By Vivek Bajaj, Cofounder StockEdge and Elearnmarkets.com
Albert Einstein once said, “Compound interest is the eighth wonder of the world. He who understands it earns it; he who doesn’t pays it.”
Once again, a year ends, and most people will make New Year’s resolutions, many of which they will break within a month. The same is true for investing; many believe that the stock market is a game of luck, but this is not true; one must be disciplined while investing to achieve a considerable fortune.
We’ve all heard of Mr. Warren Buffet, an ace investor who amassed 90 per cent of his fortune after the age 59. So, this year, let us commit ourselves to stick to the practice to reap the benefits of compounding.
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As said by Benjamin Franklin, “By Failing to prepare, you are preparing to fail,” every person should undertake financial planning once a year to know where they are at the end of the year.
A financial plan gives you an overview of your finances. It analyses your assets to your liabilities and investigates your financial objectives and the activities you may need to take to accomplish them. So, once a year, you should look over your financial strategy.
Checklist for End-of-the-Year Financial Planning:
Examine Your Current Portfolio
The end of the year is an ideal time to review the portfolio. One may look at their returns this year and compare them to the benchmark. One can check whether there are any overlapping investments; if so, such investments should be avoided since they would reduce the total portfolio return. An investor, for example, investing in a Large Cap Fund (Index Fund) across various AMCs will result in overlapping investments because the AMC will most likely be monitoring India’s Nifty 50 Index. It is advisable to avoid such mistakes.
Tax Planning
An investor should do tax planning before investing. There are several ways to save taxes; believe me, they are all legal. One might invest in an ELSS scheme (Equity Linked Saving Scheme), which reduces the investor’s tax burden and offers a good return on their capital. One might also register the loss in the investment to get benefit from taxation (STCL can be set off with both LTCG and STCG, but LTCL can only be set off against LTCG). An investor can use several permutations and combinations to improve their post-tax return.
Also Read: Income Tax: How to stay tax compliant in 2023 and beyond
Paying down existing debt or its substitute
According to Adam Smith – What can be added to the happiness of a man who is in health, out of debt, and has a clear conscience? Many people accept debt by believing they are getting Assets, but in reality, they are buying Liability. Some people purchase durable items on a credit card or EMI to sustain their living standards. As a result, they fall into debt traps. Banks provide credit cards to customers and provide them with interest-free loans for 30-40 days. The bank charges the customer interest at a very high rate if the borrower fails to pay the loan in full by the due date. So stay away from such pitfalls. One may also undertake debt refinancing, which involves taking a new loan to pay off an existing loan (for example, taking out a loan at 7.5 per cent pa and paying off an old loan at 9 per cent pa).
Increase the proportion of investment
Every investor puts a specific amount of their earnings into equity or debt. The percentage of investment must be increased year after year. As time passes, an individual’s earning ability or saving capacity increases, so they must make their investment. This is not limited to investments; it may also be done with any debt. This allows one to reach Financial Freedom much sooner.
Obtaining Insurance Protection
If a child, a spouse, a life partner, or a parent depends on you and your income, you need life insurance. – Suze Orman. Life is uncertain. As a result, one must have insurance to protect themselves from the unknown. It is an expenditure that we must all bear. Insurance includes not just term insurance but also medical insurance. Before purchasing any insurance policy, one should conduct thorough research because there are many con artists whose only goal is to sell insurance and collect commissions.
Start Investing
Last but not least, begin investing. When people ask when they should invest in the market, the answer is “Now”. Most people start investing late or try to time the market and lose their capital. Nowadays, there are several investment instruments available, the finest of which is the SIP (Systematic Investment Plan). SIPs can be started at as little as Rs 100 per month. This is the ideal approach to enter the market since the money will be deducted automatically from your bank account. An investor will also benefit from compounding (remember the quote by sir Einstein). Before investing in SIPs, one must consider the expense ratio because it directly impacts the returns.
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Irrespective of a bull market or a bear market, one must do financial planning and start taking action accordingly. We should also increase our revenue streams so that our investments don’t stop. But Investing doesn’t mean that we need to sacrifice our needs. Periodically one should enjoy their money by spending on vacation, etc. Compounding creates outcomes over time.
Stay focused and have a prosperous investing journey.