Having bid goodbye to 2017, we have just stepped into 2018 with new hope and enthusiasm. This is the time when lots of people make plans for the New Year with the best of intentions and are most determined to follow through with them. Most of these resolutions are related to leading a more organized and happier life. They could be related to quitting a toxic habit like smoking, losing weight or curbing on excessive phone usage. Some others may want to upgrade their car or travel abroad. However, while these resolutions may be good for your health or social status, they won’t help you improve your finances.
“It has been consistently noticed that people’s resolutions mostly revolve around the topics of physical health and mental well-being. Despite the massive role money plays in our lives, it’s surprising that structuring one’s finances never gets listed as a resolution. To create a happier future, however, there must be a healthy combination of all these topics,” says Amar Pandit, CFA, and Founder & Chief Happiness Officer at HappynessFactory.in.
Here’s how you can reach your goal of a happier, more secure tomorrow:
1. Get prepared for financial disruptions & risks: This is the age of disruptions. Things are moving and changing at an unbelievable pace. Anything can happen at any time. So, we need to be mentally and financially prepared for that. The sudden demonetization announcement of 2016 has proved that the greatest risk is always something that we did not prepare for. Besides there are many risks that we are aware of, but seem to ignore those risks. If we have already not done that, then this year is a great time to start working at reducing, if not eliminating, risks. Some of these include: having no plan for retirement, being inadequately insured or being overweight on only one or a few asset classes. So, we need to identify those risks and work towards reducing them.
2. Review your finances & define financial goals: You also need to review your finances. That is, you need to take stock of your assets and liabilities. You should also know how money works, and how to better put that know-how into motion in our daily lives. For instance, less credit card spending means more chance at staying out of debt; less spending on unnecessary purchases (like eating out) means more money to save. “Think about what you’d like to save for (kid’s education, having more children, upgrading to a new home etc.) and consider how many months or years you and your partner would need to save up. Once you’ve determined how your money is being spent plus how it should be spent, start setting goals in tandem with a more focused, positive outlook. You can start a suitable mutual fund SIP which is a very powerful tool to build long-term wealth,” says Brijesh Parnami, Executive Director & CEO, Essel Wealth Services.
3. 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. “You also need to maintain a savings budget instead of an expense budget. This will ensure that you not only save but can also indulge. Set a savings target of 15-25% of your annual income,” says Pandit.
4. Get your home in order: One goal for 2018 should be to start your real estate planning process: devising a will, organizing your assets and investments, naming beneficiaries and executors, and mapping out retirement arrangements. Take a suitable life and health insurance policies to ensure your survivors are financially set.
5. Involve family when taking financial resolutions: Make financial planning a family affair. Find opportunities to teach your kids about saving money, spending less and the value of earning compound interest; teaching them about these basic money concepts can help give you the clarity you need to focus on your family’s finances for the New Year. “Start talking to your family about finances and get them involved in household budgeting. They can participate in saving, spending and dividing up responsibility for the family budget. By getting everyone in the household involved, aiming for family-level accountability in a New Year’s financial resolution can prove to be stronger than any goal you’d have set just for yourself,” says Parnami.
6. Construct your wealth like a Pyramid: Build upon a solid base of savings and liquid investments, followed by security with term and health and insurance. Next should be your investment portfolio consisting of equity and debt and finally, alternative investments like real estate.
7. Make informed and definite choices: With every new service, product or website comes a pressure to withstand the barrage of newsletters and experiences being offered. “Understand how the introduction of something new will affect your overall financial situation before making any decision,” says Pandit.
8. Avoid having myopic vision while planning taxes: If your employer isn’t providing you with tax benefits, consider monthly tax saving in products like ELSS as they will help you save tax and create a substantial corpus over a long period of time.
9. Be smart while taking loans: Learn to make the distinction between good and bad loans. Good loans include home loans (which are long-term in nature) because the investment rate of return will always be higher than the interest you pay. Bad loans include personal and credit card loans because they tend to be very expensive due to higher interest rates.
10. Pay your taxes: Till now all our saving and investment decisions have been guided by this single factor – how to save and avoid paying taxes to the government. Although the income tax rules allow us to save and invest in certain products to gain exemption, but we do not stop there. Many of us tend to put our money in unregulated products and benami assets to save tax and generate unaccounted income. However, it is clear now that whatever you do, you can’t hide your unaccounted income from the government and the Income Tax Department. On the contrary, once caught, such evasive acts can also cost you dearly. Therefore, it is in your own interest now to pay your taxes to the government and also make it a New Year resolution.
Essentially, a Happy Life = Physical Health + Financial Health + Mental Health + Family Health. With these points in place, you can build your future tailored to your needs. And remember, the real value lies in acting on the plan to generate desirable results.