Here are Some Ideas to Make Your Finances Healthy in the FY 2023-24

A chaotic situation can be intimidating and frustrating, whether it is your health or your personal finances. Unhealthy eating habits can still be controlled with a healthy diet plan, but unorganised finances cannot be sorted easily. You need to put meticulous efforts into planning your finances in a way that helps to achieve your financial goals and secure your financial future. If the finances are not managed well, you may find it challenging to achieve your goals or even fall into a debt trap. Moreover, unrestricted bad financial habits can result in saving less and spending more.

Maintaining good financial health is just as important as taking care of your physical, emotional, and mental wellness. You might believe that your finances are in order if you can pay your rent or utility bills and your loan EMIs out of your earnings, but there is more you can do to strengthen your financial health.

Here's an example that will help you understand better...

Rishi, a close friend of mine, has not been prudent with his finances since the time he started earning, though he has managed to buy a car and even make some investments till now. While he has mostly been able to meet his obligations on loan repayments and expenses, there have been times when he has been short on funds. Although, it may now appear as though he has complete control over his finances, in reality, they were not well organised, which could harm his financial health. By being financially independent, Rishi was able to make ends meet; now, his next goal is to attain financial freedom and lead the life he desires. Rishi now feels the need to plan for his financial future and look after maintaining his financial health.

Now the solution to Rishi's situation is that he could begin by organising his personal finances, and here are some notions that he can consider to improve his financial health.

1. Saving and Spending

One could begin organising personal finances by estimating earnings for the year and ascertaining details about both assets and liabilities. Budgeting is an important aspect of financial planning; developing a budget helps you manage your cash flows, and you can cut back on non-discretionary costs to save more and meet your financial goals.

By gathering relevant financial data, one can review the overall financial position and understand how much money they should save and how much to spend. Remember, you should always spend after saving and not save what is left after spending. Try to resist the urge to splurge your income to fulfil instant gratification; instead, you must practice delayed gratification.

When it comes to financial planning, savings should be the priority. You see, an emergency can occur at any time, leading to the need for quick funds. The sudden loss of a job, medical emergency, financial crisis, every emergency can be managed without much stress if there are adequate savings to cover the current requirement. Thus, there is a need to build an emergency fund that is equal to 6-12 months of expenditure, including your obligations.

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2. Investments and Insurance

In the beginning, you should define your financial goals. Thereafter, you can easily invest in various rewarding investment avenues based on your appetite for risk and the investment horizon to achieve these S.M.A.R.T goals. Many individuals invest without considering the goal behind their investments, it is like driving your car without a destination in mind. Remember, you have different goals requiring different time horizons and investment amounts. As a result, no single strategy can be used to achieve all the goals. Although it may seem time-consuming, it will help you manage your investments effectively and prevent any impact on your financial health.

You can invest via Systematic Investment Plan (SIP) in mutual funds to build a corpus steadily over time and generate inflation-beating returns. Various free online tools, like a SIP Calculator, can assist you in determining the approx investment amount required for each goal. Prioritise your financial goals by relevance and accessibility; you can simply create an SIP in mutual funds towards each of your envisioned goals to accomplish them.

In order to secure the financial future of your loved ones and protect them from any financial challenges, you may also purchase an adequate insurance cover (along with your investment) to indemnify the risk to life and health. Given the rising medical costs, health insurance cover can assist you during costly medical treatments. A life insurance cover, on the other hand, will safeguard your family's financial requirements in your absence (untimely demise). Ideally, one must choose life and/or health insurance at an early age since the premium amount increases with age.

3. Review and Rebalance

Investing in worthy avenues and purchasing an adequate insurance policy is not a one-time task; you need to conduct a periodic review of your investments to help you stay on track with your goals.

It is vital to review your financial goals and the performance of diverse investments made on a periodic basis. This is required as some of your short-term investment goals may now be redundant, and there could be changes in your financial circumstances as well. A periodic review at the beginning of the year could help pinpoint the investments that are underperforming or pulling your portfolio returns down. With one's planned asset allocation, the investment portfolio can be rebalanced.

The next key point is the review of your insurance policies, both life and health insurance plans. As insurance plans can meet critical needs, these must not be considered solely for tax-saving purposes. You should check if the insurance coverage is adequate as per your current circumstances; if not, it should be increased. Holding an optimal insurance cover for both life and health is essential for your financial freedom.

4. Debt Management

A key step every individual must take to enhance their financial health, is emphasize on debt reduction plan. Eliminating the debt burden gives you more disposable income to save and invest in rewarding avenues. You need to tackle a high-interest debt that pulls out the major portion of your income, leaving you with a small amount to manage the rest of your financial needs.

If you're struggling with revolving debt, a debt consolidation may help you wrap several expenses into one monthly bill at a lower interest rate. You should aim to maintain a debt-to-income ratio of below 40%. The lower your debt burden, the better will be your financial health and the closer you will get to attaining financial freedom.

5. Taxation

Another crucial point which is commonly overlooked is filing your taxes on time and deciding on the tax regime since taxpayers can choose between the Old vs New Tax Regime.

While the new regime permits you to pay taxes at a lower rate, it does not allow the deductions permitted under the old regime. You should choose the tax regime wisely at the beginning of the financial year rather than when filing income tax (IT) returns, as it will aid in planning your taxes better. It is also important to submit tax declarations in time for lower tax deductions. Moreover, non-filing of taxes on time attracts penalties, thus affecting your financial health. Filing taxes is crucial for maintaining financial wellness. Accurate and timely filings can maximise tax savings, reduce stress, and empower you to work towards achieving your financial goals.

To conclude...

Although managing your personal finances may seem like a daunting task, you can improve them in this financial year by focusing on the ideas mentioned above. For people who find it difficult to track their cash flow or review their investments may think about adapting to the various financial tools, apps, and services that are available in the market to meet their needs. Streamlining and managing your personal finances can become simple and stress-free if these ideas/tips are followed conscientiously.

Additionally, you should arm yourself with the sword of financial knowledge, that entails learning the fundamentals of personal finance and assist in making informed decisions. Financial literacy builds the foundation of an individual's relationship with money and how you could strategically build your wealth over the years by effective financial planning.

MITALI DHOKE is a Research Analyst at PersonalFN. She is an MBA (Finance) and a post-graduate in commerce (M. Com). She focuses primarily on covering articles around mutual funds including NFOs, financial planning and fixed-income products. Mitali holds an overall experience of 4 years in the financial services industry.

She also actively contributes towards content creation for PersonalFN’s social media platforms in the endeavour to educate investors and enhance their financial knowledge.

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.

Disclaimer: This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision.