voluntary provident fund

When I resigned from my previous job, I opted to withdraw my Employees Provident Fund (EPF) contribution. Unlike D, I don’t contribute to the Voluntary Provident Fund (VPF) — hence my EPF corpus was built on a monthly contribution of 12% of my Basic Salary plus an equal match from my employer. I filled-up the necessary application forms and submitted these as part of the exit process. This was on July 31, 2010.

I received the EPF credit in two tranches: the first on February 05, 2011 and the second on February 11, 2011. Apparently, your EPF contributions are split into two: a pension part and a provident fund part. Hence, the payout also happens in two stages.

What’s interesting, however, is the guessing game that you play in the intervening six months while you wait for your money.

  • Your employer generally doesn’t have a clue about the status of your application once they handover the forms to the applicable Provident Fund office. I’ve heard multiple versions of the processing steps at different times. Quite not sure which one’s true.

  • A good friend, who resigned a couple of weeks after I did, received a couple of status SMSes from the Provident Fund office suggesting that his forms had been processed and that the payments had been dispatched through check. I, however, never received any status SMSes.

  • Having received the lower-value pension part (through NEFT) but not the higher-value provident fund part, my friend (who’d received neither) and I spent a good couple of hours at the Bank (where we have the Savings Account into which we’d asked for the payout to happen) trying to figure out why. The Bank officials were sympathetic to our cause and extremely helpful in their investigation, but ultimately they couldn’t answer why. I received the higher-value provident fund part a week later (again, through NEFT).

  • In the interim, my friend had also managed to get someone from our previous employer to personally visit the Provident Fund office and check on our applications. We were given check numbers (they were the same for both of us!) and the amounts but we were further confused when my first credit happened over NEFT but the amount was an exact match. The Bank wasn’t sure how this was possible.

  • A couple of colleagues who’d resigned before we did told us that they’d received the full amount in a single credit — but they’d faced other issues of their own such as signature mismatches.

  • We finally decided to wait it out for a week.

Luckily the ending was a happy one — for both of us.

But why it takes six months, to begin with, is beyond my understanding.

What has your experience been?

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This is a question that I’m often asked. In fact, a couple of weeks back, a colleague whose internship was recently converted into a full-time position also posed the same question:

“Starting this month, I’ll be earning a regular salary. How do I ensure that I don’t spend it all away?”

Awesome! The road to financial discipline begins when you have the right mindset. And the fact that you’re asking this question shows that you have the right mindset.

I wish I’d asked this question when I started my career. Because, the problem with newly found financial freedom is financial indiscipline — the desire to spend it all away. And I did spend it all away. Four years into my career, I seriously wondered where all that money went and I didn’t have an answer. I wish I was financially disciplined.

In retrospect, I believe the trick to learning financial discipline when you’re beginning your career is to ensure that your money gets automatically saved each month even before it reaches your hand. When you can’t touch it, you can’t spend it.

Now, how do you do that? I’d recommend two options to begin with.

  • Contribute fully to the Employees’ Provident Fund (EPF) and optionally as much as you can to the Voluntary Provident Fund (VPF).

If your employer offers you an option to avail the EPF facility as part of your compensation, I’d strongly recommend that you take up this option. I’ve written quite a bit about the EPF in the past and I’d like to particularly highlight this point.

A quick example:

Suppose your Basic Salary is Rs 10,000 per month. When you opt for the EPF, you automatically save a minimum of Rs 2,400 each month (12% of your Basic Salary that’s directly deducted from your take home pay plus an equal match from your employer) in your EPF account. For the amount that you contribute, the deduction from your salary happens even before your salary reaches you. Simply put, you can’t spend this amount. Passive financial discipline. It’s what they call paying yourself first elsewhere.

And you could even bump-up your contribution by opting for the VPF. A strong case in point: D has been contributing an additional 8% to the VPF since she started her career almost four-and-a-half years ago. So she’s been automatically unable to spend 20% of her Basic Salary (or 8% of her Gross Salary) each month.

Automatic financial discipline. Trust me. This method simply works.

  • Start a Recurring Deposit (RD) for one year.

While passive financial discipline is good, it’s great to learn some active financial discipline as well. To do that, open a one-year RD with the bank where you have your salary account. Fix a monthly contribution that you think is doable (I’d recommend 20% of your monthly Gross Salary) and transfer this amount each month into the RD as soon as you receive your salary. Though I’d prefer that you do this manually each month (remember, you’re learning active financial discipline), if your bank allows you to automate these monthly transfers between your salary account and the RD account, set the transfer to happen a day after the expected monthly date of credit of your salary.

Do this for one year and you’ll have learned financial discipline.

12% of your Basic Salary (or 4.8% of your Gross Salary) into the EPF plus another 20% of your Gross Salary into the RD. That’s 25% of your Gross Salary saved each month. Enough to inculcate financial discipline?

What do you think?

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This is a guest post from Shilpa at Under the Rainbow. Though Shilpa claims that “she knows zilch about financial planning,” her post below proves the opposite. This story-style post on personal finance is the first of its kind on this blog and is the perfect complement to my posts on EPF.

In 1993, Mr. and Mrs. Parasher, aged 45 and 43 respectively, both government employees had just paid off their home loan. They had three children — a son studying in class eight and twin daughters studying in class five. Although Mr. Parasher was setting aside small amounts for retirement for some time, it was now that he thought is the right time to start serious retirement planning.

At that point, Mr. Parasher’s basic pay was about Rs 5,000 per month. 12% of his basic was being cut from his monthly gross towards EPF, his company was contributing an equal amount, with the total contributions being compounded at 8-9% every year (variable annually).

The first step Mr. Parasher took to secure his retired life was to voluntarily contribute to his EPF account over and above the standard 12%. He increased his contribution to EPF to about 18% (12% EPF + 6% VPF) of his basic. The company still contributed 12% of the basic. With time came promotions and salary hikes. He took advantage of this and gradually increased his VPF percentage.

In 2000, Mrs. Parasher took a voluntary retirement from service and that fetched her a sum of rupees seven lakhs. At that time, their son was pursuing Engineering degree and the daughters were still in school. The Parashers set aside this money for their daughters’ education and marriage.

Early last year, in 2008, Mr. Parasher retired. At that time, his basic pay was about Rs 25,000 per month and his VPF contribution was about 80% of the basic. He now draws a pension amount of over Rs 22,000 a month — good enough to lead a decent lifestyle.

VPF or Voluntary Provident Fund is not applicable only to pensionable jobs. Since the PF interest is compounded annually, it is a good idea to contribute over and above the EPF and transfer the account when you move across companies. You will have a sizable sum at the end of your work life.

Tip Tuesdays is my initiative to share practical personal finance tips — every Tuesday. I’d be delighted if you could share a tip or two from your own experiences. Drop a comment to submit your tip. And, as always, do spread the word if you find this useful.

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