New Year resolutions for your finances

A surreal year has passed and a new one has arrived. 2020 was tough for most folks, but tough times teach valuable lessons. Use these to good effect in 2021 to get a better handle on your financial life. Here are some key money resolutions that you must make and not break in the New Year.

Get insured

Covid-19 brought home to many the importance of both health insurance and life insurance. Hospitalisation burnt a big hole in many a pocket. Also, many unfortunately passed away – leaving the near and dear ones in the financial lurch.

The wise don’t harbour illusions of immortality or invincibility. So, if you haven’t done it already, insurance should be top on your list. Get sufficient life and health insurance. If your family depends on you, your absence could leave it in deep financial trouble. Also, illness can strike anyone, anytime and medical cost can be quite high .

Get your life covered for at least 10 times your annual income. If you have loans outstanding, especially home loans, make sure the sum assured is large enough to cover these liabilities, too. Buy life cover through online, term insurance plans that offer significant cover at relatively low premiums. For an average family of four, buy health cover of at least ₹5 lakh with a family floater policy to start with, and increase the cover through cheaper top-ups and super top-ups.

Have contingency funds

Covid-19 saw many taking pay-cuts and many also losing their jobs. It was a tough situation, but one which highlighted the significance of contingency funds or emergency reserves. Emergencies — job loss, calamities, sudden major expense, etc — can strike without warning and drain your finances. To prepare for such days, build up a contingency fund that’s about 12 months’ expenses including loan repayments. Keep this money secure in safe bank FDs or in post office deposits that you can easily access. Use the money only when there is an emergency.

Spend wisely, save well

The lockdowns and work-from-home saw many cut down on their non-essential lifestyle spends such as compulsive eating out, wardrobe changes and other retail bingeing. This helped some manage pay cuts, while others could save more and invest more. The lesson is crucial – it’s not just how much you earn but also how much you spend and save that determines your finances.

So, spend smartly and within limits. Budget your monthly expenses and keep track so that they don’t spin out of control. Various online money management tools can help you with this. Refrain from borrowing to spend on stuff that you don’t really need. Cut down on non-essential expenses. Keeping a tab on your spending can help you invest more.

Stay invested, keep investing

Those who panicked and sold stocks in the market crash of March might have regretted it by December when the bourses hit new highs. So would those waiting out the rally for an attractive entry point. Staying invested and continuing to invest regularly would have helped investors navigate the volatility well.

For most folks, it is better and safer to invest through equity mutual funds than in stocks directly. Invest with a long-term perspective of at least five to seven years. Deploy money through the SIP (systematic investment plan) route rather than lump-sum. SIPs inculcate a disciplined, regular investing habit.

Importantly, don’t stop the SIP when the market is going through a rough patch. A weak market, in fact, works to the advantage of the long-term investor; you get more units of the mutual fund in a falling market. Keep increasing your SIP investments as and when you can. This will help you build a sizeable corpus for future goals, including retirement.

Also, don’t let your savings idle away in your savings bank account for just 3- 4 per cent annual return. Use the ‘sweep’ facility to transfer the idle money (over a minimum threshold) to fixed deposit accounts that offer better rates.

Diversify across assets

Don’t put all your eggs in one basket. Have investments across asset classes such as equity, debt and gold. Some assets do well in some years when others may not – this reduces the portfolio risk and optimises returns. For instance, gold outperformed in 2020, thanks to its safe haven reputation.

Decide on your asset allocation — your mix of investments across asset classes — based on your age, risk profile and circumstances. Don’t get greedy when an asset class rallies sharply. Rebalance the portfolio — buy and sell asset classes — as needed, to suit your desired asset allocation.

Nominate, make a Will

In the event of your passing away, your family must be able to access your assets without having to run from pillar to post. Keep your family informed about all your assets, liabilities, investments and insurance policies. Have nominations for your investments. Make a Will laying out how assets will be divided among family members; this key piece will help keep the peace.