How good are you at planning?

Failing to plan is planning to fail. This saying we have heard so many times, yet most of do not even put the little effort required to plan. We are ready to plan for everything, but when it comes to our financial future we leave it to fate. We plan for buying a house, but have we worked on a plan for it, think…. Most of us just work on the minimum sum required and then depend on a bank loan and then only keep hoping you have your job intact so that you would be able to keep paying. Even for your children’s education, you will start collecting all your certificates to pledge or break to collect the money or go for the loan and then keep hoping things fall in place. Why don’t we start planning in advance? We plan for everything, so why not some long term financial planning.

When we have to go for a holiday, we plan months in advance, foreign exchange, visa, tickets, hotels, places to visit etc. but for basic things like home, child education or even marriage we do not plan our finances. We plan everything around it. I know of a few friends of mine, who on meeting me or even over phone, say good article, we have to start planning, but let some money come first. I know these persons find planning a drudgery, so they keep procrastinating. A little effort and everything would look simple. This happens with most things. How many of us plan to start doing exercises daily. Almost all of us, but only a few do it, since it requires effort. Same is the case with financial planning. If we plan in advance, the amount you need to keep aside a month would be very small.

You could start a SIP in a good mutual fund and watch your money do the work for you month after month, but you need to start. All it needs is a change in attitude. We just follow the advertisements, almost all banks advertise easy money and we start believing. But do you realize that after the loan, you are under so much stress, month after month. All this is just because of lack of planning. Most of us have gone through this phase and how relieved we were when the loan was repaid. The relief was not because you repaid the loan, but because you were able to get away from the forced commitment, which you had walked into because of lack of planning.

I think its high time you took financial planning a bit more seriously.

Should one trade frequently?

One of my friends called me asking for a tip, so that he could make some money in the stock market in the short run. The next question I asked him is, how much does he plan to invest and he proudly said Rs.20,000/- to 30,000/- to really make big money, you actually need to invest big and your bets should always go right. There are many more costs involved, which most of us do not consider when we talk of trading frequently in the stock market. Let us look at some of them. For every purchase and sale of a stock you have to pay brokerage costs. Why do you think brokers happily keep giving you tips? The tips are so that you trade and with every trade they make money. Remember that whatever profit you make from that a certain portion has to be paid as brokerage costs, both at the time of purchase and sale. So this brings down your profit. In addition to this brokerage fee, you also have to pay a transaction fee to stock exchange and depository charges, add to this the service tax. Now look at your profit. It would be quite miniscule.

The next thing to consider is taxation. Frequent trading means capital gains. Short term capital gains is taxed at 15%. So from whatever you made after paying the broker, stock exchange and government, the Income tax department would be standing at your doors for their share of 15%. Short term capital gains has to be paid for any stock sold before one year from the date of purchase. But if you had held it for at least a year, there is no capital gains tax. From the tax angle, frequent traders are sometimes treated as doing business of buying and selling of shares, in such a case, if you are in a higher tax bracket, you might not get the benefit of capital gains tax.

You might make some money in the short run by doing frequent trading, but with so much volatility, it is better to be careful. In the past few days you would have seen the sharp volatility in the prices of stocks. So go stop looking for short term gains and make money by investing in good stocks for the long haul.