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Having rethought through Part #1 of this series and the comments which followed, I should point out that the choice of financial instruments also depends upon when you expect to utilize the funds built-up in working towards your goal. For example: the financial instruments applicable for a short-term goal of purchasing a washing machine may not be relevant for a short-term goal of increasing your emergency fund.
In this post, I’d like to focus on the financial instruments available for working towards my short-term financial goals (i.e. goals which are ≤ 6-months away). My short-term goals generally comprise a set of purchases that I plan to make over the next six months (for example, a household electronic good such as a washing machine, a refrigerator, etc.). I realize that your short-term goals could be entirely different from mine. If such is the case, simply drop a comment to this post or email me with your specific situation and I will follow-up with a post dedicated to each of your queries.
Coming back to my situation, to plan for and meet such purchases, the best financial instrument available to me is a fixed-deposit linked savings account (commonly known as a money multiplier account). I create a simple cash flow matrix using Microsoft Excel, identify how much I need to put aside each month, and transfer this amount each month into a fixed-deposit linked savings account. The prime concerns in this situation are safety and liquidity of funds — a savings account that auto-sweeps extra balance into a fixed deposit is the perfect choice. Just ensure that such an account does not charge any form of penalty for reverse-sweeps. When it’s time to make the actual purchase, I simply withdraw the required funds and pay for the purchase with cash.
With this approach, not only do you not have to use your credit card, you are also rewarded by the higher interest rate applicable on the auto-swept funds. Done regularly, you also get into the very good habit of saving up cash for any purchase.
Tax implications: The interest amount earned with this financial instrument directly adds to your taxable income. You will also need to check with your bank for any tax deducted at source (TDS) applicable. (This section was requested by reader Sreenidhi.)
Again, if you’d like me to comment on your specific situation, do drop a comment (if you’re comfortable) or email me.
If you’re a new reader, you can find a backgrounder to this series at:
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