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Sheetal Jhaveri shows the way to get a financial headstart in the New Year
The beginning of the New Year is always the best time to give another chance to fulfil what you couldn't in the year gone by.
2020 has been one financial train wreck. Many people's finances may have gone for a toss and many a financial trains might have completely derailed.
As you ring in the New Year, here's a list of the 10 most important financial resolutions to get your money train back on track.
1. Paying off your debt
Global debt reached a record high of $258 trillion in the first quarter of 2020. Indian household debt stood at nearly Rs 43 trillion up from Rs 19 trillion just 5 years ago.
The increase in household salary is 4.3 per cent versus increase in debt is 17.7 per cent as compared to 2015. In 2020, with slow or no business, job cuts and pay cuts, debts have increased for almost everybody.
With the benefit of moratorium, all that individuals have managed is postponement of the inevitable, with the extra burden of having to shell out extra money as interest.
Non-payment of debt not only invites loan collectors to your house but also harms your CIBIL or credit score, lowering your chances for access to finances and other financial services as required by you in the future.
Make sure to repay your debt as the number one priority in the New Year. This will not only improve your credit score but also reduce your financial burden.
2. Be informed before taking loan
There is hardly any individual who does not have debt. I am sure half of you after paying off your debt will go back to the same bank to get another one.
Make sure to do your research about the rate of interest and make sure this time around your annual debt payment does not increase more than 40 per cent of your gross income.
3. Be prepared for financial destruction
2020 has probably bought the whole world to a standstill the financial ramifications of which will be felt for next few years.
Anything can happen anytime is a lesson one has learnt this year. Be prepared at all times for financial emergencies.
No harm in mentioning AGAIN to have emergency funds of at least three months of mandatory expenses in liquid or absolute cash form (I know you are tired of reading this, but despite that I come across people who have not done it).
Get your finances in order along with emergency funds and inculcate the habit of regular savings and investing.
4. Insurance
Time and again the topic has been delved upon. But just recently, I was talking with a client who got redundant due to Covid and whose only medical insurance was from his employer despite advising him to take an independent mediclaim. Due to pandemic the medical inflation has reached 19.5 per cent from 18 per cent in 2019.
Medical treatments are expensive and due to COVID-19 and new guidelines in place, the cost of treatments in hospitals have increased.
Make a list of insurances: Medical, life, car and home and get them in order. This is known as risk management and the foundation of a good financial plan.
5. Involvement of family
Family plays an important role in financial planning. Initially only the men of the house would handle the finances. Although things have changed for the better traditions die hard. Nevertheless, now the number of women entering businesses has increased more than men. Just recently a family friend who had a roaring food business died of sudden heart attack. The lady was extremely successful. But she never discussed financials with her husband.
The husband was clueless about the money which he had to receive from her clients.
A very important part of financial planning is involvement of spouses. Have a file which lists down all your accounts with amount outstanding, in one place along with all the details be it insurances, mutual funds or shares, outstanding debts or debt to be received.
6. Your kids' education
A very important part of your kids' overall education and development. Why give other examples? I will give my husband's example who loves taking my kids to toy shops every alternate Sunday. Thankfully due to constant conditioning since their childhood, my kids will first check with me and only then pick up something or might just pick up a book (which is totally fine).
My principle is simple: if you want a toy, save for it. Let me list down three reasons why financial literacy is important at young age:
1. Financial illiteracy breeds irresponsible adults
2. Easy to pick up bad financial habits
3. Better prepares for facing emergencies
So at a young age, inculcate financial education to raise savvy investors.
7. Sort out your estate
Estate planning is always a last priority. Do not avoid it. Bear in mind that settling your money matters after you have gone is a costly affair which can have adverse impact on family equations.
Remember: Estate Planning protects the beneficiaries, protects your young children, eliminates family feuds, and can save them from shelling out big tax money.
Remember: Estate Planning is NOT only for the rich. Sort out your estate, appoint nominations and make sure to settle any disputes or dues you have so as to not leave your debt as legacy.
8. Pyramid planning
Recently I had written an article due to which I got calls and mails from many young investors which was impressive but at the same time when you ask them the usual financial planning questions about when they need the money, their investment horizon, or their insurances, that's when they are clueless.
Follow this chain: Emergency planning > Risk Management > Investment Planning > Tax Planning > Retirement Planning > Estate Planning.
Follow this hierarchy to build a strong and methodical plan with a strong foundation which no pandemic or catastrophe could shake.
9. Tax Planning
Everybody trembles at the mention of the word and people try to postpone it to the last minute. Invest smartly from the beginning and take advantages of the investment options that offer maximum tax advantages.
Resolve not to invest in benami assets to save tax, for the penalties are heavy.
Plan in advance to avoid last minute investments to save taxes which might not only yield less but also keep your money locked in for longer periods. Tax planning is equally important.
10. Develop new skills
Future holds lot of uncertainty. Just like emergency funds if possible develop new skills or an alternate way for earning so as not to face financial hardship in future.
Sheetal Jhaveri, MBA (finance) and a certfied financial planner, is the founder of Dhanplanner, an investment advisory firm. She can be reached at sheetaljhaveri@dhanplanners.com