In this chapter we will consider the importance of budgeting.
A budget is an account of the necessary expenses incurred every month. This is a computation of the essential tasks and expenses. Keeping an accurate tally of monthly earnings or income is in fact budgeting. A budget is nothing but an estimate of income and expenditure. It is a plan that details our regular income and expenses.
A well prepared budget tells us about our main expenses, and helps us understand where our hard earned money is deployed. When we prepare our budget, we note down the expenses that are deemed essential from our point of view, such as monthly groceries, rent, phone, medicines, local transport etc. This exercise tells us what our needs really are, where money is being spent needlessly, and that if such spending is avoided, how much we will be able to save. Such an exercise tells us how much we could possibly be able to spend on other important areas, thus avoiding having to borrow money or seek help from others.
It is very easy to prepare a budget. The budget making process can be understood by means of a simple illustration. Take a notebook or a diary. Write the month at the top. Write your income at the top of the page and then prepare a list of all expenditure incurred- such as school fees for children, groceries, medicine, phone and electricity bills etc.
|Monthly grocery bill||1,000|
|Children’s school fees||750|
|Milk and vegetables||1,500|
We note therefore that the monthly expenditure is 8,150 Rupees, even after inflating expenses somewhat, and we are left with at least 1,850 Rupees. This is the money that we can save if we really want to. This table represents the maximum amount that we can possibly spend. A monthly budget can be prepared in such a manner. Over time we can possibly change spending in certain areas. Perhaps we could spend more in some items and reduce expenditure in others.
This chapter attempts to explain various aspects of savings such as: What are Savings, Why one should save and how one can save. The reasons for savings money and how one should go about it are also explained in this Chapter.
Chapter 1 gave us information about budgets and we understood how it is possible to save money through the budgeting process. Savings are nothing but the money left over after our essential monthly expenses are met. Many people are unhappy about the fact that they are unaware of how and why their money gets spent. As a result, they are left with no choice but to borrow money from friends and neighbours at the end of the month. They are rendered penniless when they have to meet occasional one-off expenses or it is time for special events such as weddings etc. Adequate savings ensure that such situations do not arise and that all the family’s essential needs are met.
Savings are essential for ensuring the safety and security of one’s family, to progress with the times, to hold one’s head high in society and so that the basic needs of the senior citizens as well as children in the family are met. Savings are that part of one’s income that one conserves after meeting expenses. Savings are generated only after taking care of our basic needs.
Let us go to Chapter 1 in which Table 1 explains how a monthly budget is prepared. You will notice that you have only noted the essential monthly expenses. After adding all such expenses you will be amazed that you seem to have some funds left, whereas if you hadn’t prepared such a budget, you might have had to borrow money from your neighbours. Preparing a budget encourages you to save money. If you observe the table carefully, you will notice that it is possible to save some money in each item listed there, because the listed expense is the maximum amount that one can spend. If you are able to save some money from the various expenses listed in the table, that is nothing but generating savings from the budget exercise.
This chapter talks about the safety, income and growth of our money.
Investments are the deployment of our savings into activities that generate growth in capital and thus increasing wealth. Examples include buying a home or land, placing money in fixed deposits, buying gold or jewellery etc.
We do not get high returns or interest on money deposited in banks. Due to inflation and costs rising, the value of our rupees gets eroded. Our capacity to buy goods from the market for our needs is depleted as a result. It is essential to invest in order to ensure that our purchasing power remains intact in an inflationary environment so that rising costs do not affect us as much. In other words, our savings can be impacted by inflation but our investments will not be.
Deposits in banks give us a fixed return but investing money means that your funds are liquid and also can be deployed in several places. Investing is a modern and sound technique of saving.
Everybody can meet their basic needs using savings but if you have big aspirations and dreams then investing money is the only option.
The idea behind investing money is growth in capital. This means that while investments carry higher risks than savings, there is a chance of getting higher returns too. Investments are a good option especially for the long term horizon.
On the other hand savings are safe and secure, but the growth in capital is slow and low. Savings are a good avenue for keeping money safe and intact, which is useful in meeting your short term objectives.
|Benefits of Investments||Importance of savings|
|• Investments are long term in nature||• Savings are short term in nature|
|• There is scope for higher returns in Investments||• Savings that are deployed grow very slowly|
|• While Investments are riskier, there is a possibility of higher returns||• Savings are less risky than investments|
This chapter explains the stepwise procedure of opening a savings bank account and details the operation of the same.
A bank is an institution authorized by the Government, which accepts deposits from the public and companies, pays a certain interest rate on them, clears cheques and provides loan funds with certain terms and conditions. In addition banks are supposed to operate a transparent mechanism of monetary transactions and provide other financial services to its customers. Banks play an important role in the budgetary process and economy of the nation.
The first step in the investment process is to open an account with a bank. In addition to keeping our funds secure, banks also pay a certain rate of interest on them. One can also place one’s savings in a fixed deposit with a bank for a specified time so that a higher interest rate may be realized, which is beneficial to the account holder.
The objective of this chapter is to explain the various products available for insurance and pensions. This chapter also provides information to the consumers of these products.
An insurance policy is a contract that promises to pay the policy holder a specified amount in the future in the event of any accident, incident or damage.
Premium is the amount that the policy holder pays, either at one time or periodically, in order to insure himself against the risks and receive compensation. In return for this premium, the policy holder or their family or both are provided insurance coverage.
Types of Insurance
A. Life Insurance
This includes policies which are directly related to the life of a person. These policies provide for a specified amount to be paid to the insured person, or to their beneficiaries or family members in the event of a particular accident or occurrence taking place. This type of policy is the best way of ensuring financial security for the family of the deceased, so that the family can continue with their lives with self respect. There are several types of such policies:
One time payment policy:
This type of life insurance policy has a contract wherein one time premium amount has to be paid by the policy holder such that for the rest of the holder’s life or for a specified time period, the holder is under insurance cover without having to pay any additional amounts as premium.
Money back policy
This is a policy which pays back the premium amounts. In such a policy, instead of receiving a lump sum amount at a particular point in time, amounts can be received periodically. Such a policy is ideal for those who invest their funds for a smaller duration of time and in instruments that grow faster in return terms.
ULIP ( Unit Linked Insurance Policy)
Pensions are a type of life insurance. Pensions are a periodic and regular payment made by states to officials who have crossed the age of retirement or to their widows, disabled or differently abled persons.
B. General Insurance
Such products include policies which are not directly related to the life of individuals. Such policies insure the policy holders against risks to their wealth and health. Such policies are of the following type:
Points to note while purchasing an Insurance Policy:
Things to avoid:
This chapter aims to provide information about various government schemes and investments in capital markets. Additionally, this chapter will attempt to provide information about how the schemes can be accessed and the procedure thereof.
The Government organizes various schemes to promote savings and investments by the citizens of the country. The Government encourages savings and investments by promoting various schemes and products.
This is a good scheme for farmers. Using this scheme, it is possible for farmers to easily borrow funds for agricultural purposes. This enables farmers to buy tools, seeds and other essential items in a timely manner. This scheme is the primary tool for providing credit to farmers in a timely and efficient manner. This scheme provides a simple and quick way for farmers to borrow money for agricultural needs.
Under this scheme, farmers are provided with a credit card and a passbook. This contains the borrowers name, address, land details, duration of the loan, tenor together with passport sized photographs of the borrower. This card can also be used as a identity document.
This chapter explains about capital markets, their benefits and also the points that need to be borne in mind while investing money.
The capital market is a market where buyers and sellers or companies and Governments can raise long term funds. The markets work with financial security instruments like bonds and stocks. The duration of this market is for one year or longer. The capital market is the most important component of the Indian financial system.
Of all the avenues available for investments, the capital markets are considered to be the most challenging but also potentially highly profitable. The capital markets consist of equity and debt markets in which companies and Governments are participants. They raise capital from public investors for the long term and thereafter such investors can trade such equity securities amongst each other.
Equity shares in day to day use are also referred to as stocks or shares. They represent a fractional ownership of certain companies. Equity shareholders participate in the profits and losses incurred by a company to the extent of their shareholding in the company. Such shareholders are members of the company which gives them the right to express views on the company’s proposals and also to vote on the same.
Dividend payments are not guaranteed for equity shares. Shareholders are deemed to be the owners of the company. Companies pay dividends to common shareholders only after repaying creditors and servicing preferred shareholders. These shareholders are deemed to be the owners of the company and they have the right to express an opinion on the matters pertaining to the company. In case the company makes a loss, they get a lower or even zero dividend. In case the company makes profits, the highest gains are made by such shareholders as well.
Equity shares represent ownership in a company by its shareholders. When one buys shares in a company, a share certificate expressing that ownership is issued to the shareholder.
Mutual funds are a kind of collective investment. On a collective basis, investors deploy funds in stocks, short term investments or other securities. There is a fund manager in a mutual fund that determines the investments to be made by the fund and also maintains the records of gains and losses of the fund. The gains or losses thus generated are distributed to the investors in the fund. The mutual fund management company collects funds from investors and also charges them a fee for the service. After deducting the fees, the remaining funds are then invested on behalf of the investors in the market. The advantage of investing in such a manner is that the investor does not have to manage buying and selling of shares since the fund manager is performing the role instead.
Although Mutual funds are a convenient way of investing money for investors, there are several risks associated with them. The amount invested in the mutual funds can increase or decrease depending on the performance of the market. It is therefore essential that investors are fully aware of the risks before committing to invest in mutual funds.
A debenture or a bond is a contract. One party is a lender while the other party in the contract is the borrower. The contract contains details of the rate of interest, the dates on which the interest is to be paid as well as the date of repayment of the principal amount. Loan instruments issued by the Central or State Governments are called bonds while instruments issued by companies in the private corporate sector are called debentures. These are rated by credit rating agencies.
For Investors seeking a regular and steady income, debentures or bonds are ideal. Such instruments have higher rates of interest as compared to deposits in banks. Some bonds also offer tax savings.
Rights of shareholders
This chapter explains the points to be mindful of before and while engaging in investing activity. Additionally, knowledge of resolution of complaints and contact details for the same are also provided.
This chapter intends to caution citizens about various schemes floated by fraudulent companies/persons and to take preventive measures to avoid losing their hard earned money. This chapter attempts to make investors aware about various fraudulent schemes floated and features through which such schemes can be identified.
The common forms of fraudulent financial schemes which rely on doubtful/unviable business models are:
The answer can be:
The answer can be: