Spend, Save and Invest Smartly
There is a famous saying “Sometimes you have to stand alone to prove that you can still stand”. The time when you are single is truly yours. You can spend your money the way you want. You just need to make sure that you do not lose your money to tax. You are single and do not have a spouse or children to worry about. Children’s education can be costly and this is a worry you do not have. This is a time when you invest wisely and collect money for your future needs. You need to align your investment goals with your tax saving so that you can get twin benefits. Speak of killing two birds with one stone.
You are young and just starting your career. Time is on your side. This is the time when you need to choose aggressive investments which give good returns in a very short time. You can allot a high proportion of your portfolio (investments) to equity.
Remember : High returns at high risk.
These aggressive investments must have tax saving benefits and ELSS (Equity linked saving schemes) fits the bill. The amount you invest in an ELSS is tax deductible up to INR 1.5 Lakhs per year under Section 80 C of the income tax act. And there is better news: ELSS enjoy "EEE" benefits.
EEE means exempt, exempt, exempt.
Remember : ELSS has an equity component of over 80%. (Invests over 80% in equities) and is rated "Brown". Brown denotes "High Risk".
But high risk could mean high returns .With a lock in of only 3 years compared to other tax saving instruments which enjoy Section 80 C benefits ,tax free returns under "EEE" , and low charges to make the investment (low cost of investment popularly called expense ratio) ELSS could be the investment the youth of today seek.
You need to do your research and select a highly rated ELSS (preferably 5 star rated ELSS) to make a good investment.
You must invest a small amount of your money in a highly safe financial instrument even though your returns may be less. A PPF (Public Provident Fund) should serve you here. It enjoys "EEE" status. Your capital (the money you invest is safe) and you get decent returns (interest payments) with time. The money you contribute to the PPF enjoys a tax deduction up to INR 1.5 Lakhs under Section 80 C. You need to remember that your money is locked (PPF has a lock in of 15 years).You cannot touch your money for this time period.
You need life insurance only if you have dependents. Your spouse, children or your parents might depend on your income. You are unmarried and do not have a spouse or children. However your parents might depend on your income. This is the time you choose a term life insurance plan. This is a pure insurance plan with no survival benefits. This means you pay a very low premium for that term life plan for a high sum assured (lump sum amount your parents receive on the death of the policyholder). The premiums you pay for that term life plan are deducted from your taxable salary up to INR 1.5 Lakhs per year under Section 80 C of the income tax act. Most youngsters who have no dependents invest in an endowment life plan. Is this the right thing to do? In an endowment life plan you enjoy twin benefits : Insurance + Savings You have to pay a very high annual premium for the endowment life plan for this so called savings benefit. The high premium goes towards commissions of the life insurance agents and other charges in the policy. The money left behind is invested in fixed income securities (debt) and bonds and gives a mere 5-6% return per annum. The bonus you receive from the endowment life plan is paid to you from the returns got from the fixed income securities. The amount of life insurance you get is very less as most of the amount you invest (premiums paid) in the endowment life plan has gone towards charges. You do get the same tax benefits as a term life plan but serious thought needs to be given if you need an endowment life plan.
Health is wealth and you definitely need a health insurance policy if you are single. You get a deduction of INR 15,000 a year on the premiums you pay for a health plan under Section 80 D of the income tax act. You can also avail a health insurance plan for your parents who are senior citizens (60 Years and above) and avail a deduction of INR 20,000 a year on the premiums you pay for their health plan. You have heard the famous saying "Horses For Courses". If you are young and single you need to select only those tax saving instruments which match your financial goals and needs.