A new year is a good time to review our financial decisions. It’s time to track our spending patterns, investments over the past year, and whether these decisions were in line with our overall financial goals. The intention here is not to criticize or lament the past, but to understand our own financial behavior. It can help us align our behavior with our life goals or rethink some of our financial decisions.
Periodic review is also an important part of financial planning. Managing money is not easy and requires an honest look at your own financial habits, preferences, expectations and cash flow. But it is essential if we want to instill financial discipline and understand our own behavior. Ultimately, it is the first step in improving your financial health.
Steps to improve your financial health in 2022
Financial health refers to your monetary status. Strong financial health is characterized by a steady stream of income, a growing cash balance, a strong portfolio, and regular expenses that don’t show sudden spikes. Getting to this stage can seem like a challenge, especially when you start with limited income and high expenses.
This is where financial planning comes into play. A good financial plan should help you stay on track toward your overall financial goals.
1) Review your investments
It is essential that you review our portfolio periodically to assess the condition of your assets, how they are maturing and to monitor your cash flow. With age, your investment portfolio will also change according to your risk profile. For example, you are more open to high-risk, high-return investments at a young age when you have few dependents. In contrast, you are likely to be more cautious in your 40s, where you may have multiple responsibilities and cannot afford to take big risks.
The year-end portfolio review is also the perfect opportunity to list all of your investments in one place to see your overall asset allocation. This includes all asset classes, including gold real estate, mutual funds, EPFs, and stocks. The next step is to track the returns on your investments throughout the year and see if they meet your expectations. So if you expect a 12% return on a mid-cap stock, where does your investment sit right now?
At the same time, you can compare an asset’s weight to its returns to determine the balance between stable and high-yielding investments. The portfolio review gives you an accurate picture of the weighting of each asset, the overall returns of your portfolio and to re-evaluate this distribution based on your current risk tolerance.
2) Examine unnecessary expenses
One of the main focuses of a review is to understand our spending patterns. While we may try to follow preset spending goals, most of us are often unaware of our actual buying habits. This is often the reason why our savings at the end of the month are sometimes less than expected. Fortunately, we have the means to verify our actual spending in a more reliable way.
The first would be to try to keep a budget spreadsheet each month where you record every purchase or withdrawal from your account. If keeping a spreadsheet seems too difficult, check your bank account, including all credit card purchases. Chances are you’ll find unnecessary spending or unhealthy spending habits, like a yearly subscription to a magazine you no longer follow.
Harmful spending habits could include a tendency to buy high-end electrical appliances or overspend at restaurants. Identifying these patterns is the first step in dealing with them. Cut back on eating out and take a hard look at your subscriptions. On the other hand, it can also help you plan for unplanned expenses, such as hosting clients for lunch or buying gifts for friends or colleagues. You can set aside a specific amount each month for such expenses.
3) Automate your savings or investments
One of the surest ways to ensure sufficient cash flow for savings or investments is to automate them. It can be even more helpful for those who find themselves spending more than they should. The annual review can help clarify your spending patterns and how much you should invest monthly, quarterly, semi-annually or annually in your portfolio.
Automating your savings becomes even more important for investments that may not seem significant now, but are necessary in the long run. This includes investing in a retirement fund at age 30 or health insurance when you’re young and fit. By automating these savings, we can ensure that our biases do not prevent us from making these investments.
You can set up automatic transfers timed with your earning cycle to ensure these allocations are made as soon as you have sufficient funds in your account. It also ensures that you never fall behind on payments or premiums. It also ensures that you have a clear limitation on your spending potential, helping you maintain financial discipline.
4) Channel money in different investment channels
How diverse is your portfolio? You should already have a pretty good idea, thanks to the portfolio review. As you take a good look at your overall monetary status, this is a perfect opportunity to expand it further. But a portfolio redistribution must be aware of current financial conditions and its own risk profile.
For example, while pharmaceutical companies took the lead last year, in 2022 sectors such as financial technology, real estate, manufacturing, logistics and automotive are expected to rebound. A flurry of IPOs is also expected to hit the market this year, offering attractive investment opportunities in high-growth companies. The growth of startups and investment flow in the digital economy can help you expand your portfolio by including more small-cap, high-growth companies. With some of these stocks bouncing back, this is the perfect opportunity to further diversify your capital assets.
At the same time, investing in large companies, government securities, and mutual funds will ensure a more stable balancing act. Similarly, you may want to consider expanding into different markets, such as the US, to limit your exposure to a single economy. It can also help you avoid the impact of rupee depreciation.
2022 also offers the opportunity to work towards investing in long-term investments like real estate or further strengthening your retirement capital by investing in retirement funds.
5) Strengthen emergency funds
The last two years have shown us the importance of savings and savings that can help you through tough times. An emergency fund is designed to provide us with financial support in the event of an adverse event, such as a sudden loss of income. It can also include large unplanned expenses, like major repairs to your car.
Loss of income or sudden expenses can not only affect our lifestyle in general, but can also put our portfolio at risk since we do not make payments on time or we are forced to collect some of them to meet our obligations. . An emergency fund is meant to cover all of these short-term expenses. It can be three to six months of your salary depending on your income and expenses.
For many of us, our liabilities can often increase with age as we have to think about children’s school/college fees, EMI, loan repayments, or house rent. People with a lot of liabilities should therefore build a fund that can withstand a loss of income of at least six months.
To avoid overspending the fund, it’s best to leave it in a separate savings account, especially if the fund is quite small. For a sizeable fund, it’s best to invest in a highly liquid fund, such as debt mutual funds, where your money can grow while allowing you to quickly cash in on your assets when needed.
6) Review your debt and rework your budget
Debt can seem like a heavy burden, but it is often a necessary part of our modern lives. And in some cases, it may even be better than making hefty cash payments for each purchase. That said, it’s always best to know your debts early in the year. Prioritize your debt based on interest rates. It’s always best to pay off high-interest debt first. However, low- or no-interest debt can be paid on schedule and can help you manage your finances in a more planned way.
Reviewing your debts and payments is necessary to create your budget. As you review last year’s finances, you’ll see a clear pattern of expenses, investments, and income. This will help make a more realistic budget, one that you can stick to. You can keep adjusting it as you rework your investment decisions throughout the year.
Finally, let 2022 be the year you work to improve your financial education. Strong financial health has a direct impact on our well-being. It can help us meet our essential and non-essential needs, explore our full potential, and allow us to lead a life on our own terms. As we age, it allows us to take time off when needed, provide for our loved ones, and ensure good medical support.
Financial education is the first step in educating yourself about money and how it works. Today, you also have easy access to professional help in managing your finances through multiple platforms, whether digital or through professionals. So take the time to understand your own behavior, goals, and how to align the two.