New Year Resolution – 5 Smart Financial Planning Decisions for the New Year

Start this New Year with a bang – make these smart financial planning decisions and secure your financial future.

While money doesn’t grow on trees, it can grow when you save and invest wisely. Knowing how to secure your financial well-being is one of the most important things you’ll ever need in life. You don’t have to be a genius to do it. You just need to know a few basics, form a plan, and be ready to stick to it.

New Year is a great time to make good habits. Here are 5 smart financial planning decisions you should consider.

Smart Financial Planning for the New Year

1. Make a financial plan – What are the things you want to save and invest for? Make a list.

• A new home
• A new car
• Education
• Medical emergency
• Caring for parents
• Retirement

Next identify how much time you have to meet these goals, and how much you have saved towards them so far. Based on these, calculate how much is needed, and inflate it by 6-8% at least.

2. Review your current asset allocation – there are many rules of thumb for asset allocation. Mine is, take as much risk as you can take without losing sleep. Of course that doesn’t mean gambling with all your money. A common rule of thumb is based on a person’s age. The thinking is, the more time you have to invest, the more risk one should take. Given the life expectancy today, a person in his 60s can be expected to live well into 80s. That is a good 15-20 years window. Hence even a 60 year old should invest in stocks and mutual funds as long as one doesn’t lose sleep over it. If you cannot take risk, plan to earn more and invest in instruments that give lower returns. My preferred asset allocation is:

• Stocks and Mutual Funds – 50 to 70%
• Bonds and Deposits – 5 to 10%
• Gold – 5 to 20%
• Silver – 2 to 5%
• Real Estate – 10 to 30%

3. Review your life insurance – The amount of insurance needed varies on the amount of risk you want to cover, your age, your current liabilities, your health etc. The following life events determine your life insurance needs.

• In school or college – life insurance is not required as no one depends on you financially.
• Started your first job – if your parents and family will depend on your future earnings, buy a policy to cover that.
• Getting Married – increase your insurance coverage to support growing family.
• Birth of a child – increase your coverage substantially to partially cover for future education and marriage of your child.
• Child becomes financially independent – reduce coverage as your financial risk has now reduced.
• Child gets married – you can further reduce your insurance coverage as your financial risk has reduced further.
• Retirement – by now, you may have built a large enough savings that your family may not need to be covered by insurance.

One way to achieve this is to build a ladder of term insurance policies for different durations so that you don’t have to pay any more premium than absolutely necessary.

4. Review your medical insurance coverage – given how expensive medical treatments have become, coverage of Rs. 5 Lakhs is not sufficient. Now there are companies that offer coverage of up to Rs. 15 Lakhs. Everything being equal, pick a plan that increases your coverage instead of giving you a discount in your premium.

In addition to basic medical insurance, consider getting the following too.

• Top up plan – these policies only kick in when the medical costs reach a certain amount, say Rs. 10 Lakhs.
• Accidental death and dismemberment – these policies pay in case the policy holder dies and becomes handicapped. It is used as a replacement for income lost.

5. Calculate your financial ratios – Every individual should use personal financial ratios to ensure the financial well-being. These financial ratios can provide warning signals that can help investors adjust the financial situations as needed. For more, read this.