Seal your financial leakages this year
ARIHANT Capital Markets
As the famous adage goes, “Change is the only constant in life”
Financial planning is not a one-time process. Life, your goals, tax laws, and your financial world have a way of changing, sometimes dramatically. It is quite unfortunate fact that though we spend more than half of our lives working and saving, but we hardly spend any time in contemplating on putting our hard-earned money to work more effectively for us. This approach leads to various Financial Leakages which often causes a financial disaster in the long run. Keeping a regular eye on our personal finances and sealing these financial leakages helps us to make the most of our money.
Let us take a resolution in this new year that we take charge of our finances wisely as we alone are the architects of our financial future. Reviewing provides us an early signal and prevents us from potential financial problems. Hence, we have identified few areas that need a regular review to help our financial plan running as planned:
Review your Goals- You should review your goals and find out if there are changes in your life, changes in job/increments/ loss, if any of your goals have been achieved; if there have been birth or death in your family, or change in the family size on account of marriage; it makes sense to re-look at the goals and re-set the plan.
You should also assure that your saving plan is on track. If you are even not able to save for your high priority goals such as children education, children marriage or retirement then you should curtail your discretionary expenses.
Review your Loans- You should review your existing loans and ensure that all loans help you in increasing your net worth (assets- liabilities). In case they do not, you should plan for repaying the same. You should also review that your interest cost on loan is less than return on your investments. If it is not then you should redeem your low yield investments to repay loans. You should also find out the ways to reduce your interest burden.
Review your Insurance policies- Insurance is often the most crucial and yet the most overlooked aspect of financial planning. Though most of us take life insurance or health insurance covers but the amount of cover is usually inadequate. While buying life insurance, you need to consider the immediate, future and living expenses that your family might have to incur in case a tragedy strikes you. The right strategy is to buy pure term insurance with adequate cover. Hence, you should not mix insurance and investment. If you have life insurance policies other than the pure term insurance then, it is time for your to reconsider them.
Review your Investments: Year 2012 was characterized by sheer pessimism for the retail investors and hence most of the investors chose to stay away from the markets. However, as a matter of fact, equities generated more than 25% return in the past year, which was the highest among all the asset classes. If we look back, in the year 2008 there was a lot of optimism for equities and in the year 2010, there was a lot of optimism for silver but the returns in these asset classes were substantially negative in those years. Hence, our investment decisions should not be marked by pessimism or optimism about any asset class whereas they should be based on the correct Asset Allocation.
Asset Allocation decision involves deciding the percentage of investable funds to be placed in equities, bonds, real estate, gold, and cash equivalents. It is decided on the basis of investors’ return requirements, risk tolerance and the time horizon in conjunction with the expectation about the capital markets and individual asset class.
You should also review risk and return of your individual investments and should take corrective measures if it has underperformed the benchmark.
Prepare and Review your WILL: Most of the individuals do not opt for making WILL just because they do not possess many assets or are under the impression that they have already made nomination. No doubt, nomination is a great help to successors but the Nominee can hold the assets only in the capacity of a trustee. In such a case, the nominee has to pass the assets to its successors. Hence, it is prudent to write WILL in addition to nomination. An important point to note here is that you have all the rights and privileges over your assets during your life time even after you have written your WILL. In other words, the contents of WILL are effective only after your death and your assets are safe during your life time.
You can also do tax planning for your successor through WILL. Your successors are your kith and kin and hence you would not want to burden them with any unnecessary tax liabilities. Hence, it is pertinent that you should review your WILL keeping in mind your successor’s tax liability. It is advisable to take the assistance from a Certified Financial Planner having expertise in estate planning or a Chartered Accountant to mitigate this problem.
Review your Advisors performance: Financial advisor plays an important role in our financial decision making. In India, the financial service providers often focus on providing commission based recommendations without providing adequate knowledge to their customers. Hence, you need to ensure that your financial advisor is providing you advice or giving solutions considering your over all needs, attitude, life style, risk tolerance and financial situation. You should also review that your advisor is competent in providing advice on every aspect of personal finance. Additionally, transparency, honesty and proactive approach are a must while reviewing your advisors performance. If your advisors do not fulfill these parameters, then you should consider hiring a competent certified financial planner.
The author is Principal Financial Planner at ARIHANT Capital Markets.