Financial Checklist to Keep in Mind When Approaching the Year 2023

Good financial management will save you time, money, and stress, helping you prioritise expenditures, make informed decisions, and effectively allocate resources. However, given the ongoing macroeconomic and geopolitical uncertainty, sharp rate hikes with a degree of coherence unseen over the past five decades to curb the spiralling inflation and warning signs of high market volatility in the near term are flashing in the global economy. The domestic picture may look rosy, but the distant rumblings are getting louder. According to the World Bank report, several indicators indicate a possible worldwide recession in 2023. When that happens, India will not escape the heat.

A contraction in economic activity usually brings discontent, such as job loss and salary cuts, to people's doorsteps. Businesses struggle to stay afloat. When markets decline, portfolio values decrease. During this time, expenses also keep mounting. Making ends meet for many families becomes difficult, let alone saving for the future. Many people struggled with severe financial difficulties in the past amidst the pandemic. However, we can be wiser from past experiences and put certain safeguards in place to prepare for any eventuality. That means it's probably time to take action to protect your finances for the year ahead.

With this in mind, here's a financial checklist with key things to bear in mind when approaching the year 2023:

1. Review your assets and liabilities

It is essential to be aware of your existing financial condition before you can do anything with your finances. You should assess your assets and liabilities before the start of each year to accurately comprehend your current financial situation and create an effective financial strategy for the year ahead. This will help you define realistic and appropriate goals that span short, intermediate and long-term time frames.

Your first step should be to review your assets and liabilities; while you do that, you should gather statements from your bank accounts and retirement or investment portfolios and list valuables that you own, such as a vehicle or house property, etc. Further, you need to gather statements for all your liabilities, like student loans, personal loans, car loans, housing loans or outstanding credit cards.

This will assist you in having a better overview of your finances and help you improve your financial condition by managing investments in a wiser way by making changes as per the prevailing market conditions, and by planning to reduce your debt burden.

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2. Define S.M.A.R.T goals

When you have your finances all laid out, you can start to focus on your financial goals. Due to various circumstances like a pandemic or financial challenges, you might encounter changes in your financial profile and your goals. Thus, you should ensure that your finances remain in accordance with your financial goals as each year passes by.

On the other hand, everyone's financial goals are different; whether your goal is accumulating wealth, paying off credit card debt, or buying that dream home, each call for a different strategy. As a result, think about creating a mind map or flowchart that reflects your present progress in 2022 and further modify your goals based on that; it will help you get a step closer to achieving your envisioned financial goals.

3. Maintain a budget and rein in major expenses

Living on a budget is essential. You should list out every expense you are responsible for each month. For example, your expected food bill, utilities or rent payment. Thinking hard about everyday expenses can help you enhance your savings. Your budget is a tool that enables you to make financial progress toward your goals. Using the information you collected from step one makes setting up your budget a breeze. You can create your own spreadsheet or use a budgeting app to help you.

You need to cut off on your major and avoidable expenses; finding a cheaper cell phone or internet plan, reducing the number of streaming subscriptions you have, and making your own coffee and lunch rather than buying them every day can prove to be easy wins for cutting unnecessary expenses. Knowing which goals to prioritise is important, too, when setting up your budget. Paying off debt is a priority, as is building an emergency fund and investing a sizeable portion of your income in retirement funds. Your monthly budget will help to stay on track towards achieving these goals.

4. Build an emergency fund

It is always advisable to build up an emergency fund to cover your expenses in times of need or any unforeseen event. Such a fund would ideally cover 12-24 months of expenses, including your loan EMIs. Many of us may find it challenging to set aside a specific amount from our monthly salaries to build an emergency fund. This is where your budgeting exercise plays an important role.

This can act as a safety net of financial cushion for you and maintain your financial stability in uncertain times. You could choose to park that money in relatively less risky liquid funds as it would offer you slightly better returns than your savings bank account. If you already have set up an emergency fund this year, plan to boost up your emergency fund in the coming year, 2023.

5. Consider Debt management

Paying off your loans, especially those that charge a higher interest rate, can make your financial life easier and help enhance your credit score. You can start by clearing outstanding credit card dues, car loans, or even personal loans, if any, and then move on to other debts like home loans.

As in step one, you have listed out your debt obligations; it will help you prioritise which loans to pay off as early as possible. This is the ideal time to set goals for reducing your debt burden in the coming year. You may consider debt restructuring or debt consolidation plans to manage your debt burden. This will help enhance your creditworthiness and maintain your debt-to-income ratio below 40%, which will get you access to avail loans in future in times of need. By reducing debt, you would be in a position to save more and invest it wisely in rewarding investment avenues that help in wealth creation.

6. Tax planning

The tax season comes right after the New Year. Many individuals delay their tax planning for the last moment and end up paying higher tax liabilities due to a lack of time and the hassle of filing before the deadline. Make sure you are aware of what documents you require to file your taxes well in advance and consult a tax professional if there are any tax benefits you are eligible for. Also, consider investing in tax-saving instruments based on your suitability from now itself to generate better risk-adjusted returns and avoid making wrong investments at the last moment.

However, if you expect a tax refund, plan how it can benefit your financial life. How can that help you pay off debt? Save for a new car? If you are debt-free and have a fully funded emergency fund, consider investing it directly into mutual funds schemes as per your suitability to earn inflation-beating returns in the long run.

7. Evaluate your insurance cover

Something you should consider when thinking about your family finances is a plan for emergencies. Life insurance and health insurance should be part of your financial plan, especially if your family depends on your income to cover monthly expenses. Many life and health insurance options are affordable and offer you plans that cover your entire family.

Now is the time if you have not purchased a life and health insurance policy. Remember, you have to ensure the terms and conditions of the insurance policy before purchasing for easy access to claims. In case you have existing life and health insurance coverage, you may consider evaluating the same and ensuring it covers all your medical and financial requirements.

8. Plan your year-end portfolio review

If you are planning to complete several tasks before the new year, reviewing your investment portfolio should be one of them. With all the changes that you and your investment portfolio might have experienced over the prevailing year, it's important to take some time to evaluate your holdings this year.

An investment portfolio review helps you know your investments better; it makes it easy to make informed decisions aligned with your investment strategy so that you do not deviate from your financial goals. Thus, you may consider planning to execute and year-end portfolio review of your investments. It will also help you eliminate the consistently underperforming schemes that drag down the overall portfolio returns.

To conclude...

The earlier you assess your financial situation, the sooner you will be able to may make changes without stressing later. The most important decision you can make as the year ends is ensuring everything is in order with your finances. With a few months left before year-end, investors should take advantage of the time to simultaneously look back review their portfolios and make changes accordingly to achieve their financial, investment and retirement goals. This strategic checkpoint ensures you stay on your path towards financial success in the coming year.

Therefore, you need to consider the above-mentioned key points in your financial checklist while approaching the new year 2023. Additionally, you need to enhance your financial knowledge to better understand the nuances of financial planning and work towards building a secure financial future.

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Warm Regards,
Mitali Dhoke
Research Analyst