New Financial Year is something, not very different from a new calendar year. All of us look back at the year gone by, sigh at the mistakes made and swear not to repeat them in the new year. In India, as our financial year ends in March, and the new year starts with April, its time we make some “Financial resolutions” for the coming year so that we do not repeat old mistakes and do better investing and tax savings.
1. Get rid of the habit of having too many credit cards
Those who are young and have just started to earn, feel highly honoured being offered free credit cards and enjoy earning points on those by spending more. My dear friends, nothing comes free. Your spends through credit cards involve a transaction fee, which is built-in the cost of the product or services you buy. Secondly, you land up spending much more through credit cards than with actual money.
I am not saying that you should stop having a credit card. But use it for emergency purposes like booking a train / flight ticket online where you have to use a card. Also, limit the number of credit cards you possess to two, so that you are not caught in a debt trap. Having multiple cards and spending on all of them, you tend to lose track of the payment dates and would be required to pay heavy finance charges and late fees.
2. Don’t save what is left after Spending. Spend what is left after Saving
This is a Warren Buffet principle of saving and investing. Whatever you earn, if you decide to save after spending for the entire month, chances are, you may be left with peanuts. Rather, decide on an amount you would be saving every month so that it automatically control your spends.
An SIP is a great tool for doing so. Pick up some good mutual funds and start an SIP. When the money is invested in the very first week after it is credited to your account, that much saving is already done. You are free to spend the balance money for yourself without bothering about savings now.
Now, how much do you save? A thumb rule is, you should save at least 26% of your annual earnings. If you are not saving this much, it is time you revisit your spends and cut down those unnecessary. This will ensure not only a comfortable retirement planning but also give you some back-up in case of an unfortunate job-loss (as seen in the recent meltdown).
3. Get Adequate Insurance
Cutting down unnecessary expenses nowhere suggests that you cut down on your insurance cover. Both Life and Health insurance are extremely necessary taking into account the well-being of your family. Life Insurance will ensure safety for your family in case of unfortunate death of the earning member. Likewise, health insurance will safeguard your financial planning from going for a toss, in case of an accident or critical illness.
For Life Insurance, choose term insurance which will give you maximum risk cover at the lowest cost. Do not get lured by ULIPs which fail at both fronts i.e. insurance and investments. (Please read my blog “Look before ULIP” for more info on ULIPs)
For health insurance, go for a family floater policy. This gives you good amount of cover at a lower cost. Most of the employers provide the health insurance policy to employees. I would still recommend buying an additional health insurance as it helps the employees when they change jobs or start up on their own.
4. Don’t leave everything for March
I have seen many professionals, procrastinating investments, insurance, tax saving etc. for March. What these people end up with is buying a wrong product (generally ULIP) which is a highly beneficial product, but for the Advisors (as it fetches them fat commissions).
My personal opinion is to keep insurance and investments as two separate avenues to get good life risk cover and get good returns.
Best idea is to start making your investments in April itself. This will give you good time to study the products, and also earn good returns throughout the year. Also, never make mistake of timing the market. Remember, “Its not timing the market, but the time you spend in the market, that will create wealth for you”. Thus, an SIP model helps you make investments in a staggered way and do rupee cost averaging.
Let March be a month for everyone else to make hastened decisions while you smile, looking at them running around and seeking your advice.
5. Look beyond tax Saving
There are many of us, who are earning in excess of Rs. 5 Lakh a year and still stop at saving Rs. 1 lakh. You ask them a reason and they would say, “80C would give tax benefits only for Rs. 1 lakh”. We recently also heard many people demanding that the overall limit of 80C should be increased.
My question is, whom are you saving for ?? For yourself or for the government ?? If you are saving for your own future, why do you want the government to incentivise you for that ??
This is like saying, if tomorrow, the government stops imposing fines for people crossing railway lines, would you start crossing them ? Is it only government’s responsibility to safeguard our interests ? Shouldn’t we take some responsibility for ourselves ?
The point is, do not stop your savings at Rs. 1.2 Lakh (as per the new budget) just because you get tax saving upto that amount. Make sure that you are saving at least 26% of your annual income and investing it in securing your future.
6. Do the right Asset Allocation
“Divide and Rule” is the name of the game. “Do not put all your eggs in one basket “ is something every person on the street will also understand. Its time we retrospect, where have we put all our eggs.
Putting all your savings in the equity market is definitely not a great idea. But then putting all of it in fixed income products in such an inflationary environment is also heading towards disaster. So what should you do then ?
Make an asset allocation depending on your age and risk profile so that you minimise the risk and maximise returns. Seeking professional guidance can definitely help you. But beware, a blind trust on the Investment Advisor is definitely not recommended. Give some time understanding, where and why he is putting your hard earned money. Demand services like periodic updates on your portfolio so that you know which way your money is growing. Reviewing and rebalancing the portfolio is the least you would be expecting from your investment advisor.
7. Be an alert investor
Practicing alertness from day one would be much better than blaming someone after things go wrong. Although we might try n excuse ourselves to be “too busy”, we have some basic responsibilities of our own money. Few of them include, keeping a track of the bank account statements, credit card statements, mutual fund account statements, insurance policies, income tax returns etc. A regular review of each would keep us updated about the current position and would prompt us to take a timely action in case of something not being in place. Paying charges such as late payment charges on credit cards or late charges on insurance policies or interest on tax not paid on time, would be a sheer insult to our hard earned money.
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(The views mentioned in the article are personal opinion of the author. The readers are advised to use their own judgement and consult their investment advisor before making any investment decisions.)