Young adults these days live in the moment with little care for the future. However, as exciting as it seems to take each day as it comes, it is not the most practical lifestyle. Financial emergencies are real possibilities that can arise anytime. It would help if you had some savings to fall back on in such cases.
Despite the importance of money management, few people even consider a savings plan to safeguard their finances. However, it is crucial to restrict your expenses and save the unspent money to meet your contingency needs in the future. You can start saving as early as you like. The main objective is to maintain liquidity to enable you to fulfil all upcoming expenses without any hassle.
To start saving, you need first to start budgeting. This tool allows you to segregate your income and expenses. After identifying your costs, you must analyse them to see how you can cut corners. At the end of this exercise, your income should exceed your expenses in meeting your saving goals. It is only after you have a corpus of these funds can you consider investing in some of the best saving plans.
When you reach a point where you are ready to start investing your savings, then you can look at some helpful schemes launched by the government of India. With this savings plan, you will be able to save a part of your income for future use. Let us now discuss saving schemes in detail to help you make an informed choice.
What is Savings Scheme?
Savings scheme is an investment option for the citizens of India introduced by the government as well as public sector financial institutions. The objective behind launching this savings plan is to cultivate a healthy habit of saving and investing. This also increases the flow of money into the economy. By investing in these schemes backed by the government, you can not only safeguard your finances but also allow your wealth to appreciate at a higher rate of interest. As a result, you earn not just profits but also tax exemptions.
Savings plan usually caters to a wide range of audience with a diverse demographic profile. By investing in the best saving plans, you can quickly fulfil your financial obligations at various stages of life, such as retirement, children’s education, and their marriage. They are a perfect solution for long-term wealth creation because they come with a lock-in period and offer robust returns. They are also immune to market volatility, offering safer investment options. Moreover, the interest rate on various schemes is revised regularly to account for rising inflation and cost of living.
- Unit Linked Insurance Plan (ULIP)
A ULIP plan combines the benefits of both investment and life insurance. A portion of the premium paid towards a ULIP plan is allocated towards life insurance and the rest of it towards equity or debt-oriented mutual funds. The allocation of funds towards investments is based on your long-term goals, such as retirement, marriage, and your child’s education. If you invest in ULIPs, you become eligible for a tax benefit of up to Rs. 1.5L u/s 80C of the Income Tax Act. Even the interest earned through this savings plan remains tax exempted. While the minimum investment amount may vary from one insurance provider to the other, there is no limit to the maximum investment.
- Fixed deposits
Fixed deposits are a suitable savings plan for you if you are looking for low risk and fixed return on a long-term basis. Deposit that you make towards your FDs are eligible for tax benefits of up to Rs. 1.5L.
- National saving certificate (NSC)
NSC is a great investment option, especially when you want to leverage its tax benefit. These certificates can be obtained from any post office if you are an Indian citizen. If you are someone who doesn’t want to take a risk with their hard-earned money, then this savings scheme is perfect for you. The rate of interest earned on NSC is determined by the Ministry of Finance every financial year.
For instance, this year, the NSC interest rate is 8% compounded yearly. The minimum investment in NSC starts with Rs. 100 and there is no upper limit to the maximum amount deposited. However, it is essential to note that you can only avail tax benefits up to Rs. 1.5L annually as per section 80C of the Income Tax Act.
Another critical point to note is that NSC accumulates all the interest rate, so you earn interest on accrued interest by the power of compounding.
But what is the power of compounding? Compounding is essentially the process of reinvesting your earnings at the same rate of return to allow your principal amount to grow, year after year. So when you invest in NSC savings plan, your wealth will increase over a period of time, giving you higher returns for your investment.
- Equity Linked Savings Scheme (ELSS)
ELSS is a type of mutual fund savings plan with the shortest lock-in period of just three years. Most of your ELSS premium is allocated towards equity-based assets, offering higher compounding potential in the long term. While your interest earned is taxable at 10% as per Long Term Capital Gains taxing system. However, you are also eligible for a deduction of up to Rs. 1.5L on your principal amount.
By this time, you probably already know that savings and investments are mutually connected. Therefore, it is essential to build a safety net so that you can have full control over your life and future.