Financial planning options to follow for a well-balanced FY17

By: | Published: April 5, 2016 12:53 AM

As April is the first month of a new financial year, it is a great idea to make your financial resolutions. So what could be your financial resolution for FY17?

As April is the first month of a new financial year, it is a great idea to make your financial resolutions. So what could be your financial resolution for FY17?

Maybe you would want to save more for your child’s higher education or wish to have an appropriate mix of investments. Here goes a list of resolutions and how to adhere to the same.

Spend less and save more

Every one of us have monthly expenses, but you may be able to reduce costs in multiple ways ranging from refinancing to a lower housing loan rate or shopping during discounts. Discretionary expenses those ‘nice to haves’ actually provide an even bigger opportunity for savings. If spending less is your goal, take a look at how often you eat out and any impulse purchases. When you see how much they cost, it may provide the incentive to cut them out. Saving more is a close cousin to spending less. After getting a sense of your spending, you can begin to figure out how to increase your saving. A disorganised approach to saving will almost certainly produce haphazard results.

The point is to create a savings plan which will help you to stay disciplined. One of the simplest ways to ensure you save regularly is to make it automatic. That means scheduled, regular, automatic transfers into a savings or retirement account. If the money is not in your main account you are less likely to spend it frivolously.

Pay off debt

Another resolution that needs further details. For instance, do you want to completely erase your debt by the end of the year; reduce it into half; pay off your credit card outstanding; consolidate your other loans?

The monthly instalments can take a big slice of your income. The key is to pay down the debt with the highest interest rate first, like outstanding on credit cards. Consider paying more than the minimum each month. Set a specific goal and come up with a timeline. Ensure that it

is doable too, so you will not get discouraged.

In other words, the goals must be SMART one. Financial goals must be specific, measurable, achievable, realistic and time bound.

Plan a strategic budget

How to make a strategic budget? The best way to make a budget is to gather together all of your bills from the past couple of months and then make a list of your recurring expenses in the order of importance with true necessities like housing, food and healthcare obviously taking precedence. You can then compare the cost of these expenses against your monthly take-home or net income per month and eliminate any outliers that would outpace your spending power. After that, just make sure to compare your ensuing monthly spending to your planned budget to make sure you are abiding by the same.

Save more for retirement

General rule of thumb is to save at least 12 to 15% of your pretax income each year, from age 25 to age 67. It should help ensure that you have enough income to maintain your current lifestyle even after retirement.

Create an emergency fund

Studies in western countries says that roughly 56 per cent of the population do have any emergency fund. The scenario in developed countries itself it more than half then there is no need to mention about emerging economies like India.

People who lack an emergency fund are like someone without insurance. Persons who lack an emergency fund are merely tempting fate and putting themselves at risk of financial catastrophe in the event of job loss or significant emergency expenses. Building up some monetary reserves should be the first orders of business for any financial makeover.

It is essential to build an emergency fund with roughly six months’ take-home income. This would not happen overnight. You need not put the rest of your financial life on hold until your emergency fund is complete, but rather chip away at it over time. That is key because actually creating a six month safety net before beginning to even pay down your debts in earnest. Doing so will help ensure that you do not end up right back where you started upon finally reaching debt freedom.

To conclude, whether you decide to take on just one of these resolutions, a few or all of them, it is time to commit to making 2016-17 financial year as a year of better finances. Through saving more, spending less, getting out of debt, saving more for retirement or creation of an emergency fund you can relieve yourself of the emotional burden of financial difficulties and get closer to your goals.

The writer is associate professor finance & accounting, IIM Shillong

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