This new year, you may have made up your mind to save more or limit your impulsive splurge. And that’s a great resolution to make! We’re not going to tell you how to plan your finances, or where to invest, or how to build a budget, or any lecture of the sort. Instead, we’re listing out five basics that you need to be aware of for a healthy financial life.
1. Always plan your investments ahead
Your investments need some prior planning. This is because you need the time to make an informed decision. Many a time, investment decisions are made in haste. When you have surplus at hand, you just invest in what looks attractive at the time. Before going ahead with any investment, it is better to tag those investments to a goal or purpose. You at least need to understand what you want from that amount – do you see yourself needing it in the next couple of years? Do you not know if you will need it in the foreseeable future? That will in-turn decide the right instrument to invest in, the amount of risk you will need to take, and it will help you stay disciplined. You also ensure you are not putting all eggs in a single basket by being conscious of your existing investments.
2. Understand the products before investing in them
Another important aspect that is often ignored is understanding the product itself. We often decide where to invest based on suggestions of our friends, families, or which product’s returns look great. They may not have the product understanding required to advise or your own requirements. Each person is unique.
Before investing in any product, you need to ask two basic questions – 1. What is the product? and 2. How is it suitable for my needs? You do this by looking at different aspects of the product such as its objective, how it generates returns, what are the risks it involves, how long you should remain invested in it to earn optimal returns, and how easily you can liquidate it. Confusing insurance with investments, choosing funds solely based on high double-digit past returns, going for products only because of their taxation aspects are some common mistakes you should try to avoid. Look at what the product can do for you, and if there’s a better option before going for it.
3. Make investing a habit
Investing as and when you have surplus money is good. But given that such surpluses can be erratic, this method won’t help you build wealth. Investing needs to be regular – even small amounts can add up to a lot over time! Set aside money for savings and investments every month instead of rummaging around for whatever is left at the end of the month. The best way to follow through this habit is by automating it. Be it your deposits (using RDs) or mutual funds (using SIPs), automate your investments.
4. Keep track of your investments
Keeping your investments organised is critical to keeping track of them. If they are products with maturity, you need to keep track of when it is maturing and plan for what needs to be done with it. Insurance money back policies or bank FDs are often forgotten in the savings account. Either you spend it away unwittingly or it earns low savings bank interest. Mutual fund portfolios need to be reviewed to check for rebalancing or any other developments at least annually. Tracking also allows you to know if you’re falling short of your requirements and need to step up savings, or if you’re in a comfortable position.
It’s also good to compile your investments in one place. This makes it easier to track your investments based on objectives or goals you have set for them, rather than individual instruments.
5. Adjust your finances for lifestyle changes
Your goals or the amount required to meet them may change over the years. For example, your retirement plans may adapt to the changing world while your retirement funds are still dated to simpler times. As your earnings increase, your spending does too. That means your future spending is also likely to increase. These changes need to be accounted for in your investment plans. So take stock of where you are and change your investments accordingly.
So, keep these five tips in mind when you’re drawing up your financial resolutions and when you’re investing. Happy investing and happy new year!
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