It’s February already and while many of us are busy making tax saving investments, some of us are wondering about how we should plan our finances and investments for the coming financial year starting April.
Here’s a quick checklist for getting a head start on your financial planning for the year.
1. Do you know how much you are going to be able to save each month?
You might or might not get a hike this year. We hope you do. Either way, learn how much you can save. It might be likely to be the same as you have been doing. Ensure it is between 20%-30% of your take home. Increase this by the same percentage as your hike if you do get one.
Think of purchases as multiples of your savings. For example, if you save Rs 20,000 per month then something worth Rs 100,000 is worth 5 months of savings. You are probably going to end up taking on debt if something is worth more than a year’s worth of savings.
2. Do you anticipate any big expenses coming up?
Are you planning to take on debt to finance a big purchase – home or car loan? Can you adequately pay the EMIs without cutting out your savings? It can be a life saver to anticipate big expenses before they arise.
Think of purchases as multiples of your savings. For example, if you save Rs 20,000 per month then something worth Rs 100,000 is worth 5 months of savings. You are probably going to end up taking on debt if something is worth more than a year’s worth of savings. Before you do, ensure that the EMIs won’t cut into your savings rate. Better yet, ensure you have an emergency fund before your big buy.
3. Have you figured out your tax saving investments for 2020?
Budget 2020 brought a new optional tax structure which is honestly not that useful for those of us with home loans or if we are renting a home in a metro with high rental payments or contributing to various investments covered under Sec 80c or make insurance payments for health and life. However, if you think it is a good idea to switch then that is your call.
Either way figure out if you need to save tax. You will probably need to make tax saving investments if your taxable income exceeds Rs 6.5-7.5 Lakhs and you choose to stay in the existing tax structure. Plan where your tax saving investments need to go.
Deduct your EPF contributions, insurance premium payments (if you bought a policy), home loan principal payment for that year etc. from the Rs. 1.5 Lakh limit under Sec 80c. The remainder is how much you can invest.
Tax saving mutual funds make the most sense here as you can start the investment via SIP and not end up making a bulk investment towards the end of the year. It’s just more convenient and planning friendly. If you don’t like the volatility of equity then consider other fixed income investments such as PPF or 5 year deposits. Be prepared for a longer lock in though. These investments will go from your monthly savings so plan accordingly.
4. Figure out how much will you be investing in short term (fixed income) and how much in long term (equity)
Finally, we come to the main investments of the year. If you have an emergency fund and have planned for your big purchases for the year then you can consider investing the majority of your savings towards long term objectives such as a post-employment life.
The best and the easiest way to invest for the long term is through equity and through equity mutual funds. Here’s why.
For your short-term needs, invest in shorter term debt funds such as liquid funds and ultra-short-term debt funds as they are the are more stable and provide tax efficient growth if you hold for at least 3 years. If the amount needed is not big then you can also consider FDs and the like.
Make sure to set aside at least a month’s savings towards an indulgence fund. Having a plan for your finances doesn’t mean life has to be all dreary and boring. Have fun, but just plan for it.