Five best ways to plan your finances in 2023

resr 5paisa Research Team

Last Updated: 23rd February 2023 - 11:03 am

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The start of a new year is filled with hopes and promises. It is also the time for many of us to make resolutions. Be it focusing on health—joining a gym, eating healthy food—or even indulging in hobbies or planning to visit exotic locations. Some of us also make it a point to take stock of our finances. In fact, financial planning goes a long way in fulfilling both short as well long-term dreams and goals.

To put it simply, if you don’t want money to be a roadblock for anything, then financial planning is the answer to most questions. While it may be a little late to start work on your 2023 resolution, it is never too late when it comes to taking care of your personal finances.

People often think that keeping whatever money is left in a bank account after meeting their needs and spending on lifestyle expenses is savings. But money management covers the entire gamut of budgeting, saving, investing with goals in mind, and understanding taxes. 

For most salaried folks, an increase in monthly salary post-annual hikes often leads to higher spending. Many a time these are to maintain a certain lifestyle, maybe to upgrade to a better car or frequent fine dining, shopping, vacations, etc. In today’s day and age of social media, the propensity to spend on your wants is even higher.

So, here are five easy steps to help you manage your finances and start your journey to achieve financial freedom. 

Make a budget

This is the first and the most crucial step in managing your finances. Budgeting involves drawing down monthly income and allocating a certain amount to meet your wants, savings, and needs. It gives you a definitive plan and helps to avoid wasteful expenses such as shopping therapy.

Most people follow the 50/30/20 rule but it varies from person to person and also on the location. For instance, rent costs are higher in Mumbai compared to other cities. But going by this formula, a minimum of 50% of the monthly net income should be allocated towards needs such as groceries, rent, paying phone and power bills, etc. Those with high-cost debt should also plan to pay off the debt by including it in their monthly expenditure.  

Once all the monthly expenses are taken care of, money is to be divided between spending on wants such as eating out, weekend trips, going to movies, etc, and then for savings and investment. One of the simple ways to divide is to allocate money, which can be a minimum of 30%, towards savings and then the remaining 20% on wants.

For tech-savvy millennials, many mobile phone applications and even some of the neo-banks (digital-only banks) can help in tracking expenses as well as earn discounts on online shopping, ordering food, etc. For every penny saved, can go towards investment. 

Safety and security first

Emergencies such as hospitalisation can leave a big dent in your pocket and can disrupt household budgets. As emergencies often come without any notice, buying an insurance policy is a must even before starting savings and investments. It is important to remember that insurance is safety cover that you buy to meet unforeseen expenses and hence it should not be clubbed with investment or savings. There are different types of insurance policies but two of the most essential ones are term insurance and medical insurance.

Term insurance, especially, is a must for the sole breadwinner of the family. It is also a relatively cheap and pure insurance product that can be brought to provide the beneficiary or nominee with a large sum of money in case of a policyholder’s death. Those with high-risk jobs in industries should also consider buying accident insurance coverage. Do check online aggregation websites to buy such insurance policies at the best rate possible.

Medical insurance is another must-have on the list. While many salaried employees are provided with medical cover by their employers, it is good to buy an additional cover with a higher sum assured given the rising cost of hospitalisation and medicines in India. One can consider buying family insurance, covering parents as well as kids. Compare the prices and track record of insurance companies in settling claims before making your purchase.

The added advantage of buying insurance policies is the tax saving. But remember, this should not be the aim of getting insurance coverage.

Prepare for emergencies

As part of your investment plan, a portion should be dedicated to creating an emergency corpus that will help meet unexpected expenses such as job loss. While some health-related emergencies are covered through an insurance policy, not all of them can be met solely through insurance. The goal of this fund is to ensure that such unseen expenses are met without disrupting both monthly budgets as well as long-term investments.

Emergency funds should invest in financial products that are liquid in nature, meaning the money is available quickly. It can be divided by investing in short-term liquid funds, which is a type of mutual fund, buying gold, and even keeping some in cash. It is a good idea to keep a separate bank account for this purpose. The size of the funds depends on the monthly income but one can arrive at it by assuming it to be over certain times of the monthly salary. A minimum of five-six times of monthly salary must be the size of the emergency corpus, which also helps to avoid a debt trap.

Make your money grow

Money lying in your bank account does not amount to saving and it won’t grow on its own. This is where investment comes into the picture. Think of investment as growing a tree. You sow the seed by making a list of investments to be made based on your risk profile and the fact that everything will get costlier over time because of inflation. Your investment should at least take into account that the return at least takes care of the expenses in the future.

Remember, all the investment must be tied to a goal, be it a destination wedding, a holiday, children’s education and your own retirement. This helps in choosing a financial product. For instance, investment with an aim to meet your child’s college education cannot be in a risky financial product such as penny stocks.

Fixed deposits, mutual funds, and pension funds are some of the well-known financial investment products. Ensure that you read and understand all the terms and conditions and tax implications before investing. Don’t just get lured by the promise of higher returns.

Navigating a long list of mutual fund schemes can be daunting and it is a good idea to consult an advisor for overall investment strategy. Many new-age brokerages also provide this service online in an easy and cost-effective manner.

Don’t get stumped by taxes

January to March is often the time for most people to make last-minute investments to save on taxes. This is not a prudent way of dealing with finances and often leads to putting your hard-earned money on investments that won’t meet your aim just to save a few bucks on taxes.

It is a good habit to start learning about taxation. It helps not only in saving money but also in drawing a list of investments by fully understanding them based on your goals. The tax rate is applicable based on the salary of individuals.

In India, those with home loans have a higher chance of tax savings. Take a small step by learning about Section 80C of the Income Tax Act which allows salaried individuals tax exemption against some investments and buying insurance life policies. In addition, there are different sections allowing a specific exemption for medical insurance, toward house rent allowance. Ideally, tax planning should start at the beginning of any financial year to avoid taking last-minute decisions.

There are many websites that can help you in filing taxes as well as lowering your tax burden. The government has announced certain changes to new and old tax regimes from the start of the next financial year. Reading and understanding these changes and accordingly choosing the suitable tax regime before April 1 can be your first step.  

Summing up

Financial planning can be overwhelming but if followed correctly and consistently, it can give freedom to live life as one wants. The advent of technology has made financial planning easy, transparent, convenient, and cost-effective in a matter of a few clicks. But it is a good idea to take a little more interest in understanding with an aim to be your own money manager.

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