A new financial year has just begun. Towards the year end, most of us were running not just to meet our sales targets but our investment targets too.
You made those tax saving investment decisions in a hurry. You did not understand the products completely but had no time or will to do a proper assessment. What could you do? You just did not have enough time. You resolved that this would never happen again and you would plan better next year.
Well, the year is gone and so is the resolution. You will wake up again in February and March next year. In this post, we discuss six financial planning tips that will not only remind you of your resolutions but also work wonders for your long term financial health.
#1 Start early with your 80C investments
You don’t need to wait till your employer asks for investment proofs. Start early. There are benefits too. For interest bearing instruments such as PPF, the earlier you start more interest you earn during the year.
For equity products such as ELSS (equity linked saving schemes) you get the benefit of rupee cost averaging by investing through systematic investment plans (SIPs).
#2 Don’t mix investment and insurance
Almost all of us have been hurried into buying an insurance policy just to save taxes. These policies were projected as great investment products. We realized much later that the returns were great only for the intermediaries. Traditional plans are opaque and strictly avoidable.
Even though unit linked plans are a massive improvement from the ones launched 10 years back, an average investor finds it difficult to assess actual costs. So, avoid such plans too. Calculate your insurance requirements properly and purchase a cheap term insurance plan to cover life risk.
For investments, there are so many avenues such as mutual funds, bonds, PPF, EPF, NPS, fixed deposits, gold, real estate etc. You don’t need to purchase insurance plans to meet your investment needs.
#3 Save, and then spend
Generally, we save/invest whatever is left after taking care of monthly expenses. No wonder most of us struggle to save.
Ideally, it should be the other way round. First, you must look to invest and then spend whatever is left after investing. Of course, non-discretionary expenses must be taken care off first. However, by following this discipline, you will certainly be able to cut down on your discretionary expenses such as dinner/movie outings, leisure travel etc.
There is where systematic investment plans (SIPs) into mutual funds can help you. SIPs bring the requisite discipline to your investment and spending behaviour. Believe us it won’t even affect your lifestyle much. Probably, five dinner outings per month will go down to three. But this habit will serve you well in the long run.
To be honest, it can be difficult initially if your non-discretionary expenses (rent, loan EMIs, food etc) are quite high. In that case, you need to increase your income.
#4 Say no to credit card or personal loans
Not every debt is bad, especially the one used to build a long term asset such as housing loan.
However, the loans which have popped due to impulsive shopping or good sales pitch (personal loan for travel) are not good.
Use of credit cards is fine till such time you pay your monthly dues in full. If you cannot do that, you are living beyond your means. You may be justified in availing a personal/credit card loan in case of an emergency (medical/financial), but there is no excuse for taking such loans for furnishing the house or a vacation abroad.
Remember 0% interest EMI schemes are not really zero percent interest loans. Banks are too smart to give easy money to retail customers.
#5 Purchase health insurance
Your employer might have provided you health insurance. You need to consider if the cover is adequate or covers everyone you are financially responsible for (parents, spouse, children, siblings).
Moreover, such health cover ceases upon termination of employment. There may be an interim period during switch of jobs (after leaving current employer and before the cover from the new employer gets into force) when you might not be covered.
You can opt for a top up plan or a ground up plan depending upon your requirements. The sooner you start, earlier the waiting period for existing or specified illnesses gets over. There are associated tax incentives too for purchasing health insurance under Income Tax Sec 80D.
#6 Spend your salary bonus well
Most of us receive annual bonuses in the first three months of the financial year. This bonus shall be spent judiciously and not just on leisure. A number of us struggle to do a simple cost benefit analysis.
If you have a loan which costs you 15% per annum, you should first use your bonus proceeds to square off that high cost loan unless you can find an investment opportunity that offers you guaranteed post tax returns of more than 15%. Of course, there are no such products. Hence, go ahead and square off that high cost loan.
Please note a home loan comes with certain tax incentives and may require a little complex analysis. Additionally, use bonus as an opportunity to increase allocation to investments.
Money is not an end in itself. It is merely a means to an end. Nothing makes less sense that seeing your wealth grow but not using the wealth to enjoy your life. What good is your wealth if you never use it?
So, there is nothing wrong in enjoying your life to the fullest. However, don’t make impulsive decisions, control those urges of entitlement a bit and avoid those expenses that can affect your long term financial health.