After a great bull run in the market in the year 2014, everybody is guessing what is in store for the new year 2015? Many are sitting on 30-60% gains from the equity market in the year 2014. But more than predicting the market, we should use the newyear as a time to review our personal finance. The following key parameters should cover the review.
This is reserve money to be kept aside to meet any emergency situation in the family. If both of you are working, it can be 3 months living expenses including loam EMIs. If you are the single earning member in the family, the emergency fund should be around 6 months living expenses. The amount can be kept in savings account linked to a fixed deposit and both you and your spouse should have access to this amount in case of an emergency. If this amount is not in place, do it immediately as the first step in financial planning.
You should review the sufficiency of health insurance now. If you are depending on the office provided mediclaim only, better to take a separate health insurance now when you are healthy. This will be useful when you change jobs and for your post retirement days. No insurance company will you a health policy at the age of 60 if the health is not good. I am not seeing a single client aged 45 and above without a life style disease. Buy a health policy with minimum exclusions and sub limits. Also buy a personal accident policy and critical illness policy to supplement the health policy.
I am not talking about the ULIP and endowment policies which you already have. Ask this question to yourself. If you are not there, how your spouse will manage the monthly household expenses and other goals like children education, marriage, retirement etc. If you have already made enough liquid assets for these goals, you need not require life insurance. But how many of you can say like this confidently? Very few would have created assets of that value. Till the time you create enough assets for this, the gap can be managed through a term policy. Buy an online term policy. You can get a 1 Crore policy by paying just 1000 per month. Such policies will ensure that your family will maintain the same standard of living even in your absence! It should be a top priority in your life.
Use banks only for banking
Be careful, if you are well received in the bank by a bank employee! He will be interested in selling you a policy or mutual fund NFO. Bank employees are now not keen in banking transactions. They are keen in selling other products to you. Keep only one or two bank accounts. Close all unwanted accounts. As far as possible, do all transactions online. Be careful about the bank staff, they will make you bankrupt.
Use Credit Card carefully
If you are holding more than one credit card in your wallet, cancel them. You must have one credit card but not more than that. The credit card should be used as a substitute for carrying cash and not for availing credit. Don’t opt for very high credit limit in the card. Keep it at the required level depending on your spending pattern. Also don’t use more than 50% of your credit limit every month. Pay the full amount due 2-3 days before the due date. If you start paying the minimum amount due, you are welcome to the world of credit card trap and the interest rate of 36% and above.
Check your CIBIL Score
Better check your CIBIL score every year to measure your credit worthiness. If the score is nearing 900, be happy. Please check the records in the report for their correctness. If there is any discrepancy, take it up with the concerned lender and CIBIL.
Start SIPs in Mutual Funds
Are you still happy with bank deposit and postal schemes only? Days are changing and it is high time to adapt to the equity cult and invest in equities for the long term high returns. SIPs have created huge wealth for disciplined investors in the last 20 years. Had you invested 1000 per month in the last 20 years, you will be now sitting on 40 lakhs! Yes, many funds have given CAGR of 20% in the last 20 years.
Review your Asset Allocation
Recent rally in the equity market would have changed your asset allocation. If it is changed drastically, it requires a rebalancing. Don’t think that the markets will move in only one direction. Make the changes and ensure that your portfolio reaches the targeted return irrespective of the market conditions.
Ensure tax efficiency
All of us are bothered about the section 80C tax benefits. But it is limited to 1.5 Lakhs only. More important than this is how to invest our money in more tax efficient ways to ensure the minimum tax outgo. A second property can reduce your tax liability. With indexation benefits Debts funds are better than fixed deposits, if you can invest for at least 3 years.
I wish you and family a great year ahead. Let’s make wealth.