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Business News/ Money / Calculators/  Plan ahead to make the best of 2015
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Plan ahead to make the best of 2015

If a new year is about new beginnings, take this opportunity to move towards financial prudence

Shyamal Banerjee/MintPremium
Shyamal Banerjee/Mint

The new year may still be a few days away, but it is a good trigger for getting some personal finance matters in place (before celebrations take over). A simple thing to do is to include one money related resolution to your list. Doing so may seem like a spoiler, but it may well be the one decision that you were able to put in practice and paid handsomely in the long run. Here are a few points that you could start with.

Learn more

If you think it is solely the duty of an investment adviser or a financial planner to know about financial products, you would be wrong. It is also the investor’s responsibility to know where to invest, for how long, how much, and why. Even investors who prefer to stay with simpler products should study their investment choices.

“The problem with many investors is that they don’t have an inclination towards reading on finance. You don’t have to become a CFA or a CFP (Chartered Financial Analyst or the Certified Financial Planner), but you should at least know the basics. For instance, many who put their money in bank fixed deposits at 8-9% interest rate, should know that after tax, the returns will come down to around 6% if you are in the 30% tax bracket. Many don’t factor in tax implications," said Suresh Sadagopan, a Mumbai-based financial planner.

Having a basic understanding of financial products will help you get a bigger picture of financial products and take informed decisions. You should have the ability to understand some details such as, taxability and net returns of every product.

It is like learning to drive or swim. You don’t have to be an expert, but working knowledge is required.

Reflect on cash flow

The simplest way to get disciplined and get into the habit of saving is to first find and then plug the leaks in your expenses. If investing is important, tracking cash flow is essential.

Once you figure out which are the avoidable expenses—it could be paying premiums on unwanted insurance or wasting money on overdue penalties—you will be able to channelize the amount into savings and investments. “People are generally undisciplined. Most are happy to remain as savers; they don’t want to become investors, and thus miss out on opportunities where their money can grow," said B. Gopkumar, executive vice-president, Kotak Securities Ltd, adding that he has seen investors committing to a three-year systematic investment plan (SIP), but discontinuing midway.

An easy way to track expenses is to jot down where you spend. An even easier method is to first invest and then spend. Come payday, quickly transfer money to pre-decided investments. And then spend the rest. Of course, to do this, one would have to study a few products in advance.

Start small

If you find it difficult to save and invest, the best way to do it is to start small. “Many people think that small investments will take them nowhere. A small amount put away may look like nothing, but you will be surprised at what you will be able to create over years," said Sadagopan. To put this in perspective, here’s an example. Say, you want to accumulate 10 lakh in 10 years. That means saving 1 lakh a year, or 8,500 a month. If you choose a product that gives 10% returns, you will have to save only 4,841 every month.

“Some people wait to accumulate a lump sum amount, of say, 1-5 lakh to start investing. The threat is that there is a tendency to withdraw this money for other purposes, making it difficult to accumulate the desired amount. So, even if you have just 500 or 5,000, start investing it immediately in a systematic investment plan," said Sadagopan. This way you won’t waste time either.

Invest carefully

Many people buy financial products blindly. Traditional insurance policies are a good example. People pay premiums on such policies every year, mostly in an attempt to save on taxes, but lose out on insurance coverage. “Many investors scramble to tax saving investments at the last minute, when it is time to submit investment proof. From the next year, plan your tax investments at the beginning of the year. This will help you in two ways—to make the right decisions and invest in products that will actually help you meet financial goals," said Sadagopan.

Make financial planning a three-step approach. First, target to buy insurance, then get rid of your debts, and then start investing. For instance, if you have adequate health insurance, medical expenses will not eat into your savings and investments. The correct financial product can help you build funds to fulfil your goals. So, take an informed decision. You don’t want to regret a decade later.

Manage debt

While investigating your expenses, one point to pay close attention to is loans. If you realize that you have too many, it is time to consolidate. But before doing that do remember that all loans are not bad. For instance, if you have taken a loan to build an asset, such as a house, then it is a good loan. But if you have gone overboard on spends and have overdue payments on credit cards, it is a bad loan.

When paying off loans, pick the unsecured ones first. These would include credit card bills, personal loans or consumer durable loans. “Many people don’t know how to consolidate loans and which ones to pay off first. Liabilities should not be more than 55% of your income," said Brajesh Parnami, chief executive officer, Destimoney Advisors, a financial advisory. Typically, unsecured loans come with interest rates in the range of 14-44% and paying them off first will help you save money.

The next year, 2015, holds a lot of promise. To make the best of it, look at what you did in 2014—rectify the mistakes, and congratulate yourself on the right choices.

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Published: 22 Dec 2014, 12:15 AM IST
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