Use financial numbers collated for your taxes to get together a financial plan & investment policy

The best time to start financial planning is always 'Now'. However, the beginning of the financial year comes a close second, say financial pundits. No, it's not an auspicious date. You can start on a clean slate at the beginning of the new financial year, as it is an ideal time to finalise your plans for saving, investing, spending and so on. There is no better time than April to start the planning process as you have just gone through the exercise of collating your finances for your taxes. Use those numbers to your advantage and get together a financial plan and an investment policy statement. These two documents should become the foundation of your financial life.

Starting

According to experts, most people need to begin at the beginning. That is: starting the process to get their financial records in order so that they know about their assets and liabilities. This process will help one figure out how much money s/he has to save, invest, and spend. It may also tell you that you have to first focus on getting rid of some liabilities before dreaming about great investments. Around this time, salaried employees receive annual bonuses and the tendency is to splurge on vacations or consumer goods. Instead, they should try to repay their liabilities. If not the entire debt, they should look at repaying at least a part of it. Any credit card outstanding, particularly, should be cleared as soon as possible, as it is the most expensive form of debt.

Interest rates on credit card outstanding are in the region of 39-44% per annum. Repaying other expensive loans like personal loans, too, should be the priority. Next, you should create a contingency fund to tackle unforeseen expenses. These apart, additional limp sum inflows should be used for plugging the gaps in your financial plan.

Tax First

You may remember the cliche about taxes — you can't escape death and tax. That is why it is always a good idea to start with tax planning. Most individuals postpone this task to the end of the financial year. However, you should remember that tax-saving is not a goal in itself, but is an important constituent of your overall, long-term financial planning strategy. Therefore, it makes sense to get started with this right at the beginning of the year.

You could look at systematically planning for your section 80C investments, health insurance etc, starting from April. This approach will help prevent the last-minute pressure towards March-end.

Also, if you earn income from sources like rent or interest on bank deposits, there is no better time than April to plan for the advance tax to be paid.

April is a good time to take stock of your advance tax liabilities and plan towards discharging it during the year. For instance, say, you are a salaried individual in the highest tax bracket and also earn income from rent or interest from fixed deposits, which amounts to over Rs 10,000. Now, it is possible that your bank is deducting tax at the rate of say 10% on your interest income, whereas the rate applicable is 30%. So, there will be a differential of 20%, which will constitute your advance tax liability. This amount has to be paid to the I-T department in three instalments in the months of September, December and March. If, for some reason, you skip an instalment, you will be charged an interest of 1% per month when you pay the next tranche three months later. Therefore, if you start planning in April, you will be able to manage your cash flows better and avoid this penal interest.

Another thing you have to remember is that saving or investing regularly to meet your tax-planning goals also yield you better returns from these avenues.

Investing early in the year in other tax-savings investment plans like PPF, Ulips, pension plans and so on, which have long lock-in requirements, will maximise returns for the investing year; at the same time, also allowing exit in the beginning, at maturity. Investing lump sum in PPF, which offers fixed returns, yields the best returns.

As always with investing, the earlier you start the better, as you let your money compound longer, thus earning more. If you have a balance which can be saved via an investment, the earlier you do it the more your money will work for you.

(Rajiv Gandhi equity savings scheme)