The beginning of a new year is the most popular and appropriate time to set goals and make plans. New Year offers us an occasion to retrospect the year gone by and to preview our position in the upcoming year. If getting your financial life in order is a resolution for you this year, here are eight specific steps you can take to achieve your financial goals:
Plan Your Budget
A realistic budget is the stepping stone for a peaceful financial life. A good budget helps in maintaining the discipline in spending thereby helping you avoid unnecessary expenditures. To make a budget you need to analyze your income and expenses. After allocating money for living expenses and repayment of debts; always make sure to keep aside some of the earnings as savings. If invested diligently, 20%-30% savings of your gross income will take care of most of the future goals like retirement or housing. The budget should be strictly followed or its purpose becomes futile.
Plan for Your Financial Goals
Identify your most important financial goals; classify them as short, medium and long term and then prepare a plan to achieve them. This will make your life immensely comfortable at present and in the future. Goal planning provides great benefits no matter what stage of your life you are in. Goal-based planning helps you choose optimal investment products depending upon your risk appetite and time horizon for the fulfillment of the goals. “One size fits all strategy” in investing is a dangerous proposition. Start by making a thorough financial plan which will have a comprehensive blueprint of your goals and, strategies that would be used to achieve them.
Set Your House in Order
If you’re the kind of person, too busy to track your expenses, investments or even debts you should better start doing it because in future you may get unpleasant surprises. The key is to be methodical; list all your investments and debts and try to keep track of it periodically. If you think you are not qualified enough, hire a qualified financial advisor but don’t let your investments be unattended for long. Similarly, keep a tab on your expenditures, use apps or other freely available tools to your advantage. Exploit digital technology and automate recurring financial activities. The other major thing is to keep all important documents at a proper place known to your trusted family member or confidante so that they can find in case of emergencies.
Manage your Liabilities
Debt is a double-edged sword and should be used with much caution as unsustainable amounts of debts can lead to heavy cash outflows leaving one into a financial mess. Therefore debt repayments and EMIs should not be more than 40% of your monthly income, the lesser the better. Retire high-interest debt like credit card debt as soon as possible, these debts have enormous interest charge in the range of 36% to 48% annually and can quickly spiral into big amounts plunging you into a debt trap. Take personal loan instead which are cheaper and pay your credit card debt. Use your credit card judiciously only for necessary expenditures and avoid splurging.
Creating an Emergency Corpus
Emergencies are unforeseen events that may occur and affect your finances adversely; an accident or sudden job loss can make life difficult if you do not have enough savings. Rather than digging into your long-term investment assets like retirement or PF, it is prudent to maintain an emergency fund which could be readily used in extreme circumstances. An emergency fund should be 3 to 6 months worth of your current monthly earnings invested in highly liquid instruments like the savings account or the liquid mutual funds. Before taking up any new investment make sure to build a robust emergency fund.
Protect Yourself
Life happens to all of us. Risk management is often the most overlooked area of a financial plan, but I believe risk assessment and risk management planning should come before all other planning issues. Use the right insurances to ensure that all major risks are adequately covered through them. Term plans are the best product to get sufficient life cover at reasonable prices. The sum assured in case of term plans should be such that it repays all your existing liabilities and there are enough funds left to sustain your family in your absence.
The ever growing costs of medical services and procedures can burn a hole in your pocket or eat away your savings if you or your loved ones get afflicted by any ailments or disease. Health insurance and mediclaim can be used to mitigate such risks. Take adequate health cover for yourself and your family from a reputed insurer if you haven’t taken it yet.
Tax Planning
In India, saving taxes (mainly income tax) is one of the biggest triggers for investments by many people. Do not select substandard products in the rush of saving taxes instead carry out year-ahead planning and choose financial products according to your requirements, risk appetite and goals. While people are cautious of income taxes they tend to ignore taxes on their investment income. Many elderly people put their lump sum money in fixed deposits which attract taxes at the slab rate thus effectively reducing its yield. They could use FMP (Fixed Maturity Plans) or debt funds offered by mutual funds that are tax efficient and yields better returns than fixed deposits. Always take note of taxation and expenses associated with investments for maximizing returns.
Plan for the next generation
Succession planning is an integral part of a good financial plan but it is more imperative if you are over 45 years of age. To avoid family disputes and smooth transition of your estate to the desired heir in the proportion you want them to have, an estate plan is a necessity. Make use of estate planning tools like making a will or creating trusts so that your estate is transferred to the right heirs with minimal trouble, court cases and taxes.
The resolutions can be adhered to, only if we are determined to see the positive results in our life. Managing finances with discipline is the most vital ingredient to achieve Financial Nirvana.
Wishing all readers, A Very Happy & Prosperous New Year 2019!
Vikas Sharma, CFP®, is a first-generation purpose-driven entrepreneur with over 19 years of experience in financial services, personal finance, and the advisory space. He is a Certified Financial Planner, an IIM Calcutta Executive Alumni, and holds an MBA in Finance and a Postgraduate qualification in Financial Planning.
Currently, Vikas is the Co-Founder & CEO of The Logical Advisor (TLA Academy Pvt. Ltd.) and Goalchi Capital Solutions LLP, where he integrates life, purpose, values, and money to create meaningful financial journeys.
He has worked with a leading Asset Management Company, mentored 1,500+ IFAs and Relationship Managers across India, and educated 10,000+ investors through Financial Wellness programs. His work has consistently focused on reshaping advisor and investor behaviour to enable sustainable success.
Vikas also coaches and mentors financial advisors nationwide, helping them build purposeful and successful careers.
