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When Should One Start Saving And What Is The Best Savings Plan?

dateKnowledge Centre Team dateJanuary 27, 2021 views124 Views
When Should One Start Saving And What Is The Best Savings Plan?

Saving money, or ‘saving habit’ - as Napoleon Hill put in 70 years ago in his book “Think and Grow Rich” - is the keystone of all financial success. Saving money is what delivers the means for you to take advantage of situations -- whether it is starting a new business, going back to college, or buying shares of stock when the market crashes.

Saving money matters.

Although you are committed to saving money, you may find yourself backsliding into the trap of spending an extra Rs 5 here or Rs 10 there, thinking, “It is only a few rupees. I will never miss it”. Counting on your age, this could be a huge mistake.

One of the foundations of saving money is to appreciate the time value of money is the abstraction that Rs 1 today is more valuable than Rs 1 a year from now. This one money-saving tip could help you transfigure your balance sheet over the next ten years as you free up money to put into saving plans.

When should one start saving money?

While there is no lower limit of age to start saving money, young age is the best time to start saving money. Nevertheless, most people of the younger generation are fond of spending money, but a little saving can show great future changes. They often have a false belief that saving money is sacrificing enjoyment. It is not entirely true because sacrificing a little will bring in a great change.

Most of the time, people do not get the significance of saving money at an early age. Here are some points stating the importance of saving money at an early age:

  • If you start to save money at an early age, it assures you a secure old age. At a young age, people do not have many expenses. But with time responsibilities increase, and so do the expenses. Thus it is a better plan to save money at a young age.
  • If you start saving money at mid-age or when you are nearing your retirement, then you will have to work hard and save more as you do not have much time. So, saving at an early age gives you the scope to save less and flexibility to manage other expenses.
  • It is a well-known fact that a practice we start at a young age will last almost lifelong. Thus one who starts saving money at an early age will not stop it, and this practice will help you save money and secure your life financially.
  • Saving money prevents you from borrowing. The money you saved comes to aid during emergencies or children’s education, house requirements, etc. So, instead of opting for loans or financial credit for the support, you can use your saved money and lead a debt-free life.
  • Nowadays switching jobs has become very common. So, if you ever encounter a situation where you have to quit your job or live without a job for a few months. It becomes easy for you to live without a salary in this gap if you have your saved money.
  • One expects to spend their time relaxing leisurely after retirement. So, starting to save money at an early age allows you to save a lot of money for retirement and lead a relaxed and secured life after retiring.

What is the best savings plan?

While there are several savings plans out there, here are the top 6 best savings plans for you. Let us have a clear look at these plans one by one:

1. Fixed Deposit(FD)

Purpose: saving

Interest: 5.5% - 7.5%, guaranteed returns

Minimum investment: Varies from bank to bank

Maximum investment: No limit

For a long time now, fixed deposits have been India’s best savings option. They are bank-based investment products and closely monitored by RBI, assuring safety. They are low-risk investments. You can invest at a particular time and acquire a fixed interest rate that comes with a five-year lock-in period.

Fixed deposits offer a higher interest rate than savings bank accounts and allow only a one-time lump sum deposit. Under section 80C of the income tax act, investments up to INR 1,50,000 are eligible for tax redemption. Also, they offer higher interest rates to senior citizens.

2. Recurring Deposit(RD)

Purpose: Regular savings

Interest: 4.5% - 6.5%, guaranteed returns

Minimum investment: INR 500

Maximum investment: INR 1 Lakh per month

A Recurring deposit is a tenure deposit offered by banks. RDs allow investors to deposit money regularly and avail high returns upon maturity. With RDs, investors get to choose their term period, the amount they wish to deposit, and the number of deposits. Their savings plan period varies between 7 days to 10 years.

RDs allow premature withdrawals with a penalty and can be used as loan collateral. They also offer higher interest rates to senior citizens, but do not allow you to change your monthly investment amount.

3. Public Provident Fund (PPF)

Purpose: Retirement

Interest: 7.10%(April - June 2020), guaranteed returns.

Minimum investment: INR 500

Maximum investment: INR 1,50,000

PPF, one of the most popular savings plans, is a post office savings scheme and is backed by the government. Investors cannot open multiple accounts, but returns from PPFs are completely tax exempted. They allow investors to pay investments in a single deposit or up to 12 deposits per financial year.

PPF gives you a lock-in period of 15 years and is easily transferable from one bank or post office to another. Any Indian citizen can obtain the benefits of this savings plan. Nevertheless, HUFs and NRIs are not eligible.

4. Liquid Mutual Funds

Purpose: Short term savings

Interest: 6.5% - 7.5%(Historical returns)

Minimum investment: INR 500

Maximum investment: No limit

Liquid mutual funds invest in short-term market instruments such as treasury bills, government securities, and call money. They invest in low-risk securities that have maturity up to 91 days. Liquid mutual funds are the best alternative to FDs and savings accounts in which you can invest surplus money for a short time.

In liquid funds, short term capital gains are added to investor’s taxable income, and long term capital gains are subjected to 20% tax with indexation benefits. The risk is lower in liquid funds compared to other debt funds.

5. Equity Linked Savings Scheme(ELSS)

Purpose: Wealth creation through equity

Returns: Market linked (12 -15% historical returns)

Minimum investment: INR 500

Maximum investment: No limit, but can save tax only INR 1.5 Lakhs investment per financial year.

Indian citizens (including non-resident Indians) can invest in ELSS funds. ELSS are equity mutual funds that invest over market capitalization and sectors and have a lock-in period of 3 years.

You can invest in these funds even after a 3-year lock-in without the need to withdraw your investments. You will be charged an expense ratio on the NAV of the fund, and no premature withdrawals are allowed.

6. Equity Mutual Funds

Purpose: Long term wealth creation

Interest/Growth rate: 12% - 15% (Historical returns)

Minimum investment: Lump sum INR 500 - INR 5000; SIP INR 500

Maximum investment: No limit

Equity funds invest in stocks/equities, and each fund has to invest based on the investment objective. You can link your investments to a goal and invest towards it, and the returns are taxed based on the holding period. In this scheme, short term capital gains are taxed at 15%, and long term capital gains are taxed at 10 % and come with exit loads.

These funds are best suited for long-term goal-based investing as they offer significant returns only when invested for the long-term.

Comparison between the top 6 best saving plans in India

Savings plan Lock-in period Returns Tax Eligibility Minimum investment Maximum investment
Fixed Deposit 5 Years 5.5% - 7.5% Returns are taxable Indian individuals, NRIs, HUFs, PIO, OCI Varies from bank to bank No limit
Recurring Deposit 6 months - 10 years 4.5% - 6.5% Returns are taxable Individual, corporate, HUF, NRI, company, government organization ₹ 500 ₹ 1,00,000 per month
Public Provident Fund 15 years 7.10% No tax on returns Only Indian citizens ₹ 500 ₹ 1,50,000
Liquid Mutual Funds No Lock-in 6.5% - 7.5% (Historical returns) Returns are taxable Individual, corporate, NRI, company, government organization ₹ 500 No limit
Equity Linked Savings Scheme(ELSS) 3 Years 12% - 15% (Historical returns) Returns are taxable Indian citizens and NRIs ₹ 500 No limit
Equity Mutual Funds No Lock-in 12% - 15% (Historical returns) Returns are taxable Individual, NRI, HUF, company, corporate, government organization ₹ 500 No limit

Start saving today with the best savings plan of your choice and create a secured life path!

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