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In India, a large population among savers and investors is of the salaried people, who are relatively better off than the businessmen and self-employed people, mainly because they enjoy a higher degree of certainty with their income, something that the other two class of people lack. The regularity of income, which is seen as a blessing, along with other superannuation benefits that most salaried people enjoy, at times also make this class complacent about their post-retirement financial needs. And when they realize that their retirement corpus is inadequate to meet their financial needs, they are forced either to cut down on their spending or dig into their savings, rather than using the returns from their savings.
Financial advisors and planners say that like other people, salaried individuals also need to save regularly and invest smartly in assets that can generate higher returns, beat inflation and are also tax efficient to create wealth. They must understand that in the long run, only equities can help them achieve their financial goals and for a person who does not have time and expertise to invest in direct equities, mutual funds are the best alternatives. Mutual funds are one of the most cost effective and professionally managed products available to them.
Salaried people in general and government employees in particular have a notion that they require little or no planning for their life because everything is ensured by their employer or the government and their family and future is fully secured. But this is wrong because planning is dependent on every individual's needs and his or her family's requirements, resources, social background, family status, etc. These inputs are not taken into account by most of the salaried people and such people may end up in misery at the fag end of their service which can be very well be avoided by proper planning at the initial stage.
Among the salaried people, especially those with the government have certain special characteristics with regard to financial planning due to the nature of their job. "On the positive side are that the income flow is fairly certain and regular, there are likely to be many employer-provided benefits like medical, transportation, vacations and insurance, predictable salary increments, likelihood of a good retirement package which can result in a decent lifelong pension, and a comparative stability of the job. On the negative side, large payouts other than yearly bonus and performance-linked commissions would be a rarity and there is less likelihood of large improvements in standard of living. These characteristics create special needs for the salaried people compared to the business class and self-employed professionals.
Some of the typical traits of salaried people are their main approach towards financial planning is aimed at tax savings, they often do not have an emergency fund and outside of tax savings they prefer debt over equities, even if such preferences are hugely skewed during their early years in the job.
A study reveals that government employees prefer additional contribution to EPF to earn tax-free returns. Such returns are very poor compared to market returns.
"Government employees are poor risk takers when it comes to investing in equity-related products and hence their total dependency is on fixed income only, which has low capacity to beat inflation, and hence it also deprives them from wealth creation" Shah said.
Salaried people, mainly because of their regularity in income, also are not very careful about having in place an emergency fund that can take care of their financial requirement in case of any exigency. This should not be lost sight of since any such emergency can wipe out a large part of your planned savings, affecting other goals of life, and may even result in loans at high interest rates. A buffer for about four months of living expenses for emergencies can be taken as a general thumb rule.
For most salaried individuals in India, financial planning starts and ends with tax savings instruments. Saving taxes are a must, but there are other ways too through which a salaried individual can enjoy an absolutely successful and stress-free financial life.
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