A new year is a good time to review our financial decisions. It’s time to track our spending patterns, investments over the past year and whether these decisions were in line with our overall financial objectives. The intention here is not to criticise or regret what is bygone, but rather to understand our own financial behaviour. It can help us align our behaviour to our life goals or to rethink some of our financial decisions.
Regular review is also an important part of financial planning. Managing money isn’t easy and it requires an honest look at your own financial habits, biases, expectations, and cash flow. But it’s critical if we want to inculcate financial discipline and understand our own behaviour. Ultimately, it is the first step towards improving your financial health.
Steps To Improve Your Financial Health in 2022
Financial health refers to your monetary state. Strong financial health is characterised by a steady flow of income, a growing cash balance, a robust portfolio, and regular expenses that do not show any sudden spikes. Getting to this stage can seem challenging, especially when you are starting out with a limited income and heavy expenses.
This is where financial planning comes in. A good financial plan should help to keep you on track for your overall financial goals.
1) Review your investments
It is critical that you review our portfolio periodically to assess the status of your assets, how these are maturing, and to keep an eye on your cash flow. With age, your investment portfolio will also change in keeping with your risk profile. For instance, you are more open to high-risk high-return investments at a young age when you have few dependents. In contrast, you are likely to be more cautious in your 40s where you may have multiple liabilities and cannot afford to take high risks.
The year-end portfolio review is also the perfect opportunity to list all your investments in one place to see its overall asset allocation. This includes all asset classes, including, gold real estate, mutual funds, EPF, and equity. The next step is to track the returns on your investments through the year and see if these meet your expectations. So, if you expect a 12% return from a mid-cap stock, where does your investment stand at this time?
At the same time, you can compare the weightage of an asset against its returns to ascertain the balance between high return and steady investments. The portfolio review gives you an accurate picture of the weightage of each asset, the overall returns on your portfolio, and to reassess this distribution as per your current risk tolerance.
2) Examine unnecessary expenses
One of the major focuses of a review is to understand our spending patterns. While we may aim to follow pre-set spending goals, most of us are often unaware of our actual buying habits. This is usually why our savings at the end of the month are sometimes lesser than expected. Fortunately, we have the means to check our actual spending in a more reliable manner.
The first would be to try and maintain a budget spreadsheet each month where you record each purchase or outflow from your account. If maintaining a spreadsheet seems too challenging, check your bank account, including all credit card purchases. Chances are that you will find unnecessary expenses or unhealthy spending habits, such as an annual magazine subscription that you no longer follow.
Harmful spending habits could include the tendency to buy high-end electrical gadgets or overspending at restaurants. Identification of these patterns is the first step in dealing with them. Cut down on eating out and take a good hard look at your subscriptions. On the flip side, it can also help you plan for unplanned expenses, such as hosting clients for lunch or buying gifts for friends or colleagues. You can set aside a specific amount each month for such expenses.
3) Automate your savings or investment
One of the safest ways to ensure sufficient cash flow for savings or investments is to automate them. It can be all the more useful for those who find themselves spending more than they should. The yearly review can help clarify your spending patterns and how much you should be investing monthly, quarterly, half-yearly, or annually in your portfolio.
Automating your savings becomes even more important for investments that may not seem significant now, but are necessary in the long-run. This includes investing in a retirement fund in your 30s or in health insurance when you are young and fit. By automating these savings, we can ensure that our biases do not stop us from making these investments.
You can set up automatic transfers in sync with your income cycle to ensure that these allocations are made as soon as you have sufficient funds in your account. It also ensures that you are never late in making payments or premiums. It also ensures that you have a clear limitation on your spending potential, it helps you maintain financial discipline.
4) Channelise money in different investment avenues
How diverse is your portfolio? You must have a pretty good idea by now, thanks to the portfolio review. As you take a good look at your overall monetary status, this is a perfect opportunity to further expand it. But a portfolio redistribution must stay cognizant of current financial conditions and your own risk profile.
For instance, while pharma companies have taken the lead last year, in 2022 sectors like fintech, real estate, manufacturing, logistics, and automotive are expected to pick up. A flurry of IPOs are also expected to hit the market this year, offering attractive investment opportunities in high growth companies. The growth of startups and the flow of investment in the digital economy can help you expand your portfolio by including more small-cap, high growth companies. With some of these stocks picking up, this is the perfect opportunity to further diversify your equity assets.
At the same time, investment in big companies, government securities, and mutual funds will ensure a more stable balancing act. Similarly, you can look at expanding to different markets, such as the US to limit your exposure to a single economy. It can also help you avoid the impact of rupee’s depreciation.
2022 also offers the chance to work towards investing in long-term investments like real estate or in further strengthening your retirement corpus by investing in retirement funds.
5) Strengthen emergency funds
The last two years have shown us the importance of savings and a nest egg that can help you through the tough times. An emergency fund is designed to provide us with a financial fallback in case of an adverse event, such as a sudden loss of income. It can also include unplanned big expenses, such as major repairs to your car.
Loss of income or sudden expenses can not only impact our overall lifestyle, it can also put at risk our portfolio as we fail to make timely payments or are forced to cash in some of them in order to meet our liabilities. An emergency fund is meant to provide for all these expenses in the short term. It can be three to six months of your salary depending on your income and expenses.
For many of us, our liabilities can often increase with age as we have to think of children’s school/college fees, EMIs, loan repayments, or house rent. People with a high number of liabilities should, therefore, build a fund that can withstand at least a six-month long loss of income.
To avoid overspending from the fund, it is best to park it in a separate savings account, especially if the fund is fairly small. For a sizable fund, it’s best to invest in a highly liquid fund such as debt mutual funds where your money can grow while still allowing you to quickly cash in your assets when required.
6) Review your debt and rework your budget
A debt may seem like a heavy burden, but it is often a necessary part of our modern life. And in some cases, it may even be better than making heavy cash payments for every purchase. That said, it’s always better to know your debts at the beginning of the year. Prioritise your debt as per the interest rates. It’s always best to pay off high interest debts first. However, low or no interest debts can be paid as per schedule and may help you manage your finances in a more planned manner.
Reviewing your debts and payments is necessary for working out your budget. As you go through last year’s finances, you will see a clear pattern of spending, investments, and income. These will help in making a more realistic budget, one that you can stick to. You can keep tweaking it as you rework your investment decisions through the year.
Finally, let 2022 be the year when you work towards improving your financial literacy. A strong financial health has a direct impact on our wellbeing. It can help us to meet our essential and non-essential needs, explore our potential to the full, and allow us to lead a life on our own terms. As we grow older, it allows us to take time off when needed, provide for our loved ones, and ensure good medical support.
Financial literacy is the first step towards educating yourself about money and how it works. Today, you also have easy access to professional help in managing your finances through multiple platforms, whether digital or through professionals. So, take the time to understand your own behaviour, goals, and how to align the two.