New Year Financial Resolutions 2020

As we enter into yet another New Year, our social media feeds would again be full of New Year challenges and resolutions. Even the fitness clubs would see a sudden hike in their membership numbers. As the New Year approaches, we do make a set of rules and targets to achieve in the coming year, and make it a better year than the year gone by. Although, we do it for our health and lifestyle, it is also crucial to include your personal finances in your new year's resolutions. The New Year is a good time to review your financial situation, your personal budget and make plans for the next year.



You can start this with the review of your spending trend in the year 2019. What will help you in this, is your year-end financial statements, such as the annual bank statements, 12-month credit card summaries, etc. that will help you to figure out your spending pattern. You can also take an appointment of your financial advisor to review what worked in terms of your financial and investment plan in the year 2019 and make changes, if any, for the year ahead. If you don't have any financial advisor, then finding a good financial advisor should be one of your main New Year resolutions (if your pocket suits you), since the days heading towards the New Year's Eve are often spent on thinking about the things that happened in the year gone by, and making resolutions for the next year. The start of the year should be spent on writing down the resolutions, or rather, making it a commitment.

To help you in making your finances in 2020 much better than the year 2019, we are hereby listing out some of the basic things that you should adhere to in 2020. If you follow these things religiously then, it will make a big difference in your finances and financial situation at the end of 2020.

Track your budget

This is one of the most basic things to start with. It has been observed that most of the financial blunders happen due to inefficient budgeting or in some cases, due to no budgeting at all. So this year, make a resolution that you will have a budget in place and thereby, follow it in a disciplined manner. However, to make a proper budget, you need to know all the sources of your income as well as expenses. Hence, start tracking down your income as well as the spending. There are tons of mobile apps available in the market which would help you to autotrack the spending by reading your bank messages on every transaction. Nevertheless, those who are concerned about their privacy then, nothing is better than tracking it on your own in a disciplined way with the help of a spreadsheet (MS Excel, Google sheet etc).

Using spread sheet, you can maintain your budget in a more sophisticated way and can also do your analysis to understand various aspects of your budget. If you are not well-versed with the spreadsheet, then you can download any readymade spreadsheet templates from the web which would help you in maintaining your budget.

Change your money habits

A habit makes and breaks a character. Similarly, money habits either makes or breaks your financial character. So, it is important to inculcate good money habits and get rid of those that are deteriorating your wealth. Now you might think that what do bad money habits include? Some of the common examples are unnecessary use of credit cards, splurging on pets, availing personal loan for going on a vacation, not maintaining a budget, etc. So, this New Year take a resolution of inculcating good money habits and avoid bad money habits which often acts like a slow poison that will kill your financial happiness. 

Avoid these bad money habits

 Making late payments. Means making payments on your bills post due date.
 Rolling over your credit card debt.
 Carrying a dozen of credit cards. At the most, having 2 credit cards is more than enough.
 Spending haphazardly without having a proper budget in place.
 Paying for subscriptions like newspaper, video or audio streaming services, etc. that you do not use frequently.
 Ignoring savings for retirement.
 Living paycheck to paycheck.
 Not building an emergency corpus.
 Only saving your surplus rather than investing.
 Not reviewing investments periodically. On the contrary, reviewing investments too often.
 Considering insurance as tax-saving instrument. 

Automate your finances

As a human being, we have a tendency to forget. Nonetheless, we regret forgetting some of them not just personally but also financially. So, in such a case, one can automate things right from the payment of electricity bill to even SIP (Systematic Investment Plan) investments towards your financial goals. Today, there are a lot of Fintech companies that have introduced their apps, which not only helps you to track your expenses but also, help you to invest in mutual funds via the same app. This has added to the convenience of the investor. Automating your investments would help you to regret less on any delayed or no payment. It will help you to sort out your different payments which in turn, will help you to achieve your desired financial goals.

Evaluate financial mistake from the year 2019

Mistakes are a part of our lives, no matter how perfect one tries to be. One of the best examples is buying insurance policies that you believe also acts as an investment. Though many a times, it is being sold as an investment; you should remain alert and stop mixing both. As it is rightly said, learn from the mistakes. Hence, before moving further towards finalising your resolutions for the New Year 2020, it is important to first evaluate the financial mistakes that you have done in the previous year. This will help you to avoid them in future. Not just mistakes but also look at the things that you tried hard and then set it as a benchmark and try to do better than that.

Have a debt pay-off goal

This is one such goal that would help you achieve other financial goals. Debt is something that no one would like to carry as a burden as it is like a 'Damocles Sword', which might harm you anytime. Taking a debt in case of the utmost emergency or for things like buying your first car or first home is understandable. Apart from this, there is no need of debt at all. All you need is just a proper financial planning. Hence, as a resolution of 2020, try to set a figure (debt amount) that you would wish to pay off this year. You also need to understand that there is a difference between a good loan and a bad loan. Good loan is something that you take for some needs such as child's higher education, medical emergency, buying a first home, etc. Bad loans are those that you take for fulfilling your desires. Say for instance, taking a loan for a vacation, excessive use of credit card to buy latest gadget, etc. Good loans usually cost you less as they carry low interest rates when compared to the bad loans and they are tax efficient. It is always wise to pay off high interest-bearing debt as quickly as possible as it is eating your surplus which can be put to more productive use.

Have emergency fund in place

Planning for emergencies often help you to overcome the cash crunch at the time of income loss. There is a valid reason to have emergency fund at the first place. This is because when there is a loss of income, there are various mandatory expenses that you need to incur which also include your EMIs. Having an emergency fund in place will help you to keep the investments safe, which you have made towards achieving your financial needs, such as child's education, retirement, etc. Not just that, but it also helps to ensure your Systematic Investment Plan (SIP) commitment towards those goals to continue further. So, this new year, build an emergency fund. If you already have one, then ensure to review it. 

How to calculate and build an emergency fund?

The emergency fund should include all the fixed expenses which are mandatory on your part to incur. Expenses such as rent, groceries, school fees, etc. which are mandatory in nature and must be included in the emergency fund calculation. On top of that, you must also include the insurance premiums that you pay and the EMIs.

Next, you need to know how many months of expenses you need to keep as the emergency fund. This usually depends on the occupation that you are into. Why occupation? It's because every occupation has a different level of job security. For instance, if you are a government employee, then the job security is high and you may only need to keep 3 months of your expenses in the emergency fund. However, if you are someone in the sales job where there are high chances of job loss, then you need to have as high as 9 months of expenses in the emergency fund.

Once you understand the number of months of expenses to keep for the emergency fund, the next step would be to first, add the fixed expenses and EMIs then, multiply by the number of months. After this, add the insurance premiums to the result amount. The reason behind adding the insurance premiums later is that insurance premiums are usually paid annually.

Now it's time to build the emergency. Let's assume that you have to keep six months of your expenses in the emergency fund. Of that, it is prudent to keep one month of expenses in your savings bank account, 15 days of expenses as cash at home and remaining to be parked equally in liquid funds and ultra-short duration funds. The reason for keeping 15 days of expenses in cash is that, if there is an emergency case and you are not able to access the ATM, then you should have enough cash to bear the daily expenses until the ATM becomes accessible. This issue may arise due to flood-like conditions, where ATM is not assessable for many to withdraw cash. At such times, having cash helps you to get the daily needs. 

Identify and set your financial goals

To attain a complete financial freedom, it is important to first identify and set your financial goals. Before doing so, it is important to understand that not all goals are financial goals. A goal can be termed as financial goal only when it can be measured in monetary terms it is reasonable, can be achieved and has tenure. Say for instance, 'buying a car' is a goal. However, 'buying a car worth Rs.7 lakh in 3 years' is a financial goal. Not just that, you should also further segregate your financial goals between your 'needs' and 'wants'. Child's education, child's marriage, retirement, etc. are the examples of financial goals that can be categorised as 'need'. However, going to an international vacation, buying a farm house, owning a luxurious car, etc. are the examples of 'wants'. So, this new year, not just identify and set financial goals but also divide them between needs and wants.


Ensure rebalancing of your portfolio

Most of the people show enthusiasm while investing and also dream of making a good amount of money. However, they just invest and leave it as it is, when it is recommended to rebalance it periodically, usually every year. Rebalancing your portfolio helps you to maintain your asset allocation strategy and also tries to de-risk your portfolio. Technically, it accumulates those assets which are not in favour now and book some profits in assets that were in favour. The following instance would make you understand as to why rebalancing is necessary. 

In the above table, we have assumed that you that are in the start of the year 2009, where you have invested Rs.1 lakh. Out of this, in Sensex (Equity), you invested Rs.60,000, in S&P BSE 10 Year Sovereign Bond Index (Debt) you invested Rs.30,000 and in Gold, you had invested Rs.10,000. So, as we can see from the above table, the portfolio that was not rebalanced, ended-up fetching you Rs.2.26 lakh at the end of 2019, whereas the rebalanced portfolio fetched you Rs.2.35 lakh. You might feel that the difference is of mere 4 per cent. But it has helped you to invest with a peace of mind and not worry about any volatility. Hence, there's no doubt that rebalancing your portfolio definitely prove out to be a better approach.

Hire financial advisor

Not everyone is expert in every field. That's the reason we have experts in various fields to take care of certain things on your behalf. For instance, you cannot self-treat your illness; you need to go to a Doctor for that. Similarly, in the case of personal finance, hiring a financial advisor makes more sense. He will not just help you with his expertise but would also, guide you towards the right financial path. If you can afford, it is always better to hire a fee-only financial planner. He is someone who is virtually free from any conflict of interest and advises you, on what is good for you. He will not just look at your financial goals but also advises you on your cashflows, debt, risk management, taxes, etc. So, this new year, make a commitment to yourself of hiring a financial advisor. 

Guidelines for hiring a Financial Advisor

Do check whether the financial advisor is well-qualified and holds a Certified Financial Planner CM certification.

Ask for the services that he provides and go in details of each services to understand what you can actually expect from him.

Understanding the fee structure would help you to know how much you would be paying. Do go deep and ask how much you need to pay on your investments.

It is always prudent to trust a financial advisor who is regulated by the government. Go for the ones who are registered under SEBI (Securities and Exchange Board of India).

Do ask the financial advisor for some sample reports, as this will help you gauge his work. 

Conclusion

The above paragraphs clearly make you understand as to what are the financial resolutions that you should make this year. Every new start does require an effort and patience to see its results. So, do not get demotivated if something is not working as desired, despite putting all the efforts. Those things would surely reap you benefits in the long-run. If you think you need that extra push to get things done, you can think about hiring a competent financial advisor, who will help you in not only fixing your personal finances but also, would guide you towards your financial freedom. The bottom-line is that you should make your New Year resolutions to sort out your finances in the year 2020.