instead, they count on things like investments, or the presence of friends and relatives, to provide for their dependents, if an eventuality occurs. Such an approach is fraught with risks. In dire circumstances help from all quarters is always welcome; however, relying solely on this is not smart, or fair. A sound life insurance policy in place is therefore a good option. Investments and a support system (family) can always play a vital, but secondary role.

Beware of mis-selling Even in you are convinced about the importance of insurance and decide to buy it, you still have another obstacle to face in the form of mis-selling. Mis-selling is a rampant practice in the insurance segment. Over the years, several insurance advisors have been guilty of mis-selling products that were right for them (because they helped them earn higher commission incomes), but wrong for the investor. They conceal relevant facts about the product, thus misleading the buyer. This is not always the case, and not all mis-selling is blatantly a lie, but we caution you to be careful.

To know more about health insurance, please refer to Retire Next Year #12: What To Look Out For In A Health Insurance Policy and Retire Next Year #16: Health Insurance - Make a Resolution for No Medical Bills

Also, unit linked insurance plans (ULIPs) would easily qualify as both the most popular and mis-sold products. So having a competent and ethical advisor is vital. You should also acquaint yourself with adequate information before zeroing in on any product.

Folks, it is that time of the year when many rejoice their pay raises - making merry and indulging in the goodies of life.

But amid the exuberance, let prudence prevail.

To achieve your financial goals, you must get your personal finances in order. And as boring or daunting as it may seem, you must begin tax planning at the beginning of the financial year.

We all procrastinate. We're all tempted to push tax planning to the eleventh hour. But mind you - with better pay comes higher taxes. And if you don't plan well, taxes can take a huge chunk of your take-home pay.

Moreover, you'll want to compliment your tax planning with investment planning. You see, you can take a number of tax saving investment avenues, but it is vital to own the ones that suit you best.

If you are an aggressive investor, meaning:

You are young Earn a high income Are willing to take risk Are accumulating considerable assets Have limited liabilities and not many dependents Have far-off financial goals …you may consider market-linked tax saving instruments. You have multiple options here: Equity Linked Savings Scheme (ELSS) - Also known as tax saving mutual fund schemes, an ELSS is a diversified equity portfolio. They allow for indirect exposure to equities with the objective of alluring inflation-adjusted returns. An ELSS is distinguished by its compulsory lock-in period of usually three years. The minimum application amount is as little as Rs 500, with no upper limit.

Unit Linked Insurance Plans (ULIPs) (equity oriented plans)- Well-selected ULIPs can add value to your investment portfolio, but insurance and investment needs should be dealt with separately to ensure optimal insurance coverage. Only when you've exhausted all the other tax saving options should you consider this avenue. To indemnify risk to life, consider only term insurance.

National Pension Scheme (NPS)- This government scheme permits you to invest in three asset classes: equity (E), credit (C), and government bonds (G).

Besides these investment avenues that offer a deduction up to Rs 1.50 lakh per annum under Section 80C of the Income-tax Act, 1961, you also have: Rajiv Gandhi Equity Saving Scheme (RGESS) - Introduced in the Finance Act, 2012, this scheme provides a deduction under section 80CCG over and above the Rs 1.50 lakh limit prescribed under Section 80C. This is available to new retail investors whose gross total income for the financial year in which the investment is made does not exceed Rs 12 lakh. 'New retail investor' means a resident individual who has not opened a demat account, or has one but with no holdings. The maximum investment to claim the RGESS deduction is Rs 50,000. You are eligible to a 50% deduction of the amount invested from the taxable income for that year.

Now, if you are a conservative or risk-averse investor, meaning: You are retired or near retirement Will soon lose your regular income Manage many assets Have a low risk appetite Have many dependants Have vital short-term financial goals …you may consider tax saving instruments offering assured returns, where risk of capital erosion is almost zero. You have multiple options here as well: Public Provident Fund (PPF)- This is a government scheme. If you do not hold a PPF account, open one right away at your nearest post office or a public sector bank. It will help you plan your retirement corpus, provided you contribute to the account prudently and astutely. PPFs currently enjoy an E-E-E (Exempt-Exempt-Exempt) status, meaning the contributions you make to the account are eligible for deduction under Section 80C, interest is tax-free, and the maturity proceeds too are exempt from tax. It is one of the most tax efficient investment instruments, offering at present an interest rate of 8.1% compounded annually.

National Savings Certificate (NSC) -This is another scheme floated by the government of India. It is popular but not tax-efficient as a PPF. A five-year NSC at present carries a pre-fixed interest of 8.1% compounded half-yearly (giving you an effective interest rate of 8.26% per annum). The interest accrues annually and is reinvested in the scheme till maturity or premature withdrawal. NSC interest is taxable in the year in which it accrues; but the accrued interest of the relevant financial year, besides the principal invested, is available for deduction under Section 80C. If you are conservative and have near-term goals to meet, NSC is a good investment avenue available through India Post. If you have no income apart from interest income, to avoid Tax Deduction at Source (TDS), submit a declaration in Form 15-G or Form 15-H (if you are a senior citizen) to the post office.

Five-Year Tax Saving Bank Deposits and Five-Year Post Office Time Deposits (POTD) - The former, as the name suggests, are offered by banks while the latter is from India Post. Both carry a five-year tenure. The interest on bank deposits vary bank to bank. For the five-year POTD it is 7.9% per annum (compounded quarterly) paid annually, giving you an effective interest rate of 8.14% per annum. In both cases, the interest is taxable. But if you have no other income apart from interest income, to avoid Tax Deduction at Source (TDS), you can submit a declaration in Form 15-G or Form 15-H (if you are a senior citizen) to the bank(s) / post office(s). Premature withdrawals are not permitted with five-year tax saving bank deposits. They are with five-year POTDs, but only after one year from the date of deposit. In that case, the interest will be 1% lower than the five-year term deposit.

Non-Unit Linked Insurance Plans or Traditional Insurance Plans -Insurance schemes abound, but broadly you have two options: pure term life insurance plans and insurance-cum-investment plans. Ideally, you should opt for the former to optimally indemnify risk to life. The latter - which consists of endowment, money-back, etc - should be avoided. Don't blindly buy insurance with a motive to save tax. Make a prudent choice, and remember: It is best to keep your insurance and investment needs separate.

Pension Funds -These are offered by mutual funds and allocate a predominant portion of their assets to debt and the rest to equity. So they are somewhat risky vis-a-vis more assured investment avenues. But they have a higher potential for greater returns over the long run than assured returns products. In addition to tax planning, pension funds can be an effective instrument to plan a peaceful retired life. When you retire, you may choose to withdraw regular fixed amounts through Systematic Withdrawal Plans (SWPs) to meet your retirement cash needs.

Senior Citizen Savings Scheme (SCSS) -If you're a senior citizen, or are 55 or older and retired under the voluntary retirement scheme, you could also consider investing in a SCSS - another government scheme to provide financial security to senior citizens. An SCSS account, which has a maturity period of five years, can be opened at your nearest nationalised bank or post office. Currently, the interest rate is 8.60% payable quarterly (on March 31, June 30, September 30, and December 31) every year from the date of deposit. The interest is taxable. Withdrawals are permitted after one year of opening the account

Assured return investment avenues too, like market-linked tax saving investment instruments, qualify for a deduction up to of Rs 1.50 lakh per annum under Section 80C of the Income Tax Act, 1961.

Here are a few more tax saving avenues:

Tuition fees paid for children's education- If you're a parent paying tuition fees to a university, college, or other educational institution in India, you can claim a deduction under Section 80C up to Rs 1.50 lakh per annum for up to two children per spouse.

Principal repayment of a housing loan- If you have availed a housing loan to purchase, construct, or renovate a home, ‘repayment of principal amount' makes you eligible to claim a deduction of up to Rs 1.50 lakh under Section 80C. This benefit is available irrespective of whether you live on the property (Self Occupied Property - SOP) or rent it (Let Out Property - LOP).

Likewise, the interest paid on the housing loan can deducted under Section 24(b) of the Income Tax Act, 1961. The limit is Rs 2.00 lakh for an SOP, but there are no restrictions on LOPs. For ‘first-home buyers, the union budget 2016-17 allows a deduction for additional interest of Rs 50,000 per annum for loans up to Rs 35 lakh, provided the value of the house does not exceed Rs 50 lakh.

But, if the loan is taken for the purpose of reconstructing, repairing or renewing the property, the maxium deduction you can claim under Section 24(b) is Rs 30,000, irrespective of whether one lives on the property or lets it out.

The Income-tax Act, 1961, also gives deductions for medical insurance premiums, medical treatments for dependent handicapped, donations to specified funds for specified causes, monetary contributions to political parties or electoral trusts, higher education loans, and to individual suffering from specified diseases.

Options galore - Snapshot of deduction under other 80s Section Description of Deduction Deduction Limit 80C* Key investment instruments eligible for deduction under this Section include ELSS, PPF, EPF, NSC, SCSS, five-year bank fixed deposits, five-year POTD, life insurance premiums, housing loan principal repayment, etc A maximum of Rs 1.50 lakh per annum 80CCC* Contribution to Pension Fund of Life Insurance Corporation or any other insurer referred in section 10(23AAB) A maximum of Rs 1.50 lakh per annum 80CCD* Contributions National Pension Scheme Rs 1.50 lakh p.a. + vide sub-section 1B an additional deduction of up to Rs 50,000 is allowed for contribution towards NPS by the employee. If the employer has contributed to the NPS on behalf of employer, under Section 80CCD(2) the deduction is 10% of the salary of an individual. 80CCG Investments RGESS 50% of the amount invested 80D Medical insurance premiums Maximum of Rs 25,000 for non-senior citizens and Rs 30,000 for seniors. 80DD Medical treatment for a handicapped dependent Rs 75,000, irrespective of the amount incurred or deposited. However, in case of disability of more than 80% a higher deduction of flat Rs 1.25 lakh shall be allowed. 80DDB Medical treatments Actual incurred, with a ceiling of up to Rs 40,000 or Rs 60,000 in for seniors, whichever is lower. For those 80 and older, the deduction is Rs 80,000. 80E Higher education loan repayment Maximum deduction for interest paid for a maximum of eight years or till such interest is paid, whichever is earlier. 80G Donations to certain funds and charitable institutions Maximum deductions is 50% or 100% of the donation, subject to the stated limits as provided under this section. 80GG Rent paid on property occupied for residential use Maximum deduction is Rs 2,000 per month, 25% of total income, or excess rent paid over 10% of total income, whichever is lower 80GGC Contribution political parties or electoral trusts Fully exempt 80T Savings bank deposit interest A maximum of Rs 10,000 or actual interest, whichever is lower 80U Person suffering from specified disability(s) Rs 75,000, irrespective of the amount incurred or deposited. In case of disability of more than 80%, a higher deduction of flat Rs 1.25 lakh is allowed. *The deduction limit is upto Rs.1.5 lakh aggregated across section 80C, 80CCC, 80CCD(1) (Source: Personal FN Research)

So you see, there's more to tax planning than just Section 80C. Whether you've earned a raise this year or not, pay close attention to the various components of your salary such as the dearness allowance, house rent allowance (HRA), transport allowance, education allowance, meal allowance, leave travel concession (LTC), and medical reimbursements. We suggest you seek to restructure them with your employer.

Of course, these aren't the only avenues to reduce your tax liability. A holistic assessment of your individual tax circumstances could help you optimally and legitimately minimise your tax liability.

At PersonalFN, we believe it's a good idea to seek the opinion of an honest tax consultant while filing your returns. A self-study approach is also necessary, as one should be well-versed with at least those tax provisions that affect one directly. Finally, remember that leaving tax planning for the eleventh hour will not only cost you more in taxes, but can jeopardise your long-term financial well-being.

With India emerging as one of the world's fastest-growing economies, there may come a time when the arrival counters at Indian airports see a huge footfall of NRIs. Not long ago, many Indians dreamed of Silicon Valley. But now the trend seems to be reversing. Today, India offers tremendous career growth opportunities, and many NRIs are coming back to start ventures. Furthermore, young Indians would rather take the risk to realise their entrepreneurial aspirations than work for a top company.

Ernst & Young's global job creation and youth entrepreneurship survey 2015 revealed that 95% of the respondents were confident of the domestic economy. Of the Indian respondents, 91% were confident about their career aspirations, and 86% of the surveyed youth wanted to run their own business.

Money was not the only objective for these potential entrepreneurs. The surveyors asked what, apart from profit, made them want to start their own business. The responses were interesting. Have a look:

To leave behind a positive economic legacy To make a positive contribution to the wider community To inspire others to follow their aspirations To provide local jobs To train local labour markets To achieve social change To provide a business role model for young people Fortunately, the ecosystem for entrepreneurs has been constantly evolving. But as young entrepreneurs take risks and aggressively chase their objectives, they tend to forget age-old wisdom.

Ignoring retirement planning for example. But even…or especially…entrepreneurs need a sound retirement plan.

It's uncommon for beginning entrepreneurs to think of retiring from their own business. Entrepreneurs passionate about growing their business tend to invest their savings in their enterprise, not their retirement. But retirement is like a business plan: You need funds and a plan if you want to execute.

How should an entrepreneur plan for retirement? Retirement planning is a four-step process.

The first step is to decide at what age you want to retire. Once you have determined a tentative retirement age, check your family history to approximate your life expectancy. If members of your family lived beyond 75, you are likely to have a longer life expectancy.

This exercise gives you two inputs for further planning: 1) the time you have to build a retirement corpus and 2) how long you will depend on the corpus. For example, suppose you are 40 and expect to retire at 55. You would have fifteen years until retirement and should plan for 25 years of post-retirement life, assuming you live till 80.

The second step is to determine your monthly post-retirement expenses. You may initially find this difficult to calculate, but it is not. Start with your current monthly or annual expenses and subtract all the expenditures that won't apply in retirement. For example, the money you currently spend on your children. A common figure people arrive at is about 80% of pre-retirement expenses.

But don't forget about inflation. If inflation rises 5% every year, your monthly payments will naturally go up. For example, if you calculate your post-retirement annual expenses to be Rs 4.8 lakh per year today, adjusted for 5% annual inflation, this amount would climb to a little under Rs 10 lakh.

You are now very close to your magic figure - the retirement corpus you will work towards during your entrepreneurial lifespan. If you plan to draw Rs 10 lakh every year for the 25 years of your post-retirement lifespan, how much would you need to accumulate by the time of your retirement?

Assuming your real rate of return (the inflation-adjusted rate of return) on your corpus is 2.0%, you would need about Rs 2 crore at retirement. To reach this goal, you will have to invest a little more than Rs 6.25 lakh every year for the next 15 years, assuming 10% returns.

Current annual expenses (CAE) (Rs) 600,000 Post retirement annual expenses (Rs) @ 80% of CAE 480,000 Long term inflation rate 5% Annual expenses post retirement (Rs) 997,886 Corpus needed at the retirement (Rs) # 19,871,818 Money you should invest annually (Rs) ## 625,441 For illustration purpose only # Assuming you will invest your whole retirement kitty at 7% for the remainder of your lifespan after retiring and rate of inflation will be 5% ## You could earn 10% returns for 15 years; i.e. for the time left from now till you retire

To do these calculations, you might want to learn a few MS Excel functions or you could simply use online retirement calculators.

The third step in retirement planning is to create a personalised asset allocation. Asset allocation is nothing but the mix of various assets in your portfolio. Ideally, the assets will have a negative correlation to one another in a fixed proportion. Equity, fixed income, gold, and real estate are the most common asset classes. You should adjust your asset allocation based on your risk appetite, return expectations, and how long you have before retirement.

Within each asset class, you have a number of investment options. For example, if you plan to invest in stocks, you have thousands of listed companies to choose from. With fixed-income assets, you can invest in bank deposits, debentures, company fixed deposits, and so on.

The fourth and last step is to review your plan periodically and invest regularly.

Entrpreneurs tend to have more uneven cash flows than salaried employees. Irregular flows can make it difficult to commit to monthly investments. However, PersonalFN believes that setting annual investment targets and breaking them down into monthly commitments will ensure that you meet your annual investment targets.

Retirement: It's nice to get out of the rat race, but you have to learn to get along with less cheese. - Gene Perret

If you don't want to settle for less cheese, store extra cheese in the deepfreeze. A retirement planning professional can help you maximise your store.

Many individuals conceal their income in an attempt to dodge the income tax (IT) authorities. But few recognise the repercussions of such tactics.

Mind you, IT authorities are looking for tax evaders. In the last few months, the IT department has heightened efforts to ensure tax compliance, and they've introduced new rules to check tax leakages. If you're evading tax, you could be on the radar of IT authorities.

Below are common blunders you should avoid when filing your IT return:

Concealing interest income

If you invest in fixed deposits or fixed income instruments, the interest earned is taxable. Many don't consider it necessary to disclose this income since tax is deducted at source (TDS) on the interest earned.

However, in addition to the TDS, the interest income earned needs to be reported under 'income from other sources', which would then be taxed as per one's tax slab (i.e. marginal rate of taxation). Until a couple of years ago, TDS came into play when the interest income earned from one bank branch surpassed Rs 10,000 per financial year, leading to investors split their deposits across bank branches to avoid TDS. But the rules have changed. At present TDS comes into play when combined income from all branch deposits surpasses Rs 10,000 in a financial year.

Also, don't mix deduction under Section 80TTA of the Income Tax Act, 1961 (which provides for deductions up to Rs 10,000 from gross total income), for interest earned on your savings account. Hiding foreign assets

'Integrity is doing the right thing, even when no one is watching.' - CS Lewis

It is possible to legally buy and park assets abroad. But mind you, the IT authorities are watching, even more after the Panama Papers. Take care to report all foreign assets with all relevant details. Not reporting tax-free income

'Truth never damages a cause that is just.' - Mahatma Gandhi

You are required to report interest earned from tax-free bonds, public provident fund (PPF), income from life insurance policies, dividend income (up to Rs 10 lakh), long-term capital gains from equities, agriculture income, and much more.

While not a serious offence, honest citizens should report all sources of income, even if it's tax exempt. So disclose all such incomes in your income tax return (ITR) form, and then claim exemptions under the various sections of the act. Skipping IT returns

Even if you're not earning more than the basic exemption limit, you must file a return. But many people do not think so, especially senior citizens. And then they receive a tax notice, perhaps because they earned a substantial 'income from other sources'.

On the other hand, if you are in the prime phase of your career and you skip filing, it can hurt your credit and you may not be able to get a loan when you need one.

And remember, if a tax liability isn't paid, it will attract a tax penalty. So if you haven't filed your tax returns, do it right away. The Income Tax Act allows you to file delayed returns. Either do it yourself online, or seek the services of a tax professional. Not reporting income while switching jobs

Don't forget to report income from previous job(s). The IT authorities are aware that you have a higher tax liability. Your Form AS26 would reflect deductions on income earned from previous jobs, and this glaring discrepancy will be a red flag. Misuse of Form 15G and 15H

As per Section 194 of the Income Tax Act, banks and financial institutions are bound to deduct tax at source on all interest payments exceeding Rs 10,000 in any financial year.

Investors often use Form 15G and 15H to avoid TDS. But the fact is only individuals who are below 60 and who satisfy both of the below criteria can submit Form 15G:

The final tax computed on the total income as per the provisions of the Income Tax Act should be nil The aggregate of the interest and other income received during the financial year should not exceed the basic exemption limit as per the prevalent tax slabs

Now, Form 15H is only for individuals who are 60 and above and whose final tax on total income is nil.

Filing a false declaration can not only attract a penalty, but is a serious offence - punishable with jail for three months and up to two years. Misuse of clubbing provisions

Some individuals invest in the name of their dependent spouse and minor children to minimise their tax liability through the 'clubbing provisions' of the Income-tax Act, 1961. But they fail to recognise that the income generated through these investments attracts tax clubbed with the income of the giver, and is taxed accordingly.

For example, if the husband invests in a recurring deposit in the name of his dependent wife, the interest income earned from it will be taxed as the income of the husband (i.e. the giver), irrespective of whether the wife's income is below the basic exemption limit or not. But in contrast, if the father invests in, say, a recurring deposit in the name of his minor daughter, the interest income earned from would be treated as an income of the higher-earning parent, with an exemption up to Rs 1,500 per annum for each minor child.

It is imperative to be informed and mindful of the tax implications. If you want to save tax, opt for tax-efficient investment avenues such as PPF or tax-free bonds. And if you're investing to meet financial goals for your children (education and marriage), consider the Sukanya Samriddhi Yojana, particularly for daughters. Selling a house taken on a loan

If you buy a house on a home loan and sell within five years from the date of purchase, it will result in a tax burden for the seller. You see, the deduction for principal amount under Section 80C gets reversed in such a case, resulting in a thick tax liability. However, the interest paid on the home loan is not reversed. Forgetting to deduct TDS when buying a property

If you buy a property for more than Rs 50 lakh, remember to deduct a withholding tax of 1% when you pay the seller. The tax amount needs to be deposited with the government using Form 26QB within seven days from the date of the transaction.

The withholding tax ought to be calculated on the sale price mentioned in the agreement minus stamp duty and brokerage. The buyer ought to issue a tax withholding certificate in Form 16B to the deductee (the seller).

Non-compliance will invite a tax notice from the IT department with a penalty interest of 1% per month on the amount of tax from the date it was deductible to the date on which tax is actually deducted.

Further, as a buyer, if you've deducted the tax but failed to deposit it by the due date, the interest rate applicable is 1.5% per month, plus potential penalties.

Many are unaware of the above rule and end up with a nasty surprise. It should be noted that this applies for transactions with another individual. For transactions with a builder, TDS is automatically adjusted. Splurging beyond means

Amid competition and materialism, many stretch beyond their means. But you should know that the IT department is watching. Be careful when you go on credit-fuelled shopping sprees. Your bank is sharing a transaction report with the IT department. Don't compromise your long-term financial wellbeing by indulging in short-term gratification. Rather than dodging taxes and the IT authorities, it is best to undertake tax planning honestly and legitimately, right from the beginning of the financial year. There's no point running to your CA or tax advisor at the eleventh hour. Hardly anything can be done then. Leaving your tax planning exercise for the last moment sabotages the essence of holistic tax planning.

PersonalFN believes tax planning isn't limited to filing returns and paying taxes. It is a process that considers your larger financial plan and account for your age, financial goals, ability to take risk, and investment horizon. Proper tax planning can help you can meet vital financial goals and ensure long-term wealth creation.

Tax filing is not only a legal but a moral responsibility. It earns you the dignity of consciously contributing to the development of our nation, and you want to build financial credibility and keep a clear track record in the government's tax books. Moreover, it validates your credit worthiness at financial institutions and makes it possible to access finance when needed. Let's step up and become responsible investors and citizens of India.