Saving money vs. Hoarding – Know the Difference

Written by : Knowledge Centre Team

2020-11-05

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Remember your savings in the piggybank during your childhood? You put a lot of coins into the piggy bank, and that piggy bank never moved from its location, neither the money in it. Do you think you could collect more money than you saved in your piggy bank?

Not really. In fact, if you had a goal for which you’d use your piggy bank savings, it quite possibly outgrew your target by the time the piggy bank was full. The piggy bank is a small example of hoarding money. However, saving plans are often long-term and more goal oriented.

Invest to Build Wealth

Wealth building is a mix of multiple factors, and savings is one of the primary ingredients. However, saving money out of your income alone is not sufficient due to two factors – inflation and taxes.

If you keep your savings idle, like in a piggy bank, you will continuously lose money due to inflation and even taxes. However, when you invest the money you can get both the benefits of:

Tax-savings
Growth in the portfolio

Where to Invest for Risk-Free Growth?

You have multiple great options to invest and benefit from both guaranteed returns and tax-exemptions. Also, another secret of wealth building is investing for the long-term. Thus, the following investment options best suit your need for risk-free growth:

Public Provident Fund
Guaranteed Savings Plan
Unit Linked Insurance Plan

Public Provident Fund (PPF)

Returns on the scheme are backed by the government of India, so no question of safety. The scheme offers the best prevailing long-term interest on savings, plus tax benefits of up to Rs. 1.5 lakhs under section 80C.

The only limitation with this investment is that you cannot invest more than Rs. 1.5 lakhs in a financial year. At least not until the regulation is amended. Thus, the investments into PPF are almost entirely tax-free, and so is the maturity value.

Another limitation of this scheme is that only Resident Indians can invest in the fund. If you have been investing in the PPF account and you become a non-resident in a financial year:

You cannot invest any more in the existing account
However, you can continue holding your current balance until maturity

The maturity value, although tax-free, is non-repairable.

Guaranteed Savings Plans

Guaranteed savings plans are provided by the life insurance providers. These plans are great if you can invest for a long time. The longer your investment horizon with guaranteed savings plans the better your benefits become:

Guaranteed additions to the plan if you stay invested for more than 5 to 10 years
Best savings options for important goals like child’s education and marriage
Guaranteed maturity value
Option to cover the financial goal in case of your early demise
Completely tax-free maturity value while investment up to Rs. 1.5 lakhs is exempt under section 80C

The goal protection option lets you ensure that your child achieves his/her education or marriage goal even if anything happens to you. The insurer pays the life cover sum assured to your family in the event of your early death, but the investment plan continues.

The insurer will invest all the due future premiums on your behalf and then pay the maturity value to your nominee as you originally intended.

Unit Linked Insurance Plans (ULIPs)

Unit linked investments have been some of the most versatile and flexible investment plans available in India. If you want to invest safely, and still enjoy the benefits of market-linked returns, ULIP plan is a better choice for you.

While ULIPs provide similar tax benefits as PPF and guaranteed savings plans, it provides you with more investment options.

The best ULIP plans offer minimal charges on your investment along with the following benefits:

Bonus unit additions for long-term investors
Option to continue your ULIP plan till the age of 100
Invest in long-term debt funds for better long-term returns yet stable growth
Option to use equity funds for growth as and when you want
Goal protection option same as a guaranteed savings plan
Option to withdraw money for milestones or systematically as monthly instalments

The option to invest in a whole-life ULIP is useful if you want to create a tax-free pension stream for your retirement period. If you can start early you can build a significant retirement corpus by the time you retire.

Once you have large enough corpus in ULIP, you can start another stream of income using the systematic withdrawal option in the plan. Systematic withdrawal allows you to receive a fixed amount of money every month.

Since any payments received from a life insurer is tax-free under section 10(10D) of the income tax act, this effectively creates a tax-free pension for you.

Role of Life Insurance In Achieving Financial Independence

Should I consider buying a life insurance plan if I am single?

Life Insurance - Top Selling Plans

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