Fun fact: a lot of New Year resolutions fail right in the first week simply because the goals were unrealistic.
“I will jog 5 miles every day.”
Sure. You may do that for a couple of days. But on the third day, you don’t get out of bed. You convince yourself that it is raining cats and dogs outside when in reality, it is just cloudy.
Therefore, set goals that are realistic and achievable. Here is one such goal for you: financial planning.
In this article, let us explore the different steps you can take so that you can fashion your finances optimally this year.
1) Track your monthly expenditure
Have you ever been in a situation where you are desperately waiting for the month-end so you can get your paycheck? And a few days later, you are again waiting for the month-end. You don’t know where your money went!
To create a good financial plan, you need to first have a strong grip on your finances. You need to know where your money is going. For instance, do you really need to eat out at a fancy restaurant more than necessary? Expenses like these can escalate pretty quickly. Track your expenses daily and see which of them are unnecessary. Once you separate the unnecessary from the essential, you would be amazed how much you can save every month.
2) Set financial goals for the future
Remember that question you were asked in school: Where would you like to be in ten years’ time? Well, it is time to ask yourself that question again. What are your financial goals for the future?
Make a wish list. Some of the common goals for people include:
- a) Buy a house
- b) Clear of all existing debts (college loans, personal loans, credit card debt)
- c) Travel around the world with family
These goals don’t come by cheap. You can always postpone your goals for next year and the year later. But by doing so, you are only wasting precious time you have now. If you wish to achieve them, you need to start working towards them right now.
3) Start tax planning now
When the tax deadline approaches, you promise yourself to start tax planning early from the next year. And every year, you forget about it once the deadline passes by. How about doing things a little differently from now on?
Did you know that there are a lot of different ways for you to save tax beyond Section 80C of the Income Tax Act? In the hurry to file tax papers at the last minute, most people miss out on many interesting opportunities to save tax.
For instance, you can avail a tax deduction on payment of interest on an education loan. This is applicable under Section 80E for a loan taken for self, spouse or your children. Similarly, tax deductions are also available on home loans, payment of health insurance premium and rent payments under various sections of the IT act. Lastly, if you have donated any amount as charity during the year, you are eligible for tax deduction under Section 80G.
Find out the different tax deductions available to you and make the most of them. After all, nobody wants to pay more tax when they don’t have to, right?
4) Invest your money (in mutual funds)
If there is one quote that needs to go viral, it is: Saving is good but investing is better. Everyone tells you to save but not enough people tell you to invest your money. When you put your money in a savings bank account, you may receive a modest rate of return of 3.5-5% per annum. In comparison, investment avenues like mutual funds have the potential to offer returns anywhere between 10-15%. That is the difference between saving and investing.
Remember the list of financial goals you listed down (in point 2)?
Well, by investing your money, you can reach your goals in a faster and more comfortable fashion. Start a Systematic Investment Plan (SIP) and invest your money regularly in mutual funds. This way, you can earn steady returns that contribute towards wealth creation in the long term.
5) Limit your debts
Whether it is for your higher education or for building a home, a loan can be a great way to finance your needs. However, it is very important not to rely heavily on debt options. These days, many people go on shopping sprees and use their credit cards to pay for the expenses. You don’t have to pay the amount now, but you do have to pay it at some point in the future. And yes, at a high rate of interest. Limit your loans to what is necessary. You don’t want to go on paying interest for many years unnecessarily when you could instead use that money to invest for your future.
To sum up
Financial planning is not just about saving money or investing in a mutual fund or two. It is a complete change in your attitude towards money. Right from your income, expenses, savings, investments and financial goals; you need to ask yourself how you can do things better. By following the above steps, you can truly improve your finances in the next year.