For many of us, a new year starts with resolutions. And these resolutions can encompass a wide range of areas such as physical health, financial wealth, personal spirituality, and relationships. What are your resolutions for the new year? Well, you don’t have to tell us but make a concerted effort to see them through to completion.
On this website, we write about investments, personal finance, and credit. Therefore, in this post, I will list popular financial resolutions that can help improve your financial well-being.
# 1 Save More
It is important to save and invest consistently. It is not sufficient to just somehow meet your expenses every month. You are not going to work forever. Thus, you must save to provide for expenses after you stop working. Moreover, even while you are working, there are big expenses that can’t be met through your regular cashflows. Therefore, you must save. And if possible, save more.
You must save to build a contingency corpus. A contingency fund helps you manage unplanned expenses and provides peace of mind and protection from financial stress. In addition, you must save for your other short and long term goals. Common goals include kids’ education, wedding, house purchase, and retirement.
So, if you were investing Rs X per month, try to invest at least 5%, 10% or 20% more this year.
#2 Invest Better
Just “save more” is not enough. You must invest in line with your risk appetite and financial goals. You must have a healthy mix of safe and growth assets. Safe assets include Fixed deposits, Government Bonds, EPF, PPF, other small savings schemes. With such assets, you have assured return OF capital, but you may earn a low return ON capital.
With growth assets such as stocks, equity funds, gold, real estate, you return OF capital isn’t guaranteed but you may earn a high return ON capital. Higher risk but potentially higher rewards.
How much in “Safe assets” and “Growth assets” is a tricky question to answer. There is no single correct answer. What is better for me may not be good for you. Why? Everyone is wired differently. Different risk appetites. Moreover, everyone has a different mix of short term and long-term goals. The usual answer is: Allocate more to safe assets for short term goals. Allocate more to growth assets for long term goals. However, a higher exposure to growth assets can be a problem even for long term goals if your risk appetite is low.
Now, we can see how this is so complicated. For instance, “save more” has an objective YES answer. The answer to “Invest better” is subjective.
If you can’t decide or are not sure about how to structure your investment portfolio, seek professional assistance from an investment adviser.
#3 Earn More
No one would say NO to this. A route to “Save more” goes through “Earn more”. If you earn more and your expenses stay constant and don’t rise as much, you will automatically save more.
- If you are a salaried employee, this can happen through salary hikes, promotion, or a change in job.
- If you are self-employed or run a business, this happens through growth in business.
#4 Spend Less and Budget Better
“Earn more” is no use if your expenses also grow sharply. You must control your expenses. You do not have to pinch pennies. At the same time, be responsible with your expenses.
A prominent reason why we cannot control our expenses is that we don’t realize where our money is going. Forget that. Many struggle to figure out how much they are spending every month. Only if you could figure out how much you are spending and where the money is going, can you get a firmer grip on your cashflows. As they say, what gets measured gets managed. And budgeting helps you do that.
Prepare an estimate of your income and expenses. Thereafter, track and analyze your expenses and see how actual expenses match up with your estimates. If there is a wide discrepancy, you need to dig deeper and try to understand the cause. You could revise your budget. Or if you figure out you are spending too much on a particular head, you can proactively reduce your expenses in that area. Just this knowledge about how much you are spending and where the money is going can help you cut unnecessary expenses and “spend less”.
A good starting point is to have separate bank accounts for investments and expenses. Open a new bank account for paying bills and expenses. Transfer money from the main bank account to the new bank account at the start of the month. Use this bank account to make all the household payments, shopping, utility payments, grocery purchases and even credit card bills. With this approach, it is easy to figure out how much you are spending each month. If you are spending more than you expected, analyze the spending patterns, and make adjustments.
#5 Borrow Less
While debt can be useful when used responsibly, carrying less debt is generally a better choice for individuals than carrying more. “Spend less” automatically ensures a lower borrowing, at least to an extent. If you are running a high-cost loan such as credit card debt, take steps to close such debt as soon as possible. “Spend less” would help you to pay off your debt quickly.
Setting financial resolutions is only job half-done. It requires self-discipline, patience, and perseverance to complete these resolutions. Be smart and flexible. Review progress regularly.