Did you know that there are essentially four types of money? Doing the right thing with these four types of money will help you build healthy savings. Want to know more? Read on.
We can’t do without money. That is definitely one sentiment that nobody will deny. But did you know that there are essentially four types of money? Doing the right thing with these four types of money will help you build healthy savings. Want to know more?
When we get our monthly paycheque, our priority should be to save money first and then pay the bills. This is the general rule to encourage a successful savings habit.
But some of us need more than plain advice on saving money and making a budget for expenses. We’re going to dissect money into four different types. Each of these types has a specific purpose and must be handled in a certain manner.
Let’s get started, shall we?
Money Type 1: Spending Money
We can consider the money that we require for immediate needs as spending money. What expenses can be categorised under spending money, you ask? Well, rent payments, household expenses, and any EMIs on loans can go under this type of money.
We call this spending money because it is an amount that we need to have available for day-to-day financial obligations. Living expenses, to put it in two words.
BB Tip: Formulate a clear budget and list out all your expenses. If you find it tiresome to organise your finances, simply put aside 20% of your total monthly salary and make an attempt to manage your monthly expenses with the remaining amount. Over 30 years, are you? Then set aside 30% of that paycheque.
The next two types of money relate to your savings.
Money Type 2: Short-Term Money
Money that you save or invest for financial goals comes under this category. The funds for goals which are to be achieved in the next one to five years are considered short-term money. Here’s some advice. Invest this money and reap better returns.
Thinking of buying a car, or saving up for the down payment on that Home Loan? Salt away your money in a Debt Fund. Make savings a regular habit and ensure that your investments are accessible when you need the money.
BB Tip: Keep your short-term money far away from the market fluctuations that come with medium or high-risk investments such as Equity Mutual Funds and the stock markets.
Additional Reading: Top 3 Short-Term Investment Options
You can also consider investing your money in Debt Funds because Debt Funds are tax friendly for investors.
Additional Reading: Why Debt Funds Are Better Than Fixed Deposits
Money Type 3: Long-Term Money
The money that you put aside for any financial goals or milestones, which are generally more than 10 years into the future is considered long-term money. This long-term money will include funds for your retirement or children’s education.
Additional Reading: Retirement Planning For Everyone
With long-term investments, you need to consider the effect of inflation, because that little devil can diminish the value of your savings.
Consider Equity Mutual Funds, as they generally beat inflation over a long investment tenure.
BB Tip: If you are looking for wealth creation, consider investing in the regular Mutual Funds. You should ideally remain invested for at least more than 5-7 years to see good returns on your investments.
Money Type 4: Tax-Saving Money
Tax benefits encourage investors to build long-term savings. The fourth type of money is used for tax savings. It is always a good idea to consider investing a part of your income in various tax-saving instruments.
Tax saving should be a part of your long-term investments. You can save up to Rs. 1,50,000 per year under Section 80C of the Income Tax Act. Your taxable income amount reduces if you use your money it to make suitable tax-friendly investments.
Tax-saving investments come with a lock-in period of between 3 years to 15 years.
What are your tax saving investment options?
Investors can choose to invest in various tax saving financial products. Equity Linked Savings Schemes (ELSS) have a mandatory lock-in period of three years, while the Public Provident Fund has a lock-in period of 15 years. Other investment options include the National Pension System and National Savings Certificates.
Read This: How To Open An NPS Account Online
Too many options? Need one answer?
Look no further than Mutual Funds. Mutual Funds can effectively cater to different types of investors who may have various investment objectives and different investment horizons.
There is a Mutual Fund to match everyone’s investment needs.
Additional Reading: Understanding Mutual Funds