In India, there is a prominent connection between the auspiciousness of a festival and managing one’s finances. March end witnesses the closing of balances and accounts in firms and institutions all across India. In comes April, and we ready ourselves to begin anew our financial planning standing at the threshold of the New year as per the Samvat calendar. Gudi Parva marks the beginning of a fresh year and new harvest season in Maharashtra, while North India busies itself to celebrate Chaitra Navratras. The time is considered auspicious to purchase assets like gold, start a new venture or invest money in new portfolios. Before we start with our financial planning, why not consider a few pointers to give ourselves informed perspectives and optimum knowledge?
Here are a few key areas to look upon before we begin the new financial year 2020-21 and end it financially stronger.
Financial Health Check-up
New beginnings also call in for a revision of the old. Planning is both forward and backward-looking, isn’t it? Moreover, we are amidst a lockdown due to the current epidemic, stock markets are at an all-time low, businesses are either shut down temporarily or ambling through, barely coping up with the abnormal state of the market. This makes it all the more essential to review our current state of affairs.
- Reviewing the investment as a portfolio is essential to gauge the overall returns and cost-benefit ratio. Assess the mix of investment in bonds, stocks, deposits and other liquid assets keeping in view the long term goals and risk-taking capacity.
- If the markets are showing a negative trend it is better to disinvest and go in for safer options such as bonds and deposits to reduce risk.
- Taxes play a major role in determining the quantum of our investments. Align the investments with the new tax schedule and invest in tax saving schemes like municipal bonds and ETFs.
- While reviewing our current investments, we should always keep our long term goals, such as retirement plan, child education, and marriage, updated and in sync with our short term priorities as well.
Formulating a Financial Budget
Once we have got the hang of our last year’s investment schedule and return graphs, we can decide our budget for the new year in a more informed way.
- The simplest way is to write down the ex-ante income expected to be received and the expenditure to be taken care of. We should allocate our expenses well against the given income.
- Secondly, this is the best time to cut off unnecessary expenses and find alternate channels to reduce expenditure.
- Try and have separate budgets for healthcare, education, vacations, rent, insurance and other utilities that would occur all through the year.
- Budgeting also includes setting goals, like saving funds or acquiring assets or non-financial goals such as going on a vacation or buying a fancy car, and setting aside funds for that.
Tax and Insurance Knockout
Tax planning and insurance go hand in hand. The Income Tax Act of 1961 has ample deductions when it comes to insurance.
- Health insurance for our family is the basic needs nowadays with the humongous amount of medical bills that accrue in a single hospital visit.
- Besides that, life insurance and pension schemes, ELSS mutual funds and PPF schemes offer various tax benefits to the taxpayers.
- Instead of waiting for the year-end to pay off our taxes, we must make it a point to plan our finances so as to save taxes and ensure better returns on our investments.
- We must also take care that our current insurance coverage matches our current lifestyle. For instance, a new parent should lay aside funds for his child’s education. A new employee must increase his cover to include his dependent parents. Payment of premiums should be planned as well to enjoy unhindered claims and cover.
- If required, consult a tax advisor or a chartered accountant for formulating a customized tax saving plan.
To Save or Invest?
The onset of the new year also calls for finalizing our savings and investment goals. Saving and investment aren’t a yearly ritual but monthly exercises that scale as per our monthly income or salary.
- Risk takers can go in for higher return avenues such as equity while risk-averse people can find sound investment options in term deposits with banks, PPF, NSC or even mutual funds.
- Mutual Funds require a long term view, many would say about 7 years, to grant us favourable return and growth. Hence, MFs should be a long term goal.
- Wealth creation goals also come into fore while planning our finances. If we aim to buy a property in the near future, we should plan accordingly and save more.
- We need to provide for unforeseen expenses and keep our emergency fund stocked with enough savings.
The last and the most important aspect of planning our finances is debt management. Oftentimes, we go overboard with our expenses splurging unnecessarily. Or at times, we opt for a secured or unsecured loan to pay off the instalments of our house or vehicle, or else paying tuition fees at times. While starting afresh, all previous loans and their interest must be considered.
- Credit cards are another source of short term credit, the annualized rate of which may go up to 50-60%! A home loan may eat into your pockets at 9-11% depending on the prevailing rates of interest posited by the banks. Prioritize to repay credit card debt first.
- Next, make it a priority to pay off the debt with the highest rate of interest. Online lending portals, like EarlySalary, offer salary advances and loans at interest rates as low as INR 9 per day. Use a low-interest debt to pay a high-interest debt.
- At regular intervals, channelize the savings to the loan account. By doing this we can pay off the debt early and even save on a few interest installments.
- Use debt judiciously. Monthly crunch can be met by advances such as those provided by EarlySalary. These loans are flexible and inexpensive. We must try and explore newer sources of debt as well.
Another noteworthy thing is to protect ourselves from frauds and scams. This can easily be done by protecting the financial documents from being misused. Avoid using your Aadhar card or PAN card as identity proofs in all places. This makes us vulnerable as our financial information is easily available to dupes for misuse.
Planning can only be fruitful with optimal implementation. Sticking to our schedule and keeping ourselves flexible to the changes, we can surely boost our financial immunity and help us to kickstart a new financial year without any friction.
Happy & Safe Gudi Parwa, happy financial planning!