New Year resolutions are common. Every year, during this time, a lot of people decide that they would do a number of things to improve their lifestyle, careers and finances. However, many times things do go awry and the best-laid plans fail to fructify.
As far as finances go, it is important that any person draws a game plan every year and follows it to a tee. This would ensure that they would be able to build strong finances over the long-term.
As Gaurav Mashruwala, certified financial planner, puts it, “You never become wealthy by making money, you become wealthy by managing money well.” And managing money should be at the core of every financial planning. This year it’s important that you do these five things well...
Clear off debts
Start with the most expensive debt – credit cards, followed by personal loans, auto loans and some part of the home loan, if possible. And exactly in this order.
The stress to clear home loans, though it is the biggest one, should be minimum because the rate of interest is the lowest. Also, there are tax benefits under section 80C (up to Rs 1 lakh) on principle and section 24 on interest payouts (up to Rs 1.5 lakh). Importantly, lenders are assured of collateral.
Similarly, borrowers are assured of a vehicle as collateral, in case of a car loan. In addition, there are depreciation benefits.
The other two, credit cards and personal loans, are uncollateralised. Lenders, therefore, charge astronomical rates. In the former, it can be as high as 40-50 per cent whereas in case of the latter, it is still quite high as 15-25 per cent.
As a result, your finances can get completely dwindled. Ensure that you allocate a large part of your salary, post expenses, to pay these loans off. In fact, if the loans are too big, reduce your expenses to repay.
Get adequate insurance
Both life and health insurance are important. “Hedging your health hazards should be one of the top priorities,” said Kartik Jhaveri, director, Transcend India.
Of course, evaluating the exact amount for both life and health covers is difficult. But for young salary earners with no dependents, a life insurance policy of 5-10 times the annual gross salary would be adequate. For senior with dependents, this multiple could be as high as 20 times the yearly gross salary. And use the term policy route because it is the cheapest form of insurance.
Don’t time the market
Wealth making in 2009 was quite easy. Investing in stock markets, even through index funds would have given over 100 per cent returns.
However, it is not always so easy to double your money within a year. It makes sense to follow a disciplined approach by investing through systematic investment plans (SIPs) of mutual funds.
Getting on the bandwagon, when the market has already shot up 40-50 per cent, is inviting trouble. Instead put in money in a rising as well as a falling market. Investing in a falling market ensures more units of the scheme. These additional units help reap rich returns when markets turn around.
Don’t get lured by insurance-cum-investment products
The most common folly. Insurance agents aggressively push unit-linked insurance plans (Ulips) that provide both insurance and investment. But most of these products neither give adequate insurance nor enough returns.
Though things have improved on the cost front after the Insurance Regulatory and Development Authority (Irda) capped charges at 3 per cent. Earlier, insurers used to charge anywhere between 1.8 to 4 per cent for an Ulip. However, Irda had also hiked the lock-in period, from three to four, for these products.
For a common person, it is best to keep his investment and insurance needs separate.
Go for proper asset allocation
The phrase ‘don’t put all your eggs in the same basket’ holds true. Go for proper asset allocation, which includes equity, debt, gold and property. And review and realign the portfolio once or twice during the year to maintain the asset allocation. “Proper asset allocation and rebalancing the portfolio periodically ensures that you are not overexposed to a single asset class,” said Anil Rego, chief executive office, Right Horizons.