With 2020 fast approaching, it’s time to reflect at the financial decisions you have made this year. From the loans taken and the investments made to salary increments and lifestyle upgrades, taking into account all the new changes to your financial life is crucial. This will help you better organize your financial health and start off the New Year on the right foot. Moreover, you will get plenty of time to plan your taxes before the current fiscal year ends. While keeping track of your finances should be a priority throughout the year, let us see what factors you should keep in mind while doing the year-end planning.
The calendar year end although is not the financial year end in India, but it is still a good time to review your financial planning.
1. The first thing to do is to review your year for any major changes in your life or financial situation
a) Did you switch jobs and get a raise this year?
If yes, congratulations. More income should mean more money to spend but it should also result in more savings. Try and increase the % of salary that you save as you earn more. This is the secret to building wealth over time. Review your on-going SIPs and step them up by at least 10-15%.
b) Have your expenses increased this year – including EMIs on any new loans?
You may or may not have an emergency fund set up yet. Set one up or if you already have one you might want to top it up to ensure you have 4-6 months worth of your living expenses (including any EMIs) in your emergency fund. You can set up your emergency fund by investing in Liquid Mutual Funds or FDs. Don’t leave that money lying around in your savings bank account as you will end up spending it.
c) Has your household changed this year?
In case you got married or had a kid, several changes in your financial plan are in order. Firstly, increase your life and health insurance coverage and ensure that the new dependent(s) are provided for. Then see if you need to start another financial goal like children’s education etc. It is a good idea to make a budget otherwise your expenses will feel like they are getting out of hand. Discuss with your significant other and fix a savings target and stick to it.
2. Max out your tax saving investments
Every year you can invest up to Rs 1.5 lakh in certain tax savings instruments like PPF, Tax Saver FDs, Tax Saver Mutual Funds etc which is tax exempt under section 80C. Make sure you are maxing out on these. Your HR will usually require investment proofs by December or January end so try and finish this off before then. Consult your financial advisor on which 80C investments to make as per your risk profile.
3. Pay off your credit card debt
If you have any outstanding credit card debt, make it your first priority to pay that off. Interest rates charged by credit cards are exorbitant and can go up to 40-50% per annum (compared to 15% for a personal loan). It is even worth borrowing some amount from your friend or parents and pay off your credit card debt immediately and then slowly return them the money from your savings.
4. Review all your financial goals
Take stock of your progress on all your financial goals and check if you are on track to achieving them in time. If needed you may have to top some of them up to get them back on track. In case you haven’t laid down any financial goals for yourself yet, this might be a good time to do so. Emergency Fund, Tax Saving and Retirement are three goals that you can start with.
5. Review your spending, plan a budget for the new year and set up SIPs
It is important to look back at the year and see how much you spent. How much of it was planned and how much was impulsive and could have been avoided? Did you meet your savings target? If not then fix a savings target (20-30% of your salary is a good number to begin with) and set up automated savings for that in way of SIPs in Mutual Funds or Recurring Deposits depending on your preference of investment type. Set up your SIPs for a day close to the salary day so that you save first before spending rather than the other way round. Plan a budget for the rest of the amount and make sure you don’t exceed that in the new year.
6. Get help from a financial planner
If you feel you can do with some help regarding your finances, then seek out a fee-based financial planner who can help you prepare a budget and ensure that you have adequate insurance and savings. The sooner you get a grip on your money, the better it is and it will also prevent you from making any expensive but avoidable money mistakes. You can engage the planner on a one-time basis and then continue if required.
(By Ankur Choudhary, Co-Founder & CIO, Goalwise.com)