The New Year is often viewed as another chance to redeem, and to renew. Your New Year resolutions may reinforce some of the simple things in life – like spending more time with your family, or becoming fitter.
But when it comes to your financial life, do you really have a plan in place? Do you take stock of whether you are following some basic ‘hygiene’ practices for good financial health? If not, then it’s time you make a start this year.
Let us look at five things you can do to build your financial health, starting from this year.
Increase your savings systematically
Normally, our monthly expenses grow much faster than our income, and this makes it difficult for us to increase our savings. This happens simply because we follow a wrong savings formula. Most people are likely to follow the formula: Income – (minus) Expenses = Savings. This is the reason why most of us don’t have sufficient savings to invest. Simply change this formula to: Income – Savings = Expenditure.
Most of you might think that it is impossible to allocate savings without knowing the actual expenditure. Yes, you should allocate for your most important expenses like basic family expenses, the EMI for your housing loan, child education expenses, and so on. But there are some discretionary expenses (about 20-30 per cent of your expenses) which can be avoided or postponed. To find this out, create a list of your fixed, variable, and discretionary expenses to know what you need to really spend on, and what you can avoid.
To begin with, consider cutting down your less important discretionary expenses by 25 per cent, and allocate that to your savings. You can slowly cut all such expenses by 5 per cent month-on-month, gradually increasing your savings by 5 per cent.
Another simple way to increase your savings is to add 1 per cent of your income to your savings, month on month. If you increase it consistently for one year, you will end up saving a decent sum every month. You could further increase this amount based on a rise in your income in the future years.
Allocate equity for your long-term savings
Some of you may feel equity is a risky asset class. It is easy to ignore equity and invest in other savings like bank fixed deposits, Public Provident Fund (PPF), gold, etc. Returns of these traditional fixed income instruments have hardly ever beat inflation after paying the taxes on interest income (as high as 30 per cent), or capital gains (around 20 per cent). By ignoring equity, you are not exposing yourself to the risks (and rewards) of the asset class; instead, you risk not meeting:
• Your cost of living
• Your kids’ education, and
• Your retirement expenses
Your Recurring Deposits are not going to help you build your children’s education kitty. your PPF or Employees’ Provident Fund would simply not be sufficient to meet your post retirement expenses, leave alone your medical bills. Of course, forget about any surplus for those post retirement vacations you dreamt of. Hence, allocate at least 50 per cent of your long term savings to equity to generate optimal returns.
Reallocate your funds based on your cash flow requirement
Wherever you invest, there is an ideal/minimum duration for each investment. For instance, you should not invest in an equity fund for less than a year, or park too much surplus in liquid funds for over a year. The ideal duration for the former is over 5 years, and for the latter, a few months. When you allocate the money, you should try to align it to your goals. For instance, if you need the money in a few months, then liquid or short-term debt funds should be your choice.
Plan your future expected cash flows and allocate optimally across various funds/ investments. You can also talk to our advisors to know what asset allocation will fit your goal/time frame.
Review your present asset allocation
Asset allocation is paramount to building wealth optimally, with minimal shocks. There is no formula for this that fits all. The asset allocation you follow will depend on your risk appetite, investment horizon, and your future cash flow requirements. Each asset class has different levels of return and risk, and so, each will behave differently over time. Hence, striking a right balance will ensure you achieve your financial goals. This year, review your portfolio and check for imbalances if any. Talk to our advisors, if you wish, to know if your asset allocation aligns with your goals and time frame of investment.
Exit the underperformers in your investment portfolio
Remember you do not exit because markets do well, or if markets or underperforming. You exit when you reach your goal. Let the market influence you less in your decision to exit. However, funds or stocks need periodic review to see if they have not dipped in performance.
Consistent underperformance in a fund, or a change in strategy that no longer fits you can be reasons to exit a fund. When you do that, make sure you substitute it with a good/consistent performer. If you do not, your savings/investment plan will suffer. You should reallocate your money to a better performing fund that is managed by an experienced fund manager, who is supported by a strong process oriented research team.
If you need any help on the above recommendations, outsource the tough part of getting started by talking to your advisor today. Make a start, stay the course and you will see the difference it makes to your wealth.