You are walking from the kitchen to the couch and back again, daydreaming about the time when things will normalize and you will be able to travel the world and the other exciting things to do once this pandemic is over.
Maybe it is about heading to a beach in Spain. While the country is still locked up in their houses, spend your evening thinking of a time when you can spend your day with tapas, sangria and a lounge chair (instead of your couch and the TV) and your nights partying with the best DJs the world has to offer.
While you’re at it, why not dream about the picturesque villages and pebble-covered beaches of the mesmerizing Cyclades Islands, Greece or just taking a boat out on the Mediterranean Sea.
As you walk the six feet from your desk to your bed, imagine standing at the very top of the Burj Khalifa. You might even take a trip inside its observation deck (the world’s highest) for a 360-degree view of the magnificent city of Dubai. At the foot of the Burj Khalifa are Dubai Mall and the spectacular dancing Dubai Fountain that will keep you entertained for hours.
How can you fund these?
Of course, the most important ingredient of the holiday plan is money. Even though Indians are good at saving, this is a major problem for those planning a holiday.
Back to the present and there is another set of people you will come across: a number of people struggling to take care of their finances. You will find newspaper headlines off late asserting:
- Rush for gold loans seen as Indians seek refuge from slowdown
- Record number of people who have removed money from their PF account. 30,000 cr withdrawn as 8 million dig into retirement fund
Nearly 35% of bank customers have opted for the Loan Moratorium.
In the current situation, many people have experienced salary cuts or even job losses. It is during such times that one realizes the importance of emergency funds. It would have made a world of a difference in the lives of these who had to either pledge their gold or dip into their retirement kitty.
Whether you are in the camp who is struggling to take care of their finances or daydreaming about jetting off overseas once things normalize it will help to take stock of your finances and prepare for the future.
How to go about saving for a rainy day or invest wisely to fund your dream holiday?
Calculate How Much You Need to Save
The first step to saving is to figure out the amount you will need. If you are saving for an emergency fund, the size of the fund would depend on several factors such as your income, lifestyle, and number of dependents, existing debt, and so on. The general rule of thumb is to have around six months’ worth of essential household expenses.
Saving for a holiday? Similarly, prepare a list of possible expenses for the international holiday and savings required. A Europe tour for a four-member family would cost around Rs 8 lakh at present.
Next Step: Save For It
Though you have the option to leave the money in your bank account, this may not be the best option. That’s because you have instant access to this money so there is a high probability that you will end up using it for other expenses.
Recurring Bank Fixed Deposit or SIP in a Debt Mutual Fund
A good idea is to put it aside every month at a place where it can be accessed at short notice and there is minimal risk. Although you have RDs as an option, they come with a fixed tenure and withdrawing it before the tenure ends means penalties.
Another advantage with SIPs is that it can be customized to our requirements. You can easily start an SIP for additional amounts or cancel an existing SIP and start a new SIP of a different amount. This is not possible with Recurring Deposits.
Recurring deposits are liquid but premature withdrawals would incur penalties. Money can be withdrawn from SIPs in debt funds without incurring any penalties and the SIP can be closed.
Up to 3 years, the taxation on debt funds and RD is similar. However, after 3 years from investment, the tax on debt funds is significantly lower than the tax on RD. While returns from RDs are taxed as per your income tax slab (which could be high as 30 percent) investors in debt funds get the benefit of indexation of long term capital gains if their holding period is three years or more.
Although the primary aim of these funds is to protect your capital, they end up providing higher returns than your savings account. Plus, there are no tenure commitments or penalties for withdrawal, which means you enjoy that flexibility as well.