Getting your house in order: Tips for a healthier personal finances situation

When it comes to financial planning, savings should be the priority. An emergency can occur at any time, leading to the need for quick funds. The unexpected breakdown of one’s car or the sudden loss of a job, every emergency can be managed without much stress if there are adequate savings to cover the current requirement. In principle, the emergency funds corpus should be equal to three to six months’ expenditure.

At the outset, one should evaluate the financial and retirement objectives. Thereafter, a person must invest in these goals as per one’s appetite for risk and the time horizon. Based on these dual elements, one can decide whether to opt for debt and/or equity investments. If a person possesses a high risk appetite along with a long investment timeline, he/she could invest either in equity shares or mutual funds.

Also read | Make tax-saving a part of your overall investment plan

Deciding the tax regime and more 

Another crucial point is deciding on the tax regime since taxpayers have the choice of opting for the old or new tax one. While the new regime permits one to pay taxes at a lower rate, one must forgo approximately 70 deductions permitted under the old regime.

Individuals should choose the tax regime at the beginning of the year rather than when filing the income tax (IT) returns as it will help in planning taxes better. Taxpayers can evaluate the total liability according to the selected regime and then adhere to the IT provisions, such as declaring investments to the employer, paying the advance tax liability, etc. If an employee wishes to opt for the new tax regime, he/she does not necessarily have to invest in tax-saving instruments. Instead, one can go for other investment instruments.

It is also important to submit tax declarations in time for lower tax deductions. Those earning interest income from bank deposits but with a total income under the basic exemption limit could choose Form 15G or 15H if there is no TDS (tax deducted at source). Other taxpayers could submit Form 13 for lower or no TDS deduction.

Reviewing financial goals, investments and insurance policies 

It is vital to review one’s financial goals and the performance of diverse investments made annually. This is required as many short-term investment goals may now be redundant. An annual review at the beginning of the year could help pinpoint these investments that can be redirected to long-term objectives. In tandem with one’s planned asset allocation, the investment portfolio can then be rebalanced.

At this juncture, the next key point is the evaluation of insurance policies, both life and health plans, instead of waiting for the time when investment proofs need to be submitted or before March 31. As investment plans can meet critical needs, these must not be considered solely for tax-saving purposes.

Also, check if the insurance coverage is adequate. If not, it should be increased right away instead of waiting till March. As a rule, life insurance coverage must be at least 10 times the yearly income. When this evaluation is done well in time, it is possible to take proper stock of one’s assets, financial objectives and loans as well as the spouse’s income to determine an accurate coverage amount.

A significant aspect of financial planning is to decide on the necessary life and health cover. To do so, a person should consider his/her lifestyle, life stage, objectives, assets and liabilities. Ideally, one must choose life and/or health insurance at an early age since premiums rise with age. Some other forms of insurance, such as homeowner’s or renter’s insurance or travel insurance, could be applicable for a person in the coming year so it is best to plan for these as well.

Also read | Age of fintechs: These financial intermediaries make life easier but there're caveats too

Numbers, apps and other guidelines 

Another excellent guideline is to remember the 50-30-20 rule. This means dividing one’s expenses, wants and investments in the given ratio. On the other hand, if a person is planning to purchase a car, he/she could use the 20-4-10 rule. This denotes 20 percent for the down payment, four years for EMIs and 10 percent of an individual’s monthly income to act as the EMI amount.

For people not adept at tracking monthly expenses, multiple apps are available to keep a check on spending.

Another strategy is to use cards that provide points on each purchase. Later, the points could be redeemed to avail of other offers or buy products.

Finally, though this sounds clichéd, ensure all loans and EMIs are paid on time, for reasons stated above. If these tips are followed scrupulously, streamlining and managing personal finances can become easy and stress-free.