With more disposable income in the hands of public servants, it's time they started their financial planning. Invest before splurging should be the mantra.
Since the Budget 2008-09, Finance Minister Palaniappan Chidambaram's generosity has been a topic of discussion. On February 29, the last Budget before elections, he declared Rs 60,000 crore (Rs 600 billion) as relief for 4 crore (40 million) farmers.
Even the Indian middle class did not miss out as their basic exemption limits were hiked from Rs 110,000 to Rs 150,000 for male taxpayers, Rs 145,000 to Rs 180,000 for women and Rs 195,000 to Rs 225,000 for senior citizens.
Not to leave the public sector unhappy, the FM has quickly implemented the recommendations by Sixth Pay Commission for government employees, which is likely to make everyone rather happy.
Consider this: the salary of a cabinet secretary has been hiked from almost Rs 65,000 a month to Rs 90,000 a month. Add to that, all government employees will get arrears from January 2006 and we have a situation where there would be lump sum amounts in their bank accounts soon. Besides, there would be a rise in the disposable income quite substantially.
The numbers would look something like this. The lowermost grade employee is expected to receive over Rs 50,000 as arrears, apart from increase in the salary, and the highest grade officers will be paid over Rs 800,000.
The pay panel's recommendation will cover 500,000 Central government employees, including railway and defence. The State governments will also follow suit after some time.
So with all that cash-in-hand, what should the public servants be doing? Financial experts say that the revised pay scale can serve as an opportunity for them to fill the gap in their investment plans.
Says Zankhana Shah, certified financial planner, "In my experience, most government employees save about 15 per cent of their salary, which includes their investments in provident fund. As a result, they even miss out on saving for their retirement."
Shah also says that this is also a reason why pensioners cannot maintain the same lifestyle after retirement. Due to lower income and pension, government servants go back to their native place as cost of living is cheaper.
No matter what stage of wealth creation you are in, here are a few suggestions that you should consider before investing and spending the disposable income.
Square-off liabilities
Before you do anything else with the money, start by clearing off your debts. And it should be in this order: Credit card bills first, as companies charge an obscene interest rate (over 35 per cent a year). Then, pay off your personal loan, if any (interest rate over 16 per cent a year.)
Also, in case of home loans, since the equated monthly installment has shot up too much because of the rise in the interest rates in the last two years, pay off some part of it. But completely exiting the home loan does not make too much sense because there are tax benefits in the interest and principle pay out.
"At this time, repaying the loans makes a lot of sense as the interest rate is high. Also, lesser liabilities will help in achieving the financial goals faster," says financial planner Hintungshu Debnath.
Contingency fund
Park part of the money in a bank account or any place from where it can be enchased immediately. Such a fund will help you in time of dire financial need. These may range from a job loss to natural calamity.
In fact put at least six months to one year salary in this account. "A contingency fund is essential for things that cannot be insured," says a Mumbai-based certified financial planner.
Mediclaim
The government provides health insurance to most of its employees. But if you feel that the health insurance is not sufficient, go for an additional policy. An extra policy is also required as the claim settlement can take longer than desired, thanks to the red tape in government departments.
Life insurance
Every earning member in the family should have life insurance. Get a policy if someone in the family has not yet taken one. "One needs to avoid unit-linked insurance plans, instead go for a plain vanilla mediclaim," adds Debnath.
Build assets
Use the remaining money to create wealth as per your financial needs. If you are saving for a financial goal that needs to be accomplished in 2-3 years time, invest in debt (fixed deposits, for example). For long term goals, invest in the stock market through diversified mutual funds, is the advice of all financial planners.
Retirement planning
As government provides pension, the employees ignore planning for their retirement. "They also do not take inflation into account. The retirement fund needs to be bigger than the target amount as inflation eats into the investments. The value of saved money goes down when prices of items required in daily use go higher," says Kartik Jhaveri, Director, Transcend India.
Learn to invest
Investing money in the stock market, either directly or through mutual funds, is another way one can deal with the additional funds. This money can help them learn to invest. "And, if the investments go below the purchase price, the individual will have enough time to see it rise through the market cycle," Shah adds.
Whatever decision you may take, do it after lot of deliberation. Do proper asset allocation first before you start investing or spending.
More from rediff