Personal Finance

Resolutions for a 2020 financial vision

Anand Kalyanaraman BL Research Bureau | Updated on December 31, 2019 Published on December 31, 2019

Here are a few steps that can help your buck travel far in the new year, and beyond

The New Year is here, and it’s time for resolutions. Never mind that many such plans may have a short shelf-life. Intent matters. And, sometimes, we miraculously do manage to translate intent to reality, don’t we? So, here are a few money resolutions that can help your buck travel far in 2020 and beyond.

Cover yourself

If you haven’t done it already, this should be the first on your list. Do yourself and your family a favour, and get enough life and health insurance. The wise don’t harbour illusions of immortality or invincibility. If your family depends on you, your absence could leave it in deep financial trouble if something happens to you. Also, illness can strike anyone, anytime, and a big-ticket medical expense can burn a big hole in your pocket.

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. The best way to buy life cover is to go for 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 gradually through cheaper top-ups.

Build a contingency fund

Next on your list should be a contingency fund. Emergencies — job loss, calamities, sudden major expense, etc — can strike without warning and drain your finances. To prepare for such rainy days, build up a contingency fund that’s about six to 12 months’ expenses including loan repayments. Don’t take risks with this money and chase returns. Put it in safe bank FDs, post office deposits, or in low-risk liquid debt funds that you can easily access. Use this money only when there is an emergency.

Start early, meet deadlines

Starting early, being regular and meeting deadlines can earn you higher income and save you a good sum in taxes. A rupee saved is a rupee earned.

To begin with, deploy money (up to ₹1.5 lakh a year) in tax-saving Section 80C instruments for FY20 if you haven’t done so already. The financial year end (March 31) is just three months away. A last-minute deployment could mean making sub-optimal choices, given the many options available. An early start will give you time to reflect on where you must invest — based on factors such as your age, objectives, risk profile, return and liquidity expectations, and existing portfolio. Besides, buying health insurance gives you tax breaks. So does investing in the National Pension Scheme (up to ₹50,000 a year, over and above Section 80C benefits).

Come April and the new financial year will begin. Make your tax-saving investments early in the year, or at least invest regularly over the course of the year. An early investment starts earning returns sooner and helps you benefit from compounding. The due date for individuals to file their annual income tax return for 2019-20 is July-end (unless there is an extension). Missing the deadline could mean interest cost, penalties and delayed refunds. Save yourself the trouble by filing your tax returns well before the due date.

Pay your insurance premiums well on time — to keep yourself adequately covered, and to avoid penalty and higher premiums. Also, don’t miss your loan repayments as defaults could mean high interest cost, penalties and a dent in your credit score. Be particularly careful about your credit card dues and repay them in full — every time. This is among the costliest loans in the market and continuing delays and defaults could land you in a debt trap.

Spend smart

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’s not really essential. Keeping a tab on your spending can help you invest more.

Review, invest, step it up

The year gone by has not been a good one for many stocks and mutual funds. But that should not deter you from investing. Review the performance of your stock and fund holdings from a fundamental and long-term perspective, and assess their performance vis-à-vis their peers and benchmarks. Weed out consistent under-performers, and shift the money to better stocks and funds, depending on your requirements and risk profile.

Invest in equities for the long term with a minimum five-year perspective. For most of us, it’s easier and safer to go the mutual fund route to invest in equities rather than buying stocks directly. Despite market volatility, well-run equity funds have delivered healthy double-digit returns over the long term. Invest 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, as the broader market is now. In fact, a weak market works to the advantage of the long-term investor. You get more units of the mutual fund in a falling market, making it a good time to invest. Despite short-term turbulence, SIPs should work well in the long run.

A mutual fund SIP is a good way to invest, but the amounts deployed have to be big enough to be able to make a difference to your portfolio in the long run. Keep increasing your SIP investments as and when you can. This will help you build a sizeable corpus for your future goals, including retirement.

Diversify, focus on asset allocation

Reduce inhibitions towards equity investing; it has the potential to offer inflation-beating returns in the long run. But this does not mean that you plunge headlong into the stock market. Decide your asset allocation — your mix of investments across asset classes such as equity, fixed income, gold, real estate — based on your age, risk profile and circumstances. Rebalance — buy and sell asset classes — to suit your desired asset allocation.

A popular back-of-the-envelope calculation is that the equity percentage in your portfolio should be 100 less your age. So, if you are 25 years old, the equity exposure should be about 75 per cent. Use this thumb rule along with other factors relevant to you.

Avoid overexposure to any asset class. It’s a good idea to diversify across asset classes since it helps reduce risk and optimise returns. Take last year — gold performed quite well even as equity and debt investors got a rather raw deal. Choose the optimal way of investing in asset classes. For instance, invest in growth plans of mutual funds rather than their dividend plans to optimise returns and tax benefits. Similarly, it’s a good idea to invest in sovereign gold bonds (SGBs) than in physical gold that involves costs on wastage and storage.

Deploy idle money optimally

Don’t let your savings idle away in your savings bank account for just about 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.

Nominate, make a Will

Ensure that your family can access your assets easily and without having to run from pillar to post, in the event of your passing away. Keep your family informed about all your assets, liabilities, investments and insurance policies. Have nominations for your investments. Make a Will detailing division of assets among family members; this will help keep the peace.

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Published on December 31, 2019
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