It is very common to make new year resolutions when entering a new calendar year. You can apply the same zest as a new financial year starts.
A new financial year is an excellent start for making financial decisions related to, among others:
- Review your financial plan and journey
- Rebalancing your investment portfolio
- Boosting your health insurance
- Upgrading your term policy
- Tax Planning
Mistakes can happen while making financial decisions. Sometimes it’s due to a lack of knowledge and sometimes it’s the outcome of not being prudent.
But as Robert Kiyosaki (author of Rich Dad, Poor Dad) quotes, “Don’t waste a good mistake, learn from it.”
Entering this new financial year, make a resolution to avoid these mistakes and learn your lessons to stay aligned with your goals.
Not Reviewing your financial plan and journey
Your financial plan is not a one-time activity but a living document. The start of the financial year is a good time to review your financial plan as your income, expenses may have been updated resulting in different savings rates.
You may also need to make adjustments based on the actual performance during the year gone by. You should review your goals and incorporate the required changes in the plan.
Not investing according to appropriate asset allocation
You must pay attention to where your money goes investment-wise during the year. Asset allocation is the key here that can help you take control of your investments. Asset allocation should be done as per your goals, time period of investment, liquidity requirements, and risk appetite.
For example, at 45 years, your financial goal 15 years down the line can be to save for your retirement. At the same time, your 7-8 years goal can be to send your child for overseas education. This requires asset allocation is not only a way that you can have liquidity in the near future but also a stable income after you retire.
You can opt for asset allocation in two ways:
- A balanced portfolio with adequate liquidity provisions for your child’s education overseas
- A predominantly equity portfolio for your retirement as you have a longer time horizon Investing heavily keeping in mind just one of these goals can have adverse effects in the future.
As Peter Lynch says, “Know what you own, and why you own it.” Make this new financial year the point to do so!
Updating portfolio too frequently
Changing your portfolio too frequently will cost you in terms of transaction costs, exit loads, and capital gains taxes so avoid updating your portfolio too frequently.
Assuming you have done the due diligence and research, you need to give sufficient time for investments to perform so investing for the long-term is beneficial to your portfolio.
You should make changes or exit investments under the following three conditions:
1. Rebalancing as per your desired asset allocation (ideal frequency once a year)
2. Change in the characteristics or non-performance of an investment for a long time (ideal frequency 3-5 years if proper research is done)
3. Liquidity requirements (as per your financial plan)
Not updating life and health insurance policy as per the life stage
Your financial and health-related needs change as you pass different life stages. For example, you may have bought policies in your 30s when you were young and had fewer responsibilities compared to your 40s.
As a result, it becomes crucial for you to have a check on your life and health insurance annually or at least every two years.
For life insurance, you can consider the following factors:
- Big debt-financed purchases made recently, i.e. buying a house through financing
- Undertaking a job change
- Starting a new business
- An increase in family size
- A change in the household income
Not having you around can have a daunting effect on your family. Thus, considering all the factors, you should boost your life insurance coverage with an equivalent amount to support them in your absence.
For health insurance, your needs change with age and inflation in healthcare costs. Taking higher coverage at later stages in your life will cost you a higher premium with exclusions for pre-existing illnesses… Hence you should take higher coverage sooner rather than later.
If you are yet to revisit your life and health insurance, mark the beginning of this financial year to do so.
Not doing tax planning in advance: Tax planning is a crucial factor to consider when planning your finances. The best way to undertake this aspect is to plan for taxes in advance, and the start of a financial year is a perfect time. Income tax rules under various sections allow tax exemptions for investments, health insurance premiums, home interest payments, etc. so make allocations accordingly to save taxes.
If you are planning to redeem some investments for liquidity requirements, you should make sure to pay advance taxes by the due date to avoid unnecessary interest payments to the IT department.
Tax planning at the beginning of a financial year helps you get a better understanding of your tax savings.
Conclusion? Learn from your mistakes
Mistakes occur, but you should learn from them to improve your situation. It is better to be cautious with your finances and plan ahead to avoid costly mistakes that can compromise your goals.
This article first appeared in Times of India on May 9, 2022 here.