Planning for Financial Milestones in the New Year

Every new year brings a lot of excitement and optimism. It is time for new beginnings and to carry forward the beginnings you made in the earlier years. You may have made milestones for various aspects of life like finance, career, health, relationships, etc. and overall quality of life. In this article, let us focus on the financial aspect.

Planning financial milestones in the new year.
1) Term & Health Insurance

Financial protection is the foundation of your pyramid, essential for a secure financial journey. Safeguard your family with term life insurance against untimely death. Opt for a family floater health plan for hospitalisation protection, supplementing even a corporate health plan. Remember, view insurance as pure risk coverage, not an investment, aligning with sound financial planning principles.

2) Household Budgeting

Budgeting is a simple yet effective that exercise helps you get a grip on your monthly expenses. It provides a bird’s eye view on any corrective steps that need to be taken to curtail expenses that are impacting your financial wellbeing.

Sorting cash flows brings clarity on key personal finance ratios like savings surplus, debt-to-income ratio, etc. These ratios depict the financial health of an individual and serve as key pointers towards any actionable that is required.

Budgeting helps optimise financial resources and surplus allocation towards savings, investments, debt repayment, etc. to achieve financial goals. Most people follow the equation: Income – Expenses = Savings and Investments. You can flip the equation as: Income – Savings and Investments = Expenses. It will ensure you achieve financial goals, and that too faster.

3) Emergency fund

Covid-19 pandemic resulted in many people falling ill, and lockdowns led to job losses. It highlighted the need for a crucial financial buffer against job loss, medical emergencies, or any unforeseen expenditures. An emergency fund provides that buffer and keeps your financial journey going without derailment. It is advisable to build an emergency corpus that covers expenses for at least 6 months.

4) Making informed decisions

Before you start investing, understand concepts like inflation’s impact on purchasing power and the wealth creating potential of compounding. Assess your risk profile, comprehending the risks in different financial products. This knowledge of risk reward structures aids in setting expectations and making informed investment choices for long term financial success.

5) Goal planning

Having gained the required knowledge, it is time to put it into action. Take a systematic approach towards every financial goal with the goal-planning process.

a) Determine the future value of your financial goal by factoring inflation into the current cost.
b) Calculate the monthly investment needed for your goal, the investment horizon, and expected rate of return.
c) Review the progress annually till the goal is achieved

6) Tax planning

To avoid salary deductions, many employees invest in the Jan-Feb-Mar quarter when they get reminders from the Finance Department for submission of investment proofs. Investing to just save tax is not the appropriate approach. Always invest to achieve financial goals, and make efficient tax planning an essential part of it. While investing towards your financial goals, make sure to maximise deductions allowed under the Income Tax Act.

7) Asset diversification

Your portfolio should include various asset classes, as each of them has a specific purpose. Equity mutual funds are for growth, fixed income is for stability, gold is a hedge against economic uncertainty, insurance is for protection, and real estate is for living. You may allocate a specific percentage of your portfolio to different asset classes based on factors such as risk and return expectations, investment horizon, lock-in period and liquidity, tax benefits, etc.

8) Succession planning

Now that you have created assets over a lifetime, the next milestone is to pass them to your legal heirs after your demise. You can do that through a will. A will ensures the smooth distribution of your assets to the intended beneficiaries in a manner you desire.

Personal financial pyramid: Start 2024 with your milestones journey

Rather than focusing on a milestone to improve a specific life area, start 2024 with a holistic approach and aim to improve the overall quality of your life spanning multiple areas, including finance. We have discussed the financial milestones at length, which will set you on your comprehensive financial planning journey. We end with a quote by Vern McLellan: “What the new year brings to you will depend a great deal on what you bring to the new year.” So, give it your best shot in 2024.

The author is co-founder and COO, FinEdge, Views are personal.