Let this blog find
you having an enriching relationship with your money in this new financial
year.
One common question
we have in our workshops is “How to be financially strong?” I had written an
article last year on “Getting
out of the rat race”. Here are some additional thoughts based on
latest experience:
Tax planning:
I recently heard
from many people how the Jan – Mar 2012 salary was lower than other months in
the financial year. Mainly because initially they had declared some tax saving
investments, but later they invested much less. Check around you with salaried
professionals, you may notice a very high number of people experiencing this:
irrespective of their salary levels.
I remember when I
was an employee; I had simply no connection with tax planning. I considered it
a necessary evil. My simple logic was why lock Rs 100 for 3 years to save Rs 30
tax in the present. I would rather live with the Rs. 70 NOW. That was 15 years
ago. I find that it is still true for many people.
Little did I know
that this rule is a boon in disguise. The moment you invest the money for tax
planning, it is no longer available to spend on impulse. Your system will work
out ways to manage expenses within available funds. And silently you have a
neat fund accumulated.
Limited awareness of expense pattern:
I used to think,
saving and investments is for people who don’t trust their generating capacity
in future. As long as I was earning enough to meet my lifestyle requirements in
the current period, I was okay. I started tracking my daily expenses several
times but would give up after a few days.
Leaving accounts, planning and compliance to
accountants:
I always believed my
job is to keep generating. Last 15 years I had little awareness of the
regulations, compliance etc. beyond the basics. My CA would have to call me,
ask for various data and remind me the dates on which I had to pay what amount
of service tax, advance tax etc. I had done no planning for such payments most
of the time. This April I looked at my accounts of last several years. I found
that almost every tax payment had an interest component due to delayed payment.
Ignoring minor charges:
I rarely scrutinized
my bank, credit card, mobile bill statements. Many times there were minor
entries of some charges which I was unaware of. I simply ignored them
using the principal of materiality. If the amount is very less, why care and
waste your precious time!!
No planning or budgeting:
At work, we used to
project financials of various borrowing companies to ensure their debt
servicing capacity. We used to make realistic projections for next 5-10 years.
Personal finance projections?? Never!! So even known expenses turned into
surprises.
Life went on. 2
years ago a friend came on board as a partner in business. She had lived a life
with an absolutely opposite style. When she was an employee, she used to
calculate accurately her final tax outgo, 6 months before the year end. She had
started investing regularly, early in her career and had her own tracking sheet
for monitoring all her investments.
She started probing
every line of expense in the business which I initially laughed at. She told me
that it is not a matter of the amount. You take good care of every Rupee, it
will stay with you and will invite all other Rupees also to join!! She started
picking holes in my spending pattern. Some of the things she did appeared minor
to me that time:
- Get every unnecessary bank/credit
card charge reversed. Else get the logic of it from the bank.
- Revise the mobile plans for all the team
members to get the best deal.
- Never break a long-term investment for
a short-term expense. Plan ahead, keep money aside in a liquid fund for
known future expenses.
- She even got me to discontinue some
co-branded credit cards where I paid an annual fee, but never utilized any of
the services.
- She got me to track on an XL sheet all the
bank accounts, credit cards and even the money in my wallet. All the
balances were religiously tallied daily.
- Follow up on all the tax refunds outstanding
from Income Tax department.
These are normal
practices but the point is I never practiced them, despite having a degree in
finance.
I wonder how many
people are in this kind of boat? Since I started thinking on these lines I
found many people in a similar situation. Several of them had “invested” in
Insurance policies unaware of the real benefit from them. Many others wondered
whether the money decisions they had made earlier were valid now - the tendency
is to maintain status-quo and hope for the best. I also thought that the only
option is to make lots and lots of money and things will get handled. They don’t.
You have to clean up the act now and then everything falls in place.
Here are my
suggestions depending on your current station in life:
Cleaning connection with taxes &
compliances:
- Always know all applicable tax breaks for
you. April is the best time to do so. There are some XL sheets that are
available as free download that will allow you to accurately calculate the net
tax. Find them. Else send me a mail & I will forward one to you.
- Even though FY2012 is over, as a start: fill
your salary items in the tax calculator made for FY2012 and check the taxes
that were deducted by your company. And notice, how much tax savings went
unused.
- Understand your IT return properly. File the
originals neatly. Have scanned copies of each year’s return handy.
- Understand every communication from tax
authorities instead of leaving it to your CA.
- Understand all the clauses in your IT
return.
- File all returns in time. Your CA may remind
you but he is not accountable for the returns. You delay, you pay the interest.
And you are declaring to the creation that you don’t care about money.
For an entrepreneur / self employed professional:
- Get the applicable registrations done
proactively, be it service tax, TAN, Professional Tax etc. Ask some people who
are in the same business for many years. They will give you some more tips.
- If you charge service tax, transfer the
service tax component in all receipts, to a separate liquid fund till it
becomes payable.
- If you deduct tax at source (TDS) on a
payment, deposit the TDS amount with tax authorities within a day or two.
Online payment facility is now available which is simple & convenient.
- Basically any money that does not belong to
you, must be kept away or deposited immediately
Expense tracking, cashflow budgeting:
- Keep an XL sheet with 3 columns (inflow,
outflow, running balance) for every bank account, every credit card, cash at home.
Here is a picture of the sample sheet.
- Keep updating it regularly with current
expenses & inflows. Enter every financial transaction including credit card
swipe.
- Categorize the expenses. Also project the
future cashflows.
- You can include all your take home
salary/inflows and EMIs, house rent and other known expenses for each month.
Calculate running balance.
- This exercise will surprisingly reveal to
you some interesting patterns. Once you start this as a practice it becomes
very simple, saves lots of time & stress.
Financial Freedom Factor tracking
- Calculate your Financial Freedom Factor
(FFF) and ensure that it is improving with time (refer my article on “Getting out of the rat race”.
Send me a mail if you want the latest XL sheet to calculate FFF)
Encouraging team members to be financially
strong:
For department heads | business heads | CEOs | promoters
We keep hearing from
promoters and CEOs that they are looking for ownership, entrepreneurship in the
employees. The dream is that they take care of company’s money like their own.
Here is one suggestion:
- Check how many of your employee’s take home
in Jan – Mar 2012 was less than previous months (excluding bonus, if any).
- For all of them, organize an awareness
session: The beginning of financial year is the best time. Make them aware of
the possibilities and benefits of tax planning. Make the session interesting
and inspiring. You can instill financial prudence in them. When they are
financially prudent for self, they will
o respect and thank you for making them
financially strong
o bring a lot more ownership at the work
place
- If you want help in such a session, tell
us. We would be glad to assist you.
Finally: if you are
already taking care of your finances really well, then it is the best time to
mentor & coach people around you to build a strong financial backbone! The
joy of witnessing a person becoming self-dependent and financially strong is
incomparable.
Here is wishing
financial prosperity to you and your teams.
Link to our workshops
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