Updated: April 15, 2021 1:41:12 pm
Here comes the new financial year, but how do you make it a better one compared to the previous year? You can do so if you make a smart financial plan for the year and execute it without making any careless mistakes. FY 2020-21 was one of the most challenging years ever due to the Covid 19 pandemic that not just endangered millions of lives across the world but also led to widespread job losses and income reductions. And despite the country currently facing a second wave of the coronavirus crisis that has once again heightened the uncertainties, the accelerated vaccinations, although still in their initial phases, has put us in a slightly better position than last year. The point being, you can still cover some lost ground owing to the setbacks of 2020 and rebuild your financial strength this year if you make the right moves. I have suggested a few tips which could help you to do so.
1. Set clear savings goals and reset your budget
You may not want to miss the saving goals in the new financial year. Many missed their saving targets in FY2020 because they faced a liquidity crunch due to the Covid-19 crisis. If your finances have started stabilising now, you must not let go of the opportunity to bounce back quickly. The first thing you need to do would be to prioritise your crucial financial goals and set a realistic savings target for this year. If you want to overcome the savings shortfall that happened in the previous financial year, you may increase your savings by resetting your budget and reducing spending on non-essential expenses if required. Also, save at the beginning of the month and then spend the remaining funds on essential and discretionary expenses – not save whatever is left after your expenses.
2. Ensure your emergency fund should be able to cover your debt obligations too
The previous year had serious financial implications for many of us due to the job losses and pay cuts; however, the going was easier for those who had adequate contingency savings to fall back on when their income channels got impacted. As such, if your finances have normalised this year, you must prioritise replenishing your emergency savings quickly, or take steps to build one of adequate size at the earliest if you still don’t have one. Now, some of you might have also opted for a moratorium on debt repayments last year, or were forced to take a new loan. Measures like moratoriums could give us temporary relief, but they also lead to interest accumulation that could increase the overall debt burden or extend the repayment tenure. To address the financial risks in the new year, you must ensure that your emergency fund would be able to accommodate not just your essential expenses but also your debt obligations for at least six months without a regular source of income. This would also mean you can stay on track with your debt obligations and avoid snowballing of interest even if you lose your income for a few months. You can build a bigger emergency fund by exercising financial discipline and minimising unnecessary expenses.
3. Don’t compromise on insurance
The previous year gave all of us a rather grim reminder about the absolute importance of getting adequately insured. So, if you still think buying insurance is a waste of money or just another way to save taxes, you cannot be farther from the truth. The fact is, a life insurance cover will protect the financial interests of your dependents by taking care of their expenses and any carried-over debt if something untoward happens to you. And a comprehensive health insurance plan will protect your family’s finances from getting drained in footing steep medical bills if a family member requires hospital treatment. If you haven’t got yourself insured yet, consider going for a term life plan this financial year with a cover size of at least ten times your current annual income, and a medical insurance plan worth at least Rs. 5 lakh. Remember, premiums for both will be cheaper if you start the policy at a young age, so you have no time to lose.
4. Financial goals should take precedence over tax-saving goals
Tax-saving goals are important, but only when they are in complete alignment with your financial goals. So, this year, ensure you plan your taxes early, figure out the deficit in maximising tax-deduction benefits, and invest in tax-savers only when doing so is strictly in line with your financial goals, risk appetite and liquidity requirements.
5. Focus on the real rate of returns instead of nominal returns while investing
Don’t get lured by nominal returns when you invest money. You should instead look at the real rate of return, which is calculated after adjusting the inflation rate from the nominal return. For example, suppose the interest on your FD is 5.5% p.a., and the prevailing inflation rate is 5%. It means your real rate of return would only be 0.5%! A negative real rate of return would imply wealth erosion, whereas a positive rate would show wealth creation in the long term. Higher the real rate of return, higher would be the creation of wealth and vice-versa. So, in the new financial year, you should select investment instruments that have the potential to generate a higher real rate of return.
6. Focus on optimal diversification of investments
The markets are expected to remain highly volatile until the Covid-19 crisis completely subsides. So, to garner higher returns from your market investments in FY2021, you’ll have to take the necessary steps to blunt the risks. You can do so by optimally diversifying your investment portfolio across different products and asset classes in line with your returns expectations. For example, you may want to invest in a combination of asset classes like equities, debt, gold, realty, etc. to garner higher overall returns while keeping the risks under control instead of investing it all in a single asset class. The key is to strike the right investment balance. You can consult a certified investment planner if you need help in doing so.
7. Invest regularly
Despite the uncertainties in the market, it may not be the right idea to wait for the situation to get better or to try timing the market. You should instead focus on investing regularly. Many stopped their systematic investment plans (SIP) in panic last year due to Covid-19 uncertainties; later, the equity and debt markets bounced back to make new highs, and they lost the opportunity to earn a handsome return on investment. So, investing regularly is the key, and to lower the risk, you may opt for staggered investing techniques like mutual fund SIPs instead of making a lump sum investment.
In conclusion, you must put to good use in FY2021 the hard lessons you might have learnt last year. A pragmatic outlook, a farsighted approach and a highly disciplined execution of your plans will help you make progress this year. Here’s wishing you all the very best!
The author is CEO at BankBazaar.com. Views expressed are that of the author.
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