How to become a millionaire using Tax Savings?

Hi Friend,

If I ask someone on How to become a millionaire, he / she may be tempted to say it needs great intellect, shrewdness, luck etc., etc.,

And if one say that observation, commonsense, knowledge of basic math (that you learnt until your 10th standard) and a bit of discipline is all that you need to become a millionaire, one may be surprised. 

Here are some of my observations on how these make you a millionaire.

Observation 1:

Almost all of us do tax savings. My observation tells me that most of us do these savings towards the end of a financial year for various reasons like,

• Money will be stuck up with the tax instruments, so I should invest it as late as possible in a financial year, and use the funds to meet some other needs in the mean time.

• Markets are quite high in the beginning of a financial year, so I will wait towards the end of it.

• All my colleagues are doing it at the end of the year. As majority of them are doing that way, they might be right and I shall follow them etc.,

Let us be clear about tax savings instruments. Government is giving us tax benefits as it wants to induce us to do some savings, which will be useful to us when we can not earn / stop earning.

The reasoning is simple; it cannot provide social security to all of us. So, it is tempting us to take care of ourselves. How effectively we make use of this temptation is up to us.

Small improvisations in how we invest in tax saving instruments will save us a few more millions. Let us check how.

• Instead of doing tax savings at the end of a financial year (that is from January to March), if we do it in the beginning of a financial year (that is in the month of April) we will be, effectively, letting our investments grow for one more year.

• The impact that it has, in the long run, can be gauged using basic mathematics i.e. by making use of the compound interest formula.

• No problem even if you don’t remember it. Just make use of the following link. 
• http://www.moneycontrol.com/planning_desk/magic.php#

• I presume that you invest Rs.1,00,000/- in tax based mutual funds (As these are the best, the most transparent and efficient tax saving instruments available in India for the long term wealth creation ).

• Assume that you leave the above investment for your retirement that is until after 30 years. At 12% compounding the 1 lakh becomes Rs.29,95,992/-.

• Now if you do the same investment in march i.e. one year lost, it becomes Rs.26,74,993/- at the same rate. That is approx a loss of more than 3 lakh.

• If it is the case for 1 lakh invested, imagine what we are going to lose in our entire tax saving career. And imagine what will be the loss if the rate of return is 18% instead of 12%. One will be loosing millions. 

• The above makes it clear that doing tax savings at the beginning of a financial year is beneficial.

• I have a statistic to tell you here. One might be tempted to ask that the 12% return that I am using for calculations is not guaranteed. Yes it is not guaranteed. 

• But, for the last 30 odd years the SENSEX has given a compounded return of more than 16% and good equity based mutual funds have given a return that is 40-80% in excess of the SENSEX return for the last 14 odd years.

• I am saying 14 as it is only 14 odd years since private funds are allowed.

Observation 2:

• If one invests Rs.5000/- every month, in a good equity based mutual fund, for 30 years and do not withdraw from it, @12% the amount becomes Rs.1,52,60,066/- , Which is substantial and should be useful to take care of the retirement needs of a Middle class person.

• I am sure that you might have made similar observations in your investment career. 

• I request you to share them with me, so that I can in turn share them with my other friends.

Thank you.