The end of a year and the beginning of a new year are the time when most of us try to take stock of our situation on various fronts. Depending on the importance that we give to certain issues, we also pledge to some resolutions in the new year.
One subject that is common to many people’s New Year resolutions, is about managing personal finances. This concern cuts across demographic and socioeconomic classes and does not respect differences such as rich and poor, healthy and unwell, or even young and old. And it is not just about earning more or spending less, there are also behavioural aspects involved in making these resolutions work, which you may need to consider.
To understand what the ideal financial New Year resolutions should be for individuals in the new year, Mint Money spoke to financial planners who also highlighted the common mistakes that people make with their money. Let us first take a look at the common mistakes that people make while managing their personal finances.
According to financial planners, the most common mistakes are: not having an emergency fund, being under-insured, confusing insurance with investment and being over-invested in real estate. Moreover, spending beyond one’s means, for impulsive purchases, is also a common problem. “High lifestyle expenses are still a major share in most financial budgets," said Jitendra Solanki, a certified financial planner and founder, JS Financial Advisors.
Apart from these, young earners are also more prone to irrational buying. “In case of youngsters, impulsive and risk-taking behaviour in spending is a fact whereas in case of aged people, the spending comes under (greater) scrutiny due to conservative bias, risk aversion and financial insecurity," said Prakash Praharaj, founder, Max Secure Financial Planners.
While those in the older generation maybe better protected from perils of impulsive purchases, they could be in danger due to their investing habits, for example their fixation with fixed deposits and Public Provident Fund, said Deepali Sen, founder partner, Srujan Financial Advisors.
While these instruments could be useful to investors, having an asset allocation as per your financial goals and risk appetite is also important. “Most people avoid asset allocation and move their savings with the asset class which is in favour at a particular time. Real estate to bonds and then to equity is a common practice simply to emerge as a winner all the time. This should be avoided and one should follow asset allocation for the investments," Solanki said.
The best financial resolution would be to avoid the above-mentioned mistakes, which financial planners observe all the time among their clients. However, a new year is also a good time to sit down and take stock of your financial goals, existing investments, insurance policies and also rebalancing your portfolio.
The resolutions cannot be the same for all. For instance, if you are a young earner, it is important that you assess your risk appetite and start investing in mutual funds through systematic investment plans (SIPs), Praharaj said. You can also use SIPs to build an emergency corpus. Financial planners suggest to have an emergency fund worth at least 6 months of your expenses. Moreover, at this stage it is also important to get health insurance and term life insurance if you have dependents. Do not confuse term plans with insurance sold as investment products.
For those in the middle of their career, apart from reviewing your goals and investments, make sure that even if you are taking or have taken a home loan, your total EMI outgo should not exceed 50% of your take-home pay. “Don’t overstretch your finances by taking a huge loan. High amounts of loan ensure that many years of cash flows (15 or more years) get dedicated towards finishing off the home loan, leaving very little for other goals, dooming one to a long stint in the rat race," Sen said. At this stage of career, you should also revisit your retirement plans and retirement corpus, Praharaj said.
Paying off your debts, saving more money regularly and spending within your means are also among the basic rules of personal finance, which are applicable at all stages of life. However, you can aim for more specific financial resolutions based on your situation. “If you are young, you have time on your side; reading good books on personal finance can be a resolution. Similarly, someone nearing retirement can aim for a resolution to understand the impact before making any financial decision," Solanki said.
Also, do not be swayed with events such as a sharp rise in equity markets or the noise about cryptocurrencies. “Asset allocation should not be compromised. What you need to save for your financial well-being should be invested with this approach and in instruments that are easy to understand," Solanki said.
Cryptocurrency valuations may be fascinating now but they are beyond the understanding of most small investors. “Take exposure in such a fascinating world only with the money you can invest and forget. Any diversion of your core savings, meant for your financial goals, is a mistake to be avoided," he said.
While on equity, Sen suggests to invest in equities only if your time horizon is more than 7 years. She advises against investing in cryptocurrencies. “If you want to get thrills with your money, consider gambling," she said. Praharaj says to just stick to basics like goal-based investing, which means equity investments for long-term goals and debt investments for short-term goals.
Many people take up solemn resolutions in December, and forget them by end of January next year. While breaking these resolutions may or may not cause any immediate damage, but ignoring financial resolutions will have a severe impact on you in the time to come.