Look beyond 80C

As the financial year end draws near the salaried people have to submit the proofs of investments to their employer. Often it is called the season of tax savings.

For many of us, investment is equivalent and limited to tax saving products. But have we given a thought whether the products which we use to save tax will help us reach our goals? Or we just 'invest' without giving a thought to what our goals are? Setting a financial goal is deciding how much money is required for what and when.

For those who cannot save and invest beyond the section ‘80C’, it becomes even more important to choose the right products. The 80C category popularly contains our life insurance premiums & ULIPS, contributions to PPF & post office schemes, ELSS etc.

Let us think differently for a moment. Instead of saving tax, should one pay the legitimate tax and invest the balance amount in products outside the gamut of 80C? I believe this can help people achieve their goals. Else the same people fall into the debt trap of personal loans, credit card loans to buy a home, pay school fees etc. Basic calculation shows, for those in 10% & 20% tax brackets the maximum tax saved is 15k & 30k respectively. The interest paid on the personal loans will easily be more than the tax saved.

So give a thought to all these before buying the new exotic tax saving product or paying the hefty premiums.

For the insurance part one should look at term plans. We will learn about this later.

And yes please share ideas, experiences and alternate views.

Prasad Patwardhan

Mental Accounting

Are you prone to mental accounting?

Mental accounting sounds like a mixture of psychology and finance. And indeed it is. It is a part of behavioural finance. Subconsciously we all are prone to mental accounting. So is it good? Or is it bad? Let’s explore.

What is mental accounting?

Mental accounting in simple terms is treating your money differently based on the source and the purpose.

What are the types of mental accounting?

While spending:

People spend every bit of the salary very cautiously. They try not to exceed the budget. As the month end nears, spending reduces.

But compare this with spending the money won through lotteries or annual bonus or tax returns. People simply tend to 'splurge' this money.

In reality money 'won' or 'earned' has the same purchasing power and so needs to be treated equally. Rs.500 of salary will buy the same pizza as will Rs.500 of bonus. But we tend to ignore this fact and fall for instant gratification.

People find it painful to part away with their cash. Compared to this, the use of cards (credit or debit) is ‘painless’. So most people tend to overbuy or overspend by using cards. With many 'use now pay later' schemes designed to promote 'cashless' economy coming up, many of us may fall prey to overspending.

Sometimes people compare the price of products in percentage terms. So the price of accessories of a car may seem only to be a fraction when compared to that of the car. The mind that happily accepts Rs.100 discount on laptop cover, gets easily dejected by the idea of Rs.100 off on the laptop.

While investing:

With easy access to credit many of us may be servicing some kind of a loan. It can be a car loan, a personal loan or a home loan. While servicing the high interest bad loans (loans taken for depreciating assets) the investments are done in low return avenues. So the interest or returns from these investments are eaten up by the interest payment of loans. Effectively money is lost in this process. Ideally it would be better to clear the loans with the highest interest first to earn some positive returns from the investments.

Some people trade in stock markets. Rising markets are cheered. But when markets fall, the profits which could have been pocketed diminish. Investors who lose money, opine that the lost money was never theirs as they had never ‘earned’ those profits. When profits on an investment turn into losses, inexperienced traders tend to hold the loss making bets as they simply cannot write off these bad investments.

The good part:

Mental accounting is about compartmenting money. So when this compartmenting is linked to a particular goal, mental accounting is good. For e.g. if some part of salary is allocated to retirement fund or new home or child’s education, that money is seldom used for other purposes.

When fund of an NGO, charitable trust, educational trust, public exchequer etc. is at one’s disposal it is expected to be used wisely. The person responsible should consciously make an effort to treat this fund as someone else’s money. Mental accounting helps to separate this fund into ‘my money’ and ‘not my money’.

In a nutshell:

Treat you money equally and spend it wisely.

Please share ideas, experiences and alternate views.

Prasad Patwardhan

Have you UPIed?

Unified Payment Interface

UPI stands for Unified Payment Interface. It is an effective way to move towards a ‘less’ cash society. One may even add that it is the most effective way to reduce dependence on Visa/Mastercard/American Express and the closed/semi-closed wallet systems. So let’s explore more about UPI.

What are the pre-requisites?

1) Android smartphone with internet connection (UPI is currently unavailable on iOS, Windows platform)

2) UPI app of any bank/mobile banking app

3) Virtual Payment Address (VPA). This is a unique address which is to be created while using the UPI application. This is just like an email address (e.g. prasad@icici) but an email address for your money.

Steps for Registration:

1) User downloads the UPI application from the App Store / Banks website.

2) User creates his/ her profile by entering details like name, virtual id (payment address), password etc.

3) User goes to “Add/Link/Manage Bank Account” option and links the bank and account number with the virtual ID.

What are the benefits of UPI?

UPI can be used to transfer money to peers, make merchant payments, COD payments (currently available for Flipkart). This is very similar to IMPS but with lesser charges and without the need of account numbers & IFSC codes. You just need the VPA of the receiver or the QR code generated by the merchant. Also the VPA can be linked to any bank account. The money is debited from giver's account and credited to the receiver's account.

The biggest benefit is that the money does not get locked into closed/semi-closed wallet systems like Ola money, PayTM, FreeCharge etc. Since no PoS (swipe) machine is required it can be easily used by small vendors helping them go 'digital'. UPI can easily replace petty cash transactions. The money saved by avoiding PoS machines and consequent charges paid to Visa/Mastercard/American Express can be passed on to the customers.

Add on benefit:

Since you are less dependent on credit cards you are less prone to mental accounting.

Please share ideas, experiences and alternate views.

Prasad Patwardhan