A new year means new beginnings, new possibilities, new opportunities and new experiences. It also means new chances. Things may or may not have gone the way we wanted last year, but reflecting on the past year and gaining new insights is the key to a brighter future. And if the past two years have taught the world anything, it’s the importance of financial security and the need to be prepared for life and its uncertainties.
Working towards financial stability is a process and two days of work will not make us richer than yesterday. This shouldn’t deter you from cultivating the necessary habits, and just one more reason to start working on them.
Scientific research indicates that it takes about 66 days on average for a behavior to become part of your lifestyle/routine, in other words, a habit. So, if there’s a good time to start working towards our personal financial goals and instilling some financial discipline, now is it. Here are some habits to cultivate to achieve your goals in 2022.
Track your expenses
A good first step in financial planning is to start tracking your expenses. Know where your expenses are going and how much. Sometimes looking at things from one point of view makes it easier to understand them. So look at your income and expenses from a broader perspective to identify what can be reduced, then focus on optimizing your expenses.
In case it becomes cumbersome to keep an eye on all your expenses, expense management apps can come to your rescue. Since the apps would have a record of all your transactions, it will help you better review your spending profile and prioritize your spending. Considering that there has been a massive shift towards digital spending in India in recent years, expense management apps can be helpful for those who find it difficult to get an idea of their spending habits.
Build up your savings
Saving is difficult. But saving for a rainy day is essential because a solid savings base would give you a cushion to better handle uncertainties. A savings plan should start at the budgeting stage itself. A systematic approach to budgeting often suggested by financial experts is the 50-30-20 rule of thumb.
According to her, an individual should allocate 50% of his income to essential expenses or “needs” (life, food and other expenses), 20% to personal expenses or “wants” (luxuries and leisure) and 20% to savings or financial goals such as investments.
However, it is important to know that there is no one-size-fits-all solution. You can come up with your own ground rule after considering your income and financial goals. Set a goal and work towards it. If you can save more, by all means do so. And if you’ve reached your savings goal, try extra savings. Remember: a penny saved is a penny earned.
It’s never too early or too late to start investing. You don’t necessarily have to be “The Big Bull” or “The Big Bear” in the capital markets to start investing. Start with small but smart investments. Try practical and smart tools like Systematic Investment Plans (SIPs). SIP has become popular for investing in mutual funds on a regular basis. It’s like a recurring deposit, but linked to the market. Hence, it gives you the flexibility and convenience to invest any amount you want.
Start small and then you can work towards having a diversified portfolio of various financial instruments once you get the hang of it. Look into low-risk mutual funds and always keep the long term in mind.
Options such as Fixed Deposits, Recurring Deposits, Provident Funds, National Pension Scheme and others are other traditional but safe bets for those with less appetite for risk.
Don’t underestimate the power of compound returns. Nor chasing high returns in the short term. Slow and steady wins the race for a reason. That said, risk is inevitable in market-linked financial programs. It is therefore essential to develop a risk appetite in line with our objectives.
One of the most important things to remember when investing is not to be swayed by the fear of missing out. Don’t wait too long to invest, but never invest for fear of missing out. Always do your research and never rely solely on the advice of others, as financial markets are associated with risk. Patience is a virtue.
Secure yourself and your family
The importance of health and term insurance policies cannot be stressed enough. Not only does insurance protect you against unforeseen risks, but it could help you in the long run, provided there is adequate cover, by covering your medical/health expenses. Your disbursements will be limited. You don’t have to dip into your savings, and they’re great tax savers too!
Having health/medical, term and/or life insurance is prudent and helps protect you and your family in times of uncertainty. And switching to insurance at a younger age will give you benefits like lower premiums. But, thorough research is imperative when purchasing health/medical and life/term insurance. Read all terms and conditions carefully before choosing one.
Tax planning is a fundamental and important part of financial planning. It helps to reduce tax liabilities. So don’t just look for tax savings initiatives at year-end or when you file your taxes. Start planning early, preferably at the start of a new fiscal year.
There are different ways to reduce your tax liability, such as minimizing taxable income by investing in various government plans. Another way is to plan your tax deductions well in advance so that you can benefit from a reduction in taxes payable. Life insurance, health insurance, mutual funds, interest on home loans and others are some of the areas where standard deductions can be applied.
Financial planning is the first step to financial security. It is important to set simple goals and start the journey. The basics can go a long way to getting you off to a good start on your financial journey.