Some New Year resolutions’ to help you improve your finances

Remember don’t set up too many or unrealistic financial goals. Otherwise, you may be unable to achieve them.

January 01, 2013 10:39 IST | India Infoline News Service

Did you make any resolution concerning your personal finances last year? If so, how did you do? Did you achieve your financial goals?

Resolution means a 'solution,' i.e solving a problem, with the prefix 're,' which usually means again. We strive to solve a problem again and again and again. Making resolutions to better ourselves come January 1 is a strong desire to the human capacity for hope and optimism - and self-delusion.

While December 31 is a day to reflect on the year gone by, January 1 is a time to look forward to the New Year, use this opportunity to review your financial plans and goals for the past year and make possible improvements where necessary for the New Year.


Resolve your debts

If you owe too much debt on your credit cards, determine how much you can realistically afford to pay off to your credit card company. Negotiate with your credit card companies to allow you to pay a “settlement” to resolve your debt. The settlement is another word for a lump sum that’s less than the full amount you owe. While talking to your credit card company for debt settlement be persistent and polite.

Keep all records of your debts, so that when you do reach the credit card company, you can explain your situation. Your goal is to work out a modified payment plan that reduces your payments to a level you can manage. To make the lump sum payment for debt settlement, you also need to explore alternative investment options.

You can also seek help of a non-for-profit financial counseling service centres available in your city. They will offer you one-to-one counseling. This service is usually free and your information remains safe and confidential with the counselor. These financial counsellors are well-trained and supportive. They help you resolve your debt issues.

To gain financial education

To make informed decisions and to achieve your financial goals, you need to set up an effective financial plan. To make this plan work, you need to have some basic financial knowledge. Financial know-how does not come within a day. Most of us are quite grim about how to manage finances really well. You need to differentiate between your needs and wants. For investing in financial products such as insurance, mutual funds, etc, you need to have some basic knowledge. Try to attend financial seminars and workshops.

Before investing in a financial product ask yourself whether you really need this product. You need to know what is the risk-reward ratio. While buying an insurance plan, you need to read the fine print carefully. Make an analysis of what is covered and what is not covered under the policy. Ensure that you read the terms & conditions of the policy thoroughly. You can also seek help of your agents in case of doubt.

In case of investing in a financial instrument online, don’t hesitate to seek the help of customer care executives through online chat / 24x7 toll-free calling facilities. It is important that one gets acquainted with the salient features and conditions in detail. This will help your family avoid any disappointment at a later stage, especially while making a claim.

Save regularly in good financial products

Regular savings can provide exceptional returns over the long run. Despite your busy work and personal life, you must set aside a fixed amount every month. The power of compounding is phenomenal. Your savings grow exponentially with time, and the sooner you start the more will be the amount of returns. This New Year, make a resolution to save regularly and benefit from the power of compounding to build a corpus.

Track your portfolio & monitor your finances

Keeping a track on your investments regularly is necessary to understand how they are doing so that you can buy or sell at the right time. Making investment is not a “one-time process”. You can’t just buy an insurance policy or invest in a mutual fund, savings bank account or other financial instruments and forget it. You need to “track your investments” on regular basis.

Updated information about your investments will also help you comply with the income tax laws—you need the buy-sell data for claiming exemptions or paying capital gains tax while filing the returns. You need to review bank account statements, fees, interest charges and automatic payments regularly.

Your philosophy should be ‘income’ minus ‘investments’ and the remaining is for ‘expenses’. Track every penny that you spend. You will be amazed to find out how much money you spend. You will probably give yourself a scolding once you make the discovery.

Buy adequate amount of term plan

Most of us are not aware of ‘how much’ insurance we need to buy to protect our family in case of an eventuality. If you have dependents or significant debts that outweigh your assets, then you likely need insurance to ensure that your dependents are looked after if something happens to you.

Premiums of term plan are cheaper when you are young. A large part of choosing a life insurance policy is determining how much money your dependents will need. While buying a term plan, you need to calculate how much debt you have (if any). One of the major factors for buying life insurance is to ensure income replacement, which will be a major determinant of the size of your policy. If you are the only provider for your dependents, then you need a policy that is large enough to replace your income plus a little extra to guard against inflation.

You need to consider your income net of taxes for calculation of life insurance requirement as insurance benefits are usually income tax free. For example, your income (net of taxes) is Rs. 5 lakh in a year, you need an ‘A’ amount of sum assured which if invested as a bank fixed deposit at 8% interest per annum will fetch an interest of Rs. 5 lakh in a year’s time.

8% x A = Rs. 5 lakh

Or, A = Rs. 5 lakh / 8%= Rs. 62.5 lakh

Thus, the minimum sum assured requirement is Rs. 62.5 lakh so as to ensure that income of the earning member of the family can be replaced by interest earned on the sum assured without depleting the actual principal amount. However, Rs. 62.5 lakh doesn’t include inflation.

All dreams and goals need to be considered separately as they are not necessities but wishes of the life insured. New house, car, foreign trips, child’s wedding, etc would fall under this category. The amount that you wish to spend on such occasions need to be added to the insurance requirement, after incorporating inflation.

For example: If you wish to spend Rs. 10 lakh for your daughter’s wedding 15 years later and the expected rate of inflation is 6% per annum, then you need to add Rs. 23.97 lakh to the insurance requirement—instead of Rs. 10 lakh.

Therefore to arrive at a conclusive figure of exact amount of insurance requirement depends a lot on assumptions and expected loss. The rate of expected inflation, the future value of money and other factors considered are all on assumptions.

Being adequately covered would also ensure a good night’s sleep without having to worry for the family’s security. Or, are we putting our families in the slightest of trouble if something unfortunate were to happen? Thus, the above factors and calculation would help us to re-value ourselves and find out if we are adequately covered or not.

Store all your financial documents safely

Ensure that all your financial documents are safely maintained and that your nominee is aware of the same. You should also review your nomination whenever required. Apart from informing the family members about where the financial documents are stored, you should also inform the family members whom to contact in case of eventuality.

Failure to keep proper records may land you in severe trouble. You can also get them scanned and store them in your computer or on a pen drive. If you hold physical shares, get them dematerialised immediately through a depository participant like a bank or a broker. Currently you cannot sell physical shares. In case you need the money, you would be stuck. Hence get them dematerialised at the earliest.

A demat account also takes care of your dividend warrants. All the dividends coming in for such shares will electronically be credited to your bank account, and hence there is no risk of losing them

Write a Will

It is necessary to make a Will because a Will establishes the intention of the person that after his death assets will only be given to those people who have loved and cared for the person making the Will. A ‘Will’ can be defined as, ‘A legal statement written by an individual, stating the manner in which his or her wealth may be distributed after his or her demise.’ A person making a Will is known as a ‘testator’.

It is best that you consult an advocate before preparing a Will. It would be better if the advocate is a person on whom you have the utmost confidence. Your Will should be simple, precise and clear. Otherwise there may be problems for the legal heirs. Sometimes relatives and others may try to distort the interpretation of the Will for their own benefit. It is always better to take the advice of a trusted advocate.

There should be an ‘executor’ of the Will who would be entrusted with the responsibility of ensuring that the assets are distributed according to the provisions of the Will. You should take the prior consent of the person whom you wish to name as the executor. You (testator) should sign the Will in the presence of at least two witnesses who have to attest the same.

Each page of the Will should be serially numbered and signed by the testator and the witnesses. This is to prevent substitution, replacement or insertion of a page or pages by persons with fraudulent intentions. At the end of the Will the testator can indicate the total number of pages in the Will. Corrections if any should be countersigned.

The Will may be kept in a safe place like a bank vault. The executor and the beneficiaries should be informed where the Will is kept. It is advisable to keep a signed copy of the Will with a trusted advocate. Duplicate copies of the Will may be made, signed by the testator and the witnesses and kept at separate places so that if one is misplaced the other may be used.

Whenever changes in the family circumstances or other reasons necessitate any change in the Will in the intervening period (from the time of making the Will to the time of demise of the testator), the structure of the Will can be amended. Even if there are changes in the nature of the property or assets, an amendment may be needed.

It is not compulsory for one to register a Will with the registering authority, but in case any property or asset is given to any charitable organisation, then registration should be done. A person’s Will becomes operative only after his or her demise.

Explore additional income sources

Generating multiple streams of income—such as doing a part time job, renting your additional vacant house, etc—can have a major impact on your finances. Even an extra income of Rs. 5,000 each month could go a long way to paying down debt or increasing your investments. You can explore additional income sources such as doing a part time job, renting your additional vacant house, etc.

Build a 6-month emergency fund

Having an emergency fund is a necessity. You should maintain a cash reserve large enough to cover three to six months’ worth of household expenses. Rest assured, someday you will need it. Sickness, job loss, house maintenance, car repairs—there are so many things that can shake your financial boat. An emergency fund is a great idea, but it also requires some effort to achieve. You need to calculate how much money you need to spend each month. View your emergency fund like an insurance policy and once you have it, guard it carefully.

Make a list of all of your regular monthly expenses like housing costs, food, utilities, debt repayments and transportation costs and all of your other ‘must-pay’ bills. Add all these expenses to find out your total expenses and multiply the resulting figure by the number of months that you chose—say three or six months. For example, if your monthly expense is Rs. 25,000, then for three months you need to set aside Rs. 75,000 in your emergency funds.

Once you have decided how much you need to save, it’s time to decide where you will keep your money. Since you want your emergency fund to remain fairly accessible, a savings account makes good sense. Any one of these accounts will give you the liquidity that you need, while still earning you some interest.

Remember don’t set up too many or unrealistic financial goals. Otherwise, you may be unable to achieve them. It may be a good idea to maintain a checklist to keep track of how you are doing throughout the year, so that you can make any necessary modifications.

Teaching family members & people around the importance of savings

Last but not the least, you need to make family members, children, friends and other people understand that the importance of saving money. In your discussions—with your family members and friends—you can educate them about the importance of investing early and the impact of inflation on your investment.

You need to set a good example for people around you. You can do this by establishing prudent savings habits yourself, especially for important long-term goals such as higher education for your children, their marriage and your own retirement. When you talk to your friends and relatives be armed with some practical information on consumer spending topics so that you can best answer their questions.

Remember don’t set up too many or unrealistic financial goals. Otherwise, you may be unable to achieve them. It may be a good idea to maintain a checklist to keep track of how you are doing throughout the year, so that you can make any necessary modifications.

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