This is that time of the year again when we all start making resolutions for the New Year. While some people want to quit smoking and lose weight, some others want to upgrade their car or travel abroad. The more people, the more wishes and resolutions.
However, while these resolutions may be good for your health or social status, they won’t help you improve your finances. It is, therefore, in your own interest to make some financial resolutions too to put your financial house in order as well as secure your financial future. In fact, it is no longer a choice, but has become a necessity particularly in view of the government’s recent demonetization drive as well as uncertain policies.
True, by doing this you may not become a millionaire or be debt-free by this time next year, but you will surely be in a much better place, financially, than you are now. Here are 10 financial resolutions for the New Year:
1. Streamline your financial life: Human life has a tendency to get complicated, and this can happen with your finances too. After all, you not only have to make a lot more choices and financial decisions today compared to your father or forefathers, but also have to keep track of more details – ranging from credit card dues to various loan and bank accounts, and from stock market investments to health and retirement plans. But once things become messy, people not only start missing due dates and paying lots of late fees, but also adding a huge pile of debt and, thus, the penalties for making mistakes just keep on escalating. Therefore, learning how to winnow down your choices and streamline your finances is as much important as increasing and diversifying your portfolio. In fact, streamlining your financial life not only helps you manage your portfolio well, but also fattens your pocketbook.
2. Start budgeting: This will help you to separate needs from wants and also enable you to generate a cash outflow budget; preferably month-wise for the next 12 months. Next, you can earmark where the outflow will come from. There may already be a tax-free bond you have invested in a few years ago, whose half-yearly interest could match an insurance premium payment. This also ensures optimal utilisation of resources. “For a start, keep next month’s expenses in the bank account; and expenses for the next 3 to 6 months (depending on your comfort level with investing) in a liquid or money market fund. That way, money can’t be spent at a whim; but in case of emergencies, funds will be available within 24 hours,” says Lovaii Navlakhi, founder & CEO of International Money Matters Pvt Ltd.
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3. Go for micro-budgeting: Once you have done an annual (month wise) budgeting exercise, get down to a date-wise budgeting exercise for one month. Many young earners complain that they have nothing to save – they get their salary on the first, and by the end of the month (or before) it’s over. Here’s a suggestion: invest the salary you receive in a liquid fund. Some of these funds come along with a debit card and while you need not curtail your spending, you earn on these funds till you spend. For every Rs. 10,000 that you invest and do not use for just half the month, the earning is Rs 25. Every four months, you could go for an additional morning show at your favourite multiplex: a freebie that you have earned smartly.
4. Start saving for a goal in 2020: Financial planners can put off youngsters by insisting they plan for their retirement even before they are 30. In the days of instant gratification, the reward is too far in the future. Instead picture something you desire in the next two to three years. Say, the purchase of a car; or a planned international holiday with the family. “Share that goal with people you care about so that the target is known “publicly” and you know you cannot give up on it. Start putting aside some amount regularly and track the score card so you know time left for the goal, the balance amount and therefore what you need to put aside monthly. This will ensure that you start understanding investments, as also bring in discipline, the most valuable ingredient for successful investing,” informs Navlakhi.
5. Understand risks and prepare for them: The sudden demonetization announcement has proved that the greatest risk is always something that we did not prepare for. There are many risks that we know of, but seem to ignore and this year is a great time to start working at reducing if not eliminating risks. Some of these include: having too many eggs in one basket (overweight on property or even fixed deposits; having ownership of a single stock, or over exposed to one industry, or one group); ignoring rationality for emotion (getting “attached” to an investment selected by you); not writing a will (once you have assets and dependents, it is incumbent to complete a will; it can and should be reviewed every new year, may be).
6. Have a credit card with good limit: Though credit card is a double-edged product, however, if used wisely, this can come handy post the government’s demonetization drive. Demonetization also resulted in a liquidity crisis in the system and many people – for some days – did not have money to buy even essentials. “Let me share my experience. My daughter’s marriage was on 16th November, but I did not face any problem as the hotel, where the marriage was ceremonised, readily accepted my credit card. Since I had a credit card with a reasonable limit, I did not have any problem. True, do not use your credit card every now and then so as to avoid falling into a ‘debt trap’, but have it to take care of any unforeseen situation,” says market and tax expert Balwant Jain.
7. Have health insurance of adequate value and cover your liabilities: This resolution is less to do with the recent demonetization move, but is a must for sound financial planning. Since the cost of medical treatment has gone up substantially during the last few years, it is very difficult to arrange for the huge funds required to meet any medical emergency. Moreover, in the absence of any safety net like health insurance, any expenditure on medical treatment will drain your financial resources which may probably take years to recover. Apart from having health insurance, you also need to cover your liabilities. Very few people, in fact, realize the importance of having sufficient risk cover as most people look at insurance as a no return investment. Also, as the financial needs of individuals have evolved over time, there is heightened importance of risk protection combined with wealth creation. Insurance products can help provide an important protective shield around one’s financial goals and retirement savings.
8. Plan for tax investments at the beginning of the year: A majority of the tax-saving investments are made in the last quarter of the year. “These investments are sometimes made in haste, and get tied up with a wrong product for a longer period, like any bad insurance product bought in a hurry to save tax. A well planned-out tax investment plan will also help you avoid the risk associated with volatility in case you are planning to invest in equity-linked products like ELSS (Equity Linked Saving Scheme) or ULIP (Unit Linked Saving Plan) if you stagger your investments over the year,” informs Jain.
9. Pay your taxes: Almost all our investing habits are ruled by one factor – how to save or avoid taxes and invest. While the law allows us to invest in certain products to gain exemption, we do not stop there. We constantly look for investing options or ways to invest to avoid taxes. Products such as unregulated chit funds or gold schemes exist for this purpose and help create unaccounted income. “Some investors also hold their wealth/disclose their income in the name of relatives/friends to avoid taxes. The current practice of using others to exchange currency notes is a classic extension of such behaviour. Once caught, these evasive acts can cost you dearly. Moves like demonetisation (the clamp down can happen in other investments too sometime) shows the government can deal with such behaviour with an iron hand. Therefore, make a resolution that from now onwards you will always pay your taxes,” says Vidya Bala, head-mutual fund research, Fundsindia.com.
10. Look at returns not just taxes: Many investors avoid regulated products simply because they have to disclose their PAN or because they do not want to be taxed. Take a step back and look at regulated/liquid products that can provide you with superior returns post tax. You will realise options such as mutual funds or equities deliver better than your cash-based investment avenues, if you cared to understand them.