7th Pay Commission gains: Exercise prudence- Business News
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7th Pay Commission gains: Exercise prudence

The implementation of the 7th Pay Commission is touted to bring in a windfall for both serving and retired government employees.

  • July 1, 2016  
  • |  
  • UPDATED   17:08 IST

The implementation of the 7th Pay Commission is touted to bring in a windfall for both serving and retired government employees. In such a situation, it is often noticed that individuals tend to splurge rather than save or invest such gains. Even though there is nothing wrong in meeting aspirational needs, a more prudent approach would be how to maximize the gains from the money earned.

Following are few tips on how to use this additional money wisely

Clear your debt / loan first: Debt is always a word which create stress for all of us. If you are overburdened with debts to clear, then one of the first things to consider would be clearing high interest debts especially the ones which does not offer tax benefits like personal loan and credit card overruns. The interest levied on both the instruments is substantially higher than most other loans. Therefore, these should be cleared off on priority basis.  Next in the order comes auto loan.

Now, when it comes to home loans which offer tax benefits, it would still be prudent to pre-pay as much as possible. "In case of pre-payment, the EMI burden gets substantially reduced which should be put to good use by opting to invest in long term saving plan, especially by means of an SIP," opines Surya Bhatia.

Initiate long term investment: One of the best ways to utilize this additional earning would be to fortify your financial situation in the years ahead. This can be achieved by initiating targeted investments to meet long term goals. One of the products that can be used for this purpose could be mutual funds." Extra income can be invested in mutual funds, stocks and any other market related investments as they hold the potential to earn higher return than many other investments over larger timeframes," says Anil Rego.

Incase if you are confused as what would be the right option for your need, then it is advisable to approach a financial planner who can walk you through the ways to meet your long and short term financial needs. Suresh Sadagopan of Ladder7 Financial Advisories is of the view, "It is best to make small investments on a regular basis, through SIPs/ RDs etc.  This is the easy way to build a good corpus in the long-term for meeting long-term goals. Also, since one gets income on a monthly basis, it would be feasible to invest the surpluses available on a monthly basis too."

Save for retirement: Retirement savings can be carried out through a variety of instruments - EPF, PPF,  NPS etc. However, the moot point to remember here is that the funds saved for sunset years should not be used up to meet other needs, in between. Rego says, "One can invest in NPS, VPF, post office savings schemes and PPF which provides higher rate of interest compared other traditional deposits like FDs. The rate of return typically is between 8-8.5%. However, all these are locked in for certain set of periods and hence liquidity may be a concern. Therefore, it would be ideal to use these funds to meet long term needs."

Review Insurance cover: The needs of a family would change from time to time, especially in terms of insurance cover. Most often the cover taken several years back, which is inadequate in today's day and age, would be the ones an individual is holding to. Therefore, it is imperative to review if the insurance cover taken either life or health is good enough to meet your today's objective. If need be, increase your life and health cover. As Sadagopan notes, "Health insurance is very essential for everyone. A good health policy which covers all situations and which has no sub-limits should be ideally taken." He further adds, one should go for a good base cover and also have a super top up cover over that. This ensures that one can get a good medical insurance cover at low overall costs.

Balance asset allocation: Most of the time, it has been observed that an individual's portfolio is heavily tilted to an asset class which one is most comfortable with. However, when it comes to financial planning one of the basis tenant is not to put all your eggs in one basket. Therefore use this additional cash flow to correct the tilt in portfolio. Incase you are unclear as to how to achieve this seminal balance, then it would be advisable to seek help from financial planners. Remember, no single asset class will remain evergreen forever. Your portfolio ha be ready to face any market cycle.

Build emergency fund corpus: It is mandatory to keep aside some funds to face unexpected circumstances (mostly negative surprises) which can land an individual in peril. According to Bhatia, "Contingency fund is important as it is your rainy day fund; incase not yet created then use this additional cash to create one." The ideal thumb rule is to keep aside an amount equivalent to three to six months of salary. "Emergency funds can be kept aside in liquid funds, which can be liquidated and used at short notice. The other option would be FDs which is easily accessible whenever required." says Sadagopan.

For purchases: When ever a chunk of money is handed out, one of the first moves by an individual is to make a buy a home or a vehicle or plan an overseas vacation. However, one should be careful that the purchase made today should not cause any financial burden in the future. If the expenditure is more of aspiration, then it would be ideal if it can be restrained for the time being and use the cash for much more meaningful purpose.