7th Pay Commission pay hike: As you plan your finances ahead with the added money flow, there is always a chance to be reckless with your spending and not thinking of the long-term possibilities the increased pay packet can give you if managed properly.
The 7th Pay Commission pay hike is likely to reflect in your salaries soon. With a healthy increase in your take-home package and arrears to come your way, it is likely you would be drawing up your plans on how to deal with the money, including planning for saving and expenditure.
During the past weeks, FeMoney has been bringing to a wide array of advice from leading personal finance experts on how to deal with the money, including the various investment options in stocks, mutual funds and tax-saving instruments.
But as you plan your finances ahead with the added money flow, there is always a chance to be reckless with your spending and not thinking of the long-term possibilities the increased pay packet can give you if managed properly.
While we have been telling you till now what to do with your money, here we tell you what are the impulses that you should avoid and what not to do with the money.
“There is always the likelihood of going in for impulsive purchases. One should always try to avoid spending the additional money in vacationing and expensive purchases such as electronic items which one may not need. The additional money should be taken as a means to achieve your long-term goals and be utilised optimally,” says Arvind Rao, founder, Arvind Rao & Associates.
Anil Rego, CEO & Founder, Right Horizons advises to revisit the shopping list. “Bonus, bonanza and other one-shot money inflow should fulfill the best rule of investment – postponement of current pleasure, to experience greater benefits at a later date. Most of us would have mentally spent the money, the more conservative will have shopping lists prepared. The ‘shopping list’ would have products – for consumption and investment. We invite you to revisit the list and reconsider some of the items,” says Rego.
Here is Anil Rego’s 10 points on what you should not do with the money you get from the implementation of the Pay Commission recommendations.
Avoid buying new vehicle: If you have a bike or car that runs well there is no reason to buy another similar asset, even if it is a superior model. The vehicle will depreciate in value and the new vehicle smell (and thrill) will pass sooner than it acquires the first scratches.
Do not buy additional house: The down payment that you plan to make on the additional apartment is money saved, which is good. You expect to rent out the property and earn regular rent, which is also a good thing. You would take a loan for the balance which will give you a tax deduction. Both rent earned and interest on loan taken have tax benefits for you! But the loan costs you about 9.5 per cent plus processing fees, against which you earn about 2 per cent as rental yield. There will also be periods when the property would remain empty. Painting, plumbing, furnishing are all costs that will eat into the rental earnings. Buying property to rent out is bad economics.
Do not go for additional insurance: Insurance is essential to fill in gaps in your financial plan. But do not jump in to buy more if you do not need it. And ensure you buy the type of insurance you need – sufficient (not too much) medical, accident and life insurance for your family’s needs.
Do not invest in unregistered chit funds: Chit funds suit people who may need money in a crunch. Returns to investors is actually rather poor. If one were to believe newspapers, unregulated chit funds have the nasty habit of disappearing with money. Since it is your money, believe the press and hold on to the money. It is safer with you than with unknown parties.
Do not take an extra foreign holiday: We hope you take regular vacations. Vacations are good for your health and also helps a family bond. There is also a tax break for vacations taken within India, twice in four years. But an expensive holiday taken instead of other financial priorities is best avoided.
Do not buy household luxuries: Your home probably has most of the goods that the electronics industry says are essential for your happiness. Will you really be much happier to have a TV double the size of the one on your wall? How much will the additional AC, cooking range and other knick knacks add to your pleasure? Have a ‘proper shopping list’ instead of a ‘splurge list’.
Do not go on a shopping binge: ‘Shop till you drop’ is great for the economy of all except yourself. ‘Have money, will spend’ normally leaves a hole somewhere near the tummy, along with regrets. Buy what you need and stop!
Do not impulsively buy gold jewellery: Gold can be a good investment at times. In ETFs or the government gold bonds they can be profitable. Jewellery is a good way to get a lot less value for the money you pay.
Do not prepay home mortgage: Loans taken cost you more than the returns you make on most investments. Use the money you receive in paying up all your outstanding loans, with payment of all credit card balances being a priority. The one loan that you should not prepay is the home loan as this gives you tax benefits that actually makes the loan rather cheap. And last but not the least,
Don’t take your eyes off your long-term goals: You have long-term goals which need to be taken care of. These could be children’s education, their marriage, and your retirement plan. You need to set aside money as investment for each of them. Do not lose sight of these goals.