2020 was a year full of uncertainties. The economy witnessed a paradigm shift with respect to consumer behaviour, digital collaboration, business policies, and more. While the world persevered against the disruptions of the COVID-19 pandemic, it brought about some changes that are here to stay. Stepping up to the challenge of financially making it through the pandemic required an array of skills for most of us. There is no reason why we cannot carry through the same financial discipline into 2021. Planning your personal finances is easy to get started on, and goes a long way.
Here are four personal strategies that can give you a strong headstart for 2021.
Set goals for the future
The first step towards strong financial planning is setting short and long-term goals. Goals and expected milestones can give you a timeline to build your savings. Ask yourself: What do you want to accomplish in the next year, or the next 5, 10 and 20 years? Your goals are personal to you. Do you want to purchase a new car soon? Do you plan to buy a house, or rent a bigger one? How much do you want to have saved for your child’s college education? Visualizing these scenarios allows you to expect them as expenses in the future, and start budgeting for them. It also lets you evaluate how every financial decision you make will contribute to your overall financial health.
The best part about setting goals is that even if you, for whatever reason, fall short of fulfilling them, the effort you put towards them still remains, In the case of financial goals, it means that you will have the savings remaining. For example, let’s say you were not able to save enough to purchase a car in 2025 like you had planned to, because of some unprecedented expenses along the way. But you were able to periodically invest money towards a car over the years. You will still have the capital left and may be able to afford a car in the next year or two. It is a win-win situation.
Create a personal budget
Be it personal finance, or funding for a project- the process of financial planning usually starts with a budget. A budget can be for general expenses, such as monthly household spend, or for specific expenses you might be expecting, such as a total budget to complete renovating the garage.
A budget gives you a few advantages. Firstly, it helps you keep track of exactly how much money is coming in and where it is getting spent. If and when you find yourself exceeding your budget, you can adjust your spending habit. Secondly, allocating money according to a budget ensures that you will always have enough for essentials.
Make smart investments
You have worked hard and earned your money. You could save it in a savings account or in a safe! But what if you could get more value for your money? This is exactly what investments do- make your money work for you.
One of the ways this happens is due to the power of compounding, where the returns on your invested capital are added back to your principal. The other mechanism at work is the return-risk tradeoff. Investing in equity markets comes with its own set of risks. Market volatility, where prices are moving and down unpredictably, can be risky. Which is why market-linked instruments are generally considered riskier.
The market may be open waters, but there is a right way to approach it. Before buying stocks you must begin by establishing a clear understanding of the various terms used in trading, such as ask price, derivatives, commodities, etc. Traders use fundamental and technical analysis to help them make calculated guesses about the future performance of individual stocks, or the market as a whole. The latter is interesting because it uses technical ‘indicators’ which are patterns that use historical data to make predictions based on statistics. It is also important to focus on building a portfolio that includes various instruments with different risk levels and terms. This is known as ‘diversification’ and it safeguards your overall portfolio even if one or two assets lose their value. There are many resources online that can help you understand the stock market before you begin.
Plan your taxes
One of the most crucial steps to optimize your income is planning your taxes. Tax planning aims to minimize your tax burden and by getting the maximum returns on your payable tax amount. In India, Section 80C of the Income Tax Act, 1961 deems investments of upto Rupees 1.5 lakhs eligible for tax deductions. It lists several instruments in which you can invest to get returns.
The section includes many long-term options for returns, such as Public Provident Fund (PPF), Life Insurance plans, National Pension Scheme (NPs) etc as well as medium-term options such as 5-year Bank Fixed Deposits (FDs) and Equity-Linked Service Schemes (ELSS). You can also get tax deductions for paying your children’s tuition fees, premiums towards health insurance, and for repaying a home loan. By saving taxes, you will be left with more money to spend and re-invest. Tax planning can hence be a virtuous cycle.
Irrespective of what 2020 was like for you financially, the next year gives you a whole new opportunity to start strong with your financial planning. Online resources can arm you with the knowledge you need to start building your investment portfolio and savings corpus. Angel One brings you an extensive bank of knowledge in the form of videos, blogs, podcasts, and more, to help you get started with your investment journey. No matter the setback, the right time to start anew is now.
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