get my finances in shape
New Year’s resolutions are more often about physical and mental well-being – exercise more, eat better, get organized, spend less time on social media, and so on. But what about financial health? Did you make any resolutions for your financial well-being? If so, did you did you succeed or miss the mark?
Well, taking care of your financial health should be a priority all year round, but the New Year provides a great opportunity to reflect on your financial planning journey and set yourself up for financial success in 2024 and beyond. Here are 5 New Year’s financial resolutions to get you started:
1: Create a budget
Committing to saving and investing during your working years is a good way to create wealth and achieve life’s most important goals. But, for this, you’ll need to know how much money you’ve got. That’s where budgeting can help and here’s how to go about it.
Budget, save and invest. You should first determine how much disposable income you have, which can be calculated by deducting your income from expenses. Once you decide on the amount to save and invest, consider ways to automate savings transfers to recurring deposits, mutual fund SIPs, etc.
Prepare for emergencies. Build an emergency fund to fall back on by setting aside an emergency fund which is equal to six months’ worth of living expenses in a savings account or liquid fund.
Check your financial health. Make a list of what you own and what you owe and then calculate your net worth by deducting your liabilities from your assets. A positive net worth indicates your assets outweigh your liabilities, which means you are on track in your wealth creation journey. A negative net worth means you need to improve certain areas of financial planning.
2: Pay off your debt
Debt isn’t all bad. It depends on how you manage debt. While moderate amounts of debt may help you create wealth, high levels of debt can be damaging. Here’s how to stay in control.
Keep debt manageable. Don’t borrow more than you can repay and keep tenure as short as possible. You should also vary of and avoid taking loans from unorganised lenders and unreliable apps. As a thumb rule, the total monthly payment for all of your loans should not exceed 30 to 35% of your monthly income. Also, clearing your loans and credit card debt on time helps greatly reduce exorbitant interest burden and improve your credit score.
Decide which debts to pay off first. If numerous smaller debts at similar interest rates, you could start by paying off your smallest debt first as this enables you to clear debts early. But if you have debt, especially credit card debt, that has a wide spread in interest rates you can choose to pay off the highest-interest debt as you end up paying less if you settle high-interest debts first.
3: Stay on track with your goals
Make the most of your investments – no matter what the market condition! Here’s how you meet your goals.
Diversify investment portfolio. Spreading your money over a variety of investments, including stocks, bonds, real estate, fixed investments, gold and other assets, is crucial to portfolio optimization. Diversification helps one better handle the volatility and uncertainty in the market as certain assets perform well when others struggle.
Revisit asset allocation. Evaluate your portfolio’s performance at least twice a year and rebalance your portfolio as needed. If you know you’ll need the money within a few years, move your investments to fixed-income investments which offer steady returns. If you are investing for the long term, investing in equities may be rewarded with good returns.
Resolution 4: Prepare for the unexpected
We are exposed to different types and levels of risks, which include loss of life, health, assets, property, etc. The following guidelines can help you prepare for them.
Protection against large medical expenses: Dealing with health conditions can be mentally and financially draining. But by getting yourself a suitable health insurance policy, you manage your medical expenditure without dipping into your savings and also beat the burden of medical inflation.
Life insurance provides cash when needed most: Buying life insurance protects your spouse and children from the potentially devastating financial losses that could result if something happened to you.
Protect your financial well-being: An effective Motor / Home / Travel insurance policy can help you rebuild and recover from substantial loss or damage caused by natural calamities, medical emergencies, or accidents.
Resolution 5: Plan for retirement
Though retirement may seem a long time away, retirement planning is crucial for financial stability and independence in old age. Financial planning experts estimate that you may need 70 to 90% of your pre-retirement income to maintain your standard of living during retirement.
Start investing early and regularly, so that your retirement corpus benefits from the power of compounding, given the longer period available to build the corpus. You can select from a wide variety of investment avenues in the financial markets or the various government-sponsored retirement-oriented schemes.
Remember you don’t have to try and do everything at once. Using these resolutions as a checklist and by taking things one step at a time, you can make significant progress toward getting your finances in shape! But if you find this to be a daunting task, it would be prudent to seek professional advice form a certified financial planner who can help you create a roadmap to meet your short-term and long-term financial goals.