10 steps to align your finances

As Indians, we have a saving rate of 30%, as per the data from the central statistical organization, in fiscal year 2019; compared to United States which was just 7.6% in the year 2019. We are ingrained since childhood to save for the future, however saving is just not enough, we should invest it appropriately. You spend so many years to build your career life, to get that income, but perhaps don’t pay heed on where that incomes goes. Financial Literacy is very important, and you just cannot take random tips from relatives, friends or follow blindly some investment advice given on television, print etc. Financial education is not taught in schools and colleges, yet money management is so important. You can’t outsource this, and it is important life skill from my point of view. Money management can be learned, it just needs your time and attention. Personal finance is very personal, however, these steps might be useful to start aligning your finances.

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  1. Have a financial plan – This is the first step for aligning the finances, as this creates a roadmap where the money should go. It should have all your financial goals, investment framework, financial strategies (paying off/eliminate debt, build and stick to budget, increase your credit score, etc.) asset allocation, investments (equities, fixed deposits, etc.), risk management by knowing your risk profile, asset portfolio (real estate, properties, etc.), insurance plan, and other important aspects related to your finances. Write your short term goals (0-12 months), medium term goals (1-5 years) and long term goals (5-20+ years). Know the future value of all the goals in present value and allocate the percentages of savings against each category and then decide what type of investments (i.e. equity, debt, fixed deposit) should you be making for each time horizon. For example, if your child is in 10th standard and you require to fund his college education then 6 months before, you shouldn’t invest that money in stock market. Another example if you are funding for retirement which is 30-40 years from now, then no point in keeping the entire money in Fixed deposits. Asset allocation is another important aspect here. Have a plan for appropriate mix of equity and debt in you plan. Usually the debt portion is your age and the equity portion is (100-age), however it depends on your financially position, current assets and time horizon of your goals. Your financial plan would give you and your money a clear direction. Revisit & update your financial plan annually or in case of change in any of the factors.
  2. Know your net worth – List down all your assets and liabilities at book value and estimated present marketable value. Assets are real estate investments, car, building, corporate fixed deposits, bank fixed deposits, shares, debentures, gold etc. Liabilities are mortgage loans, vehicle loans, items taken on installments, guarantees given to anyone’s loan, etc. If you do not know the exact market value, find out the nearest market value. Calculate the net worth by subtracting net liabilities by net assets at both book value and the present market value. This will also help to understand what price your assets has grown against book value.
  3. Insure yourself – The earning member in the family must insure themselves for at least 10-15 times of the gross annual income till the retirement starts or the person is financially free, to prevent the family from struggling from finances after that person is gone. Buy these policies online and early on to prevent paying high premiums. Pro tip – Make all the necessary disclosures such as preexisting illness, smoking and drinking habits, etc. even if it results in higher premium to avoid any claim rejections in future.
  4. Provide for health related contingencies – Even if you have corporate health insurance, then also insure yourself and your family by taking family floater policies and individual health policies for senior citizens. You should have a base cover of 20 lakhs and super top of 1-2 crores depending on the health condition of the family. Take into account the rising medical costs if you think this number is quite huge. Know these terms like exclusions, pre-existing waiting period (opt for the least waiting period), co-pay (avoid such policy if possible), sub limits (avoid if too many), special coverage (avoid if not needed e.g. maternity benefit if you already have children), etc. and read the fine print to understand what’s not covered, the benefits and always have health cash reserves handy. Port if your existing insurance policy doesn’t meet your requirements. Pro tip – Make all the necessary disclosures such as preexisting illness, smoking and drinking habits, etc. even if it results in higher premium to avoid any claim rejections in future.
  5. Prepare a budget – While everyone has a fair idea of how much was spend and how much they earn, unless you list down each and each expense. If you do not tell your money where it must go then you will not realize where it went.  Hence track your expenses for at least 3 months and then prepare the budget. Don’t forget to include taxes in the calculation, do the tracking on gross income and not on net income. Roughly, 50% of the incomes goes towards needs (groceries, basic clothing, rent, mortgages, bills and utilities, insurances, transportation, etc.), 20% towards wants (dining out, partying, vacations, weekend trips, events, shopping, hobbies, etc.), and 30% towards savings (debt/loans repayments, cash funds, liquid funds, health cash reserves, vacation funds, fun funds, retirement funding, child education, etc.). Label the expenses into fixed, variable, intermittent and discretionary expense. Fixed expenses are known expenses like rents, school fees, tuition fees, study classes, society maintenance charges, maid and cook expenses, etc. Variable expenses include groceries, electricity bills, gas, petrol, transportation, books, school and college related expenses etc. Intermittent expenses are expenses which pop up any time of the year such as repairs, maintenance of car, home, sudden unavoidable expenses, etc. Discretionary expenses include the expenses which you expend as per your wish such as gifts, birthday and wedding parties, dining out, weekend travel, dining out, etc.  You could further bifurcate this into money jars and separate the finances as per the requirement i.e. immediate needs and wants fund (55%), future retirement fund (10%), vacation fund (10%), child education fund (10%), cash reserves (10%) such as cash funds (6-12 months of living expenses), liquid funds (2-3 years of living expenses), health reserves (depending on health profile, at least 20 lakhs), and gifts and charity fund (5%) or your own personal allocation etc. This is a great money management tool. Whenever you receive a lumpsum amount like yearly bonus, income tax refund, etc., you and your money exactly knows where to go. This way you aren’t depriving yourself of anything but planning in advance. You can save up to 75-80% if you are aiming for financial freedom. Pro tip – All earning members should participant in the budgeting process for saving, spending and investments to a fair percentage, this helps to prevent high tax liabilities on one person and helps to accumulate assets for all members. This is especially for women who give all the money to their fathers and husbands to manage or in case they have to manage then just keep it in low interest yield savings accounts and lose opportunity to grow wealth.
  6. Use your credit card wisely – If you use the credit card towards all the possible expenses, then you get a complete picture of the spends and you can earn those points too. This is useful for funding your future travels without having a dent on your finances. It also assists to save by availing the discounts, cash backs, promotions, etc. Align your credit card billing cycle with your salary credit dates, so that you never miss that. Use CRED to pay and manage credit bill payments. Prudent credit cards usage helps to build good credit score and establishes credit worthiness, resulting in savings of lakhs of rupees by getting a better interest rate while availing a future housing loan. Pro-tip – Negotiate well and consider taking women home loan as it saves a lot of interest, even 0.25% over a long period of time is lot of money and at least pay 20% + down payment to reduce the loan amount.
  7. Automate everything – You have to automate your payments, savings and investments. As soon as you receive that salary or credit, allocate as per your budgeted percentages. Set with standing instructions, pay yourself that 30% + first, set up SIPs or schedule lump sum investments on shares or bonds, set up that cash funds, liquid funds, reserve funds, and contribute monthly towards it (remember money jars philosophy), transfer your expenses to joint account as per the share decided, pay credit card dues in full, set aside some money for cash expenses, save money for wants and desires as based your goals. Execute prudent goal based planning.
  8. Investments – Every member in the family must have investments in their name, this helps with better tax planning and in case things go bitter, then you have money to take care of yourself and your finances. Ensure that asset allocation of equity and debt is per your financial plan if not then rebalance your portfolio as and when needed. Invest according to your risk profile and ensure that you are investing in simple products which you understand. Do not chase that extra 1% and invest in the riskier investment like co-operative bank, get rich quickly schemes which gives higher interest rate. Return of capital is more important than return on capital. Any product which is complicated and you cannot understand is not worth considering as investment. Keep it simple. Consider the cost, time, liquidity and risk involved before committing your money towards that investment. Remember that whatever investment you chose, never lose money. Match your investments to your goals, and shift to low risk investment products when you come nearer to your goal. This is important aspect of goal based planning.  Look beyond fixed deposits and LIC for investments, as they would not beat inflation and not grow your wealth. This is where many people go wrong. Increase your financial knowledge. If you want to have equity exposure, go with low cost index funds. Do not mix your insurance with your investments. Get rid of the ULIPs, Child Insurance plans, Retirement plans, Endowment plans, etc. after calculating the Internal rate of return (IRR) of these products. You would be surprised that the cover given by these type of policies is so low and they do not give better returns too. Pro-tip – Before going full-on with investments towards long term investments, vacation fund investments, child education fund, etc. do consider repayment of all the debts including home loans if possible and save the lakhs of interest payments which would assist in building your wealth, as debt is secret destroyer of wealth.
  9. Track your progress – The first weekend of every month must go your tracking the progress and reconciling with the actuals. Take your credit card and your bank statements and classify each and every expense into needs, wants and investments and see how much did you stick to your budget. Track your no spend days initially and then set the days in your calendar for no spend days. Do not forget to reconcile your points earned through credit cards, debit cards, memberships, etc. Track your retirement contributions to Employees Provident Fund (EPF), Public Provident Fund (PPF), National Pension Scheme (NPS), Pension Fund (PF), too. Transfer your EPFs immediately when you change your job. Look critically into each item and see if you can do better by not expending towards unwanted or unneeded items. Cut costs brutally, look for reduction in variable and discretionary, expenses to begin with. Switch to unbranded items, stop impulse purchases. Schedule money dates, everyone’s buy-in is quite necessary to make this work.
  10. Filing of documents – Keep all the necessary documents in physical or soft copies for claiming income tax rebates, deductions and refunds. Also keep the spreadsheet for tracking all the investments, bank accounts, demat accounts, shares, bonds, retirement accounts, property details, nominations, passwords and let your family members know about it. Update this periodically and inform your family members from time to time. Make a will and get it registered.

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