Realtors© do you have your financial house in order? Working towards financial stability is a process and two days of work won’t make us any richer than yesterday. Scientific research indicates that it takes about an average of 66 days for a behavior to become a part of your lifestyle/routine, in other words, a habit. So, if there is a good time to start working towards our personal financial goals and inculcate some financial discipline, it is now. Here are some habits one could cultivate to accomplish your goals in 2022. These are just a few simple and powerful ways that I have learned to shift my financial house in order.
Track Your Expenses - A good first step in financial planning is to start tracking your expenses. Know where your expenditure is going and how much. Sometimes, looking at things from a vantage point helps in understanding them better. So, take a look at your income and expenses from a broader perspective to identify what can be cut down and then narrow down your focus to optimizing your spending. In case it gets tedious to keep a tab of all your expenditure, expense management apps can come to your rescue. Since the apps would have a record of all your transactions, it will help you review your expense profile better and help prioritize your spending. Considering that there has been a massive shift to digital spending in India in recent years, expense management apps can come in handy for those struggling to get a sense of their spending habits.
Build Your Savings - Saving is difficult. But saving for a rainy day is essential as a solid savings base would give you a cushion to handle uncertainties in a better way. A plan for savings should begin at the budgeting stage itself. A systematic approach for budgeting often suggested by financial experts is the 50-30-20 rule of thumb. According to it, an individual should allot 50% of the income to essential expenses or “needs” (living, food, and other expenses), 20% towards personal expenditure or “wants” (luxuries and leisure) and 20% towards savings or financial goals such as investments. However, it is important to know that there is no one-size-fits-all. You can arrive at your own rule of thumb after taking into account your income and financial goals. Set a target and work towards it. If you can save more, do so by all means. And if you have reached your savings target, give incremental savings a shot. Remember: A penny saved is a penny earned.
Start Investing - It is never too early or too late to start investing. You need not necessarily be ‘The Big Bull’ or ‘The Big Bear’ in the capital markets to start investing. Start off with small but smart investments. Try convenient and smart tools like Systematic Investment Plans (SIPs). SIP has become popular for investing regularly in mutual funds. It is like a recurring deposit, but market-linked. Hence, it gives you the flexibility and convenience to invest the amount of your choice. Start small and then you can work towards having a diverse portfolio of various financial instruments once you get a hang of it. Look at low-risk mutual funds and keep long-term in mind always. Options such as fixed deposits, recurring deposits, provident funds, national pension scheme and others are other traditional yet safe bets for those with a lesser risk appetite. Don’t underestimate the power of compounding returns. Neither chase after high returns in the short-term. Slow and steady wins the race for a reason. But that said, risk is inevitable in market-linked financial programs. Hence, building a risk appetite in line with our goals is critical. One of the most important things to remember while investing is not to be swayed by the fear of missing out. Don’t wait until too long to invest, but never invest out of the fear of missing out. Always do your research and never solely rely on others’ advice as capital markets are associated with risks. Patience is a virtue.
Secure Yourself and Your Family - The importance of health and term insurance policies can’t be stressed enough. Not only does insurance protect you from unforeseen risks, but could help you in the long run, provided there is adequate coverage, by covering your medical/health costs. Your out-of-pocket expenses shall be restricted. You don’t need to dip into your savings, and they are also great tax savers! Having health/medical, term and/or life insurance is prudent and it helps secure yourself and your family in times of uncertainty. And opting for insurance at a younger age will give you benefits such as lower premium charges. But, thorough research is imperative while purchasing health/medical and life/term insurances. Carefully read all the terms and conditions, before opting for one.
Tax Planning - Tax planning is a basic and important part of financial planning. It helps in reducing tax liabilities. Therefore, don’t just look for tax savings initiatives at the end of the financial year or when it is time to file your tax returns. Start planning early, preferably at the beginning of a new fiscal year. There are various ways to reduce your tax liability such as minimizing taxable income by investing in various government schemes. Another way is to plan your tax deductions well in advance so that you could claim a reduction in taxes payable. Life insurance, health insurance, mutual funds, home loan interest and others are some of the areas where standard deductions can be availed. Bottom line, financial planning is the first step towards financial security. It’s important to set out simple goals and start off on the journey. The basics can go a long way in ensuring you have a solid start on your financial journey.
Strength and courage,
Wade
