Another financial year has just gone by. Was it only yesterday that you sat down to list out the things you wanted to do in 2006 to change the way you manage your money and your life? One year on, the “to do” list is still to be completed. You had decided not to let the credit company charge a late fee, not to let your insurance agent constantly remind you about the last date for paying the insurance premium. Resolutions, resolutions.
Still, it’s never too late. It’s that time of the year again, to make new financial resolutions and stick to them this time round.
Trust us, it’s not that difficult. All it requires is some planning right at the start. If you don’t do that, your expenses may increase, you may go on that spur of the moment holiday, you may just splurge on something you have always wanted. And by the time this financial year too draws to a close, that hurried call to your tax consultant may not get you the desired results.
This cycle will repeat itself until you discipline yourself on your money matters. Some may argue that life is more than just about paying premiums and phone bills. ‘A stitch in time saves nine’ may be a cliché, but there’s nothing like planning to save precious time, energy and, of course, money.
Himanshu Kohli, partner at Client Associates, a Gurgaon-based wealth-management company, cites the example of his client, who continued to invest in real estate despite being advised not to do so. And, of course, came to a sticky end when prices crashed.
Mamun, 26, who works with a production house, doesn’t care about being unsystematic and disorganized when it comes to financial matters. “I earn a decent salary, but I don’t feel the need for any kind of financial planning,” he says.
As the new financial year starts, you could resolve to do the following things:
1. I will start tax planning today:
Ever since tax rules were simplified in 2005, the whole exercise of tax planning is no longer as complex as it used to be. All kinds of tax-saving instruments—such as Public Provident fund (PPF), national saving certificates (NSCs), equity-linked mutual funds, tax-saving bonds, or unit-linked insurance plans (ULIPs) enjoy similar tax benefits. So, one can just invest the maximum permissible limit of Rs1,10,000 either in tax-saving funds or spread it across these instruments.
“Despite the fact that people are aware of the new simplified tax-rebate rules, they still tend to procrastinate till the last moment,” says Arvind Rao, chief planner, Dreamz Infinite Financial Planners. His clients tend to start planning only towards the end of the year. In fact, most of us forget about savings plans until the financial year-end, when mutual funds and insurance companies go all out on advertising their various schemes.
Preeti Kathuria, a 23-year-old beauty counsellor, is a victim of sheer ignorance. There was a time when she used to rush to do her tax-saving investments towards the end of the year. Now she has started planning much in advance, but her decision to lock her money in PPF hasn’t made her happy. “Had I been aware of other investment options which give more returns, I would have started saving much in advance and could have owned a car by now,” she says.
There are some like Ipshita Aggarwal who get into tax-planning mode only when they get their pay cheques cut in half because they have not made any investments on time. All it takes is a couple of hours with your chartered accountant or your advisor and you can easily draw up a plan for the amount you need to invest, in order to reduce the tax burden.
2. I will pay my bills/insurance premium, file my tax returns on time
Shaily Mehra, a 29-year-old catering manager in Mumbai, depends on her father to pay her insurance premium on time. “I have no clue as to what policy I have taken and the amount of the insurance premium that is being paid out. All I know is that it helps me reduce my tax burden,” she says.
Richa Gupta works for a leading housing-mortgage company. At the end of the year, she scrambles to put together tax-saving investments and searches through all her papers to locate bills and insurance premium reminders. “I couldn’t avail the rebate on insurance premium in the last financial year as I forgot to pay the quarterly premium on time. I did get a reminder from the insurance company a few days in advance, but by then I had blown up my whole salary for the month,” says Richa.
At the other end of the spectrum are people such as Sangeeta and Gaurav Bawa, a salaried couple from Hyderabad, who plan out their finances right at the start of the year. In April, Sangeeta lists the dates for cash outgo in relation to insurance premiums, quarterly school fees for their six-year-old and other such things, in a diary. Not only does this help them in remembering the payout dates, but also in planning and controlling their finances throughout the year. “We accumulate our salaries from April to June and start putting money in tax-saving instruments from July. So, by the time February rolls around, we don’t need to cut down on monthly expenses in order to make investments for tax saving,” says Sangeeta.
3. I will assign nominees for my investments and bank accounts, and make sure they are reviewed regularly
It’s common practice to ignore the “nominee” section while filling up a form to open a bank account, while making an investment into a fund or taking an insurance policy.
Rekha Jain, a businesswoman from Aligarh, has had to learn it the hard way. “My late husband had an insurance policy in which his mother was a nominee, but she passed away several years before his death. I had no idea how to get the nomination changed and ended up running around to recover the insurance claim.” Now she reviews it every year.
“Most people start working when they are single, so it’s natural to make a parent the nominee. But how many of us review it regularly?” asks Arvind Rao. “If no nominee is stated in the policy, insurance proceeds are distributed according to the will of the policy holder. In the event of the death of the nominee before that of the policy holder, or no nominee and any will to execute the same, the proceeds typically follow a legal settlement,” says Rahul Sinha, head of marketing, Kotak Life Insurance. “We usually get around 40-50 applications each month for a change in nominations out of the around 2.5 lakh active policies (as on 31 December 2006).”
4. I will get out of dud investments
When was the last time you went through that old file of papers? Do you know that many mutual fund schemes from Unit Trust of India have been wound up? Or that shares of companies in the form of share certificates are as good as a blank sheet of paper until you get them converted into an electronic format?
Despite having a financial planner, who keeps on reminding her about cashing old Unit Trust of India schemes, Ipshita is just too lazy to hunt for the unit certificates of old schemes that her grandfather had bought for her when she was young. The total worth could be around Rs2,00,000 today. This time around, she is more focussed. “The stock markets have gone up and I have realized that the worth of my old investments can partly fund the down payment for my new car. So I am definitely going to redeem them soon,’says Ipshita.
5. Tear up that add-on credit card
Once you become a high spender on your credit card, the bank or the credit card company will send you unsolicited cards for free. It may be add-on or complimentary, and is normally free for the first year. ‘Throwing away unnecessary credit cards will help you maintain a close control on your finances. An investor may be able to avoid unnecesssary charges levied for not maintaining bank account balances or for bounced cheques. On credit cards, borrowers can avoid high interest cost on rollovers and late payment fees,’says assistant vice-president of ASK Wealth Advisors.
6. I will draw up a plan to re-skill myself
How often have you thought that you must apply for that fellowship programme in business administration or take a sabbatical to write a book or change your specialization? But amid a hectic work schedule and social life, planning for this is left for that elusive weekend when you will “have more time”. That time will probably never come.
But now that it’s the beginning of another year, you can decide in advance about how you plan to re-engineer your professional life. Of course, you need to set aside the money for it. For instance, if you are planning to go abroad for higher studies, you may need to take an education loan. You will need to show a reasonable amount of savings for this.
7. I will force myself to save regularly by investing in systematic investment plans
Simply put, if you think you just can’t save and money tends to get spent quickly, a systematic investment plan (SIP), which is offered by most mutual funds, is what you need. It ensures saving, as every month, a fixed amount will be transferred from your bank account and will be automatically invested in the selected mutual-fund scheme.
SIPs are the best way to inculcate a regular saving habit. In the long run, those who invest through SIPs tend to create more wealth than those who invest in one go or make just one big investment.
8. I will flip that high-cost loan to a low-cost one
Whatever you want, there’s a loan for it. But never take a second loan to pay off the first one. “People tend to take multiple loans and get trapped in a vicious debt maze. To get out of this mess, the first step is to flip your high-cost loan to a low-cost one,” says Archana Bhingarde. “One of my clients took a loan of Rs1.5 lakh at 2% per month. I got him a loan against his life-insurance plan at 9% per annum. The burden increases with the size of the loan also.
9. I will start organizing my bills/receipts
One may argue that it is pointless to store utility bills that have been paid. “But this simple act could organize life beyond your imagination,” says Deepak Jain, CEO of etaxesindia, a personal-finance portal. “Records help us remember important things about what we owe and own. They can help us manage and track our everyday finances, future aspirations as well as handle emergencies efficiently. Important records may also help protect us in legal and financial matters.”
10. I will set aside money for contingencies
Adverse situations or financial crises occur without a warning. If you set aside a certain sum every month or every quarter, it will help you tide over such unforeseen events. “Resorting to credit cards for cash needs should be a last resort unless some medical emergency comes up. Interest rates are charged as high as 42% annually from the withdrawal date and you can easily get yourself into a debt trap. One of the best ways is to work out how much money you will need for two months to sustain yourself and your family in case you lose your job,” says Lovaii Navlakhi, financial advisor of Money Matters, a Bangalore-based firm.