Handle Finances Smartly in 2021 for Your Financial Wellbeing

The banking sector has a fresh offering, as cheque payments have become much safer. Banks have begun implementing the 'Positive Pay System' as directed by the Reserve Bank of India (RBI) for the cheque truncation system. Hopefully, we look forward to a positive year ahead and you should smartly manage your finances for your better financial health.

Recently a friend of mine was discussing her New Year resolutions and how she has adopted the "New Year new me" concept to stick through her resolutions. Having been through different financial challenges in the year 2020, she placed financial health at the top of her resolutions list.

Besides that, she said, "I need to be better at financial planning with money management skills to achieve my set resolutions for the year. But, somehow I don't understand where to start with"

To which I responded, "Maintain financial discipline in your life."

"How?" she asked.

Here's what I explained to her...

You see, the main purpose of financial planning is to set things right financially - whether it is budgeting, saving, investing, accomplishing financial goals, or even following the required financial discipline. All these set the foundation to sound financial health and wealth creation.

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Financial discipline means being in control of how you utilize your money. Let 2021 be the year you are able to avoid impulsive purchases, make informed investment decisions, and more likely to pay your bills and clear your dues before you spend your money frivolously. Sure, it happens that you initially start with great intentions of how to save and invest, but at times, you succumb to spending impetuously. Therefore, financial discipline is the cornerstone of your financial independence.

Here are some questions that can help you assess your level of financial discipline:

• Do I pay all the bills on time?

• Do I manage to save money?

• Am I able to avoid impulsive or unnecessary spending?

• Am I saving enough to meet the envisioned financial goals, particularly retirement?

• Do I have an emergency fund?

• Do I have an optimal insurance cover (both life insurance and health insurance)

If your answer is 'Yes' for all questions then you are on a right track. But if it's 'No' then, you must initiate financial discipline for a better financial future.

In today's world, it is so easy to buy new things at any hour of the day (with credit cards and easy EMI facility available). I know from personal experience that quite a few millennials are very determined to have what they didn't have while growing up. So you stretch yourself and your finances to overcompensate for that perceived shortcoming or tend to spend more than you should to keep up with others. However, doing this only causes more of your hard-earned money to slip through your fingers, which, in turn, begins to affect your financial wellbeing.

After the hard financial lessons 2020 has taught us, it is the perfect time to handle your finances smartly to be in pink of your financial health in the year 2021.

So, if you want to stop the money drain, become more disciplined and give yourself a higher chance of reaching your envisioned financial goals for the year 2021.

Accordingly, here are various essential parameters to lead a healthy and disciplined financial life, listed below for you:

1. Organise your paperwork wisely

   In this fast-paced world, handling paperwork becomes a time-consuming and tedious task that usually gets put off for another day. Although we are in a digital world, there are essential documentations that we are required to manage. Thus, maintain records and categorise your documents in order:

   • Personal documents [PAN Card, Aadhaar, Passport, Voter ID, Driving License, etc.]

   • Certificates [Birth, marriage, death, domicile, school leaving, education and job related]

   • Investment, insurance, and banking-related documents [Demat account statement, Mutual fund account statements, insurance policies, fixed deposit certificates, bank passbooks, acknowledgement from banks, etc.]

   • Taxation related documents [Form16, bank statement, loan statements, HRA supporting documents, charity receipts (to claim deduction under Section 80G), tax-saving investment proofs (to claim deduction under Section 80C), health insurance premium receipts (to claim deduction under Section 80D)]

   • Estate documents [Purchase agreement, sale deed, leave & license agreement, stamp duty and registration receipt, rent receipts, share certificate, loan statement, loan re-payment statement, acknowledgement letter from the society, etc.]

   All the documents should be filed properly and make it a point to review or update for changes if any (regularly or quarterly) as required. Given that life spells uncertainty, you must keep your trusted family members in the loop for any case of any emergency.

2. Engage in a prudent budgeting exercise

   If you wish to improve financial discipline in your life, budgeting is the most important exercise to do. It helps allocate a substantial portion of your income to the long-term financial objectives/goal by sifting your wants v/s needs, thereby helping you save more. Many individuals earn well, but lack prudent budgeting practice, which eventually means a struggle financially.

   Setting up a budget for the first time may seem difficult; but to avoid any financial setbacks, you must evaluate your financial inflows and outflows, as it leaves you with a perspective to make informed financial decisions. Track your spending and categorize it into expenses that are avoidable and unavoidable, as this can help you reduce some expenses and leave a surplus amount for investing and/or maintaining a contingency reserve.

   So, create your budget and stick to it throughout the year. Learn to distinguish between 'needs' and 'wants,' so you can save more, spend rationally, and create an emergency fund that serves as a buffer for you in times of need.

3. Set S.M.A.R.T financial goals

   The financial goals that you set for this year should be S.M.A.R.T (Specific, Measurable, Adjustable, Realistic, and Time-bound). Assess what you want to accomplish with your finances.

   The year 2020 made us realise how unpredictable circumstances can be. Thus, your financial goals should be set in a way to survive any challenges the New Year 2021 throws at us. Prepare a goal worksheet, and plan with your family members as a majority of financial goals are family-oriented - children's education, their wedding expenses, that lavish car, the dream house, a vacation, etc.

   If your financial goals are set S.M.A.R.T enough, they will motivate you to balance your spending and savings to reach your objectives.

4. Make productive and tax-efficient investments

   Avoid making any investments based on recommendations from friends, peers, etc. Ideally, investing is an individualistic exercise and it must enable you to build wealth at a pace that can counter inflation. We have written many articles highlighting the importance of making investments that are productive and tax-efficient.

   [Read: How to Make Wealth Creation a Fulfilling Journey]

   Before you start investing make sure you have set your financial goals prudently and align investments accordingly.

   To inculcate the habit of investing regularly and systematically, start SIP (Systematic Investment Plans) in worthy and suitably mutual fund schemes (as per your risk profile, broader investment objective, the financial goals you are addressing, and time in hand to achieve those goals).

   Make sure you follow asset allocation that is best suited for you, diversify well within each asset class, and make tax-efficient choices.

   Over long periods, the compounding power of such investments would help you counter potential inflation by a comfortable margin. Note that not all asset classes may perform well always year-on-year. Construct the portfolio in such a way that can optimise risk-returns for you and enable fulfilling financial goals in the short-term, medium-term, and long term.

5. Review your Insurance cover

   Your financial health could be devastated if you do not have adequate insurance coverage. In the previous year, for example, because of the pandemic, maybe fundraising requests had to be made for those undergoing costly hospitalizations or families being financially drained because of the demise of the sole earner.

   The primary objective of insurance is not to invest and to earn a return, but to indemnify life and health risks. As the health cost increases, you need to change your health insurance plan if it does not cover enough. Ensure that your insurance coverage for life and health is reviewed on time.

   This year, if you don't have any insurance cover, get one and use PersonalFN's HLV calculator to calculate the optimal amount of insurance you need. If you already have, review your term insurance to cover life risk and check if your health insurance is with adequate top-ups to cover everyone in the family.

6. Do a comprehensive portfolio review

   Periodically consolidate and rebalance the existing portfolio with a thorough review to make a more efficient portfolio. Investments in your portfolio may have been built ideally earlier, but your risk profile may have drifted after the impact of last year.

   A comprehensive portfolio review will help you in making changes such as, culling out underperforming investments, diversifying well, reinvest in better alternatives, and optimising the risk-return potential of the portfolio among other things.

   Having your investment portfolio aligned with your risk profile, broader investment goals, financial goals, and time horizon is essential so that you have one of the best suited and a well-diversified portfolio that can perform in any economic climate when emergencies strike.

7. Keep your debt under check

   Another key step to financial discipline is maintaining your debt under control. This year, make a conscious effort to reduce your debt, which would eventually facilitate you to save and invest more than paying EMI on loans.

   Keep your debt-to-income ratio below 40% of your net monthly income to avoid getting into a debt-overhang situation. Besides, in times of need, a good credit history would help you get a fresh loan. It is not iniquitous to have debt obligations as long as you have the means to repay it.

8. Plan for your Retirement

   Saving for your retirement when you are young probably sounds like the least exciting thing you'd want to do with your money. The truth is, the earlier you start, the more secure you will be when you retire. Remember, if you wisely save and plan early for your retirement, your golden years could be truly blissful. Wish To Live Life King Style When You Retire? Read This!

   But note that, there isn't a one-strategy-fits-all when it comes to retirement planning. This is because what you want from retirement may be different from another individual. You must give your retirement plan attention now as it an important life goal.

I recommend you watch this video on retirement planning:

To conclude,

It's not always about trying to fix something that went wrong last year. Sometimes it's about starting where you are and creating something better. If you wish to take it a step further, you can start by empowering yourself with the weapon of financial knowledge.

Financial education is the key to be more disciplined with money and it will help you guide your family to make informed financial choices as well.

PersonalFN encourages you to enhance your financial knowledge and become a 'Financial Guardian', who understands the financial planning elements to guide your family through and become more disciplined with your finances so you can have a better financial future.

And in case you are wondering how to become that financial guardian for your family, PersonalFN's latest special initiative, the "Certified Family Guardian", offers you an exclusive opportunity to learn the finer nuances of money management.

Organised into eight modules with 24 extensive videos, the "Certified Family Guardian" will help you with all the relevant tools and learning modules needed to get better at money management and making informed financial decisions for your family's secure future.

It also offers a host of other benefits to help you make informed investment decisions. Read here for complete details.

So, if you wish to handle your finances smartly in 2021 and become financially disciplined, then enrol for "Certified Family Guardian" course today!

Warm Regards,
Mitali Dhoke
Content Writer

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