It is a new year. A chance to look back at how the past year went by. Achievements, setbacks, things that went right and what could have been. And an opportunity to welcome the new year. Make new resolutions and set out to achieve with loads of optimism. We will leave your life resolutions to you, but we will write about some of the financial resolutions that will help your long-term financial well-being.
#1 Don’t Just Invest for Returns. Look at Your Financial Goals
Do you have enough wealth? Absolute numbers mean nothing here. This question can be answered only in the context of your life stage, lifestyle, financial goals, or other unique aspects of your life. For a 60-year-old whose monthly expenses are Rs 5,000 per month, Rs 50 lacs may be enough. However, for a 60-year-old with monthly expenses of Rs 1 lac per month, even Rs 1 crore won’t be enough.
Write down your financial goals. Make an estimate of how much you need to complete those goals. Then, do a back-calculation and look at existing wealth and future investment ability to appreciate where you stand. This is the best way to do a reality check. This gives a good sense of “How much” you have and whether you are investing enough. Such knowledge will help you reassess and rework your finances. And this is vital. Most of us chase investment returns. However, the problem is, beyond a point, you cannot control returns. But you can control how much you invest.
The compounding equation is A=P*(1+r) ^n
While we focus on “r”, you can see “P” (the amount you invest) and “n” (investment horizon) also matter. You don’t control “r” but have some control over “P” and “n”. When you look at your wealth in term of your financial goals, the importance of “P” and “n” automatically shines through.
#2 Diversify
It is easy to go with the flavour of the season approach with investments. Not only are such decisions easy to make but are also socially acceptable. When your colleagues are neck-deep in stocks, it is difficult to shun stocks completely. Or else you will feel left out when they discuss investments.
Fine. However, when it comes to investments, the question is not “IF” but “How much”. The question is not if you must invest in stocks. My answer would be in the affirmative, even for the most conservative investors. The real question is “How much should you invest in stocks?”
Use an asset allocation approach. Build a diversified portfolio with stocks (mutual funds), fixed income, gold, and real estate. Rebalance regularly. If this is too much for you, seek professional assistance.
#3 Don’t Forget about Adequate Insurance
You have time to build wealth. If you make mistakes, you can still recover. However, if you get your insurance planning wrong, you won’t get a second chance. And many families discovered this during the past 2 Covid waves.
Buy adequate life, health, and disability insurance.
And “adequate” is important. As with investments, it is not just a question of “if you have insurance” but also “how much insurance”. A 35-year-old sole earning member with a family of 4 has a LIC policy with cover of 3 lacs. Ticks the “if” part. However, does that Rs 3 lac cover tick the “adequate” part? Clearly not. Rs 3 lacs won’t be sufficient to meet financial goals and provide for regular expenses of the family.
When trying to calculate your life insurance requirement, you can look at the following simple equation.
Your life insurance + Existing Wealth = (or should be sufficient to) Square off all your loans + Meet your financial goals + Provide for regular expenses of the family
Even simple heuristics are better than a Rs 3 lacs cover. Example: Buy a life cover equal to 10 to 15 times your annual income.
Similarly, you can’t just rely on your employer health cover. What happens when you are between jobs? OR you employer reduces the coverage to cut costs? OR your new employer does not offer any coverage? Would a cover of Rs 5 lacs suffice for a family of 4 in a big city such as Mumbai, Delhi, or Bengaluru? So many uncertainties. A simple solution is a private health cover.
#4 Spend with Discipline
Asking you to spend less would be supercilious since I do not know about your life and family compulsions. However, you must spend with discipline. Keep an eye on your budget. If you are unable to save enough, see if you can cut down a few discretionary expenses that won’t affect your lifestyle in a big way. If your finances are a mess, you might have to compromise on your lifestyle too.
#5 Be Cautious with Loans and Credit Card Debt
This flows from the above point. If you spend more than you can afford, the deficit must be bridged through loans or credit card debt. And such debt can be expensive. If used irresponsibly, this can lead to debt troubles.
However, not all debt is bad. If used smartly, loans can help you gradually accumulate assets and reach a desired standard of living. To buy assets that would take you many years to buy using own funds. A house and a car are good examples. With credit cards, you can earn attractive discounts and cashbacks on your purchases.
Therefore, while loans are not evil, you need to exercise some discretion. Don’t borrow what you can’t afford to repay.
Don’t Go Overboard Either
Money is a means to an end. It is not an end into itself. Never forget this while you try to grow your wealth. Therefore, have a few cheat days. Don’t let your focus on financial goals compromise those small bits of happiness. Travel, eat out and enjoy time with friends and families. These experiences make up your life, not your bank balance. Stay away from social media warriors who will make you feel guilty about buying a home on mortgage or even ordering food on Zomato or Swiggy.
Shun negativity. Be happy.