As we enter into a new financial year, let us all be grateful that the March madness is now behind us and we can all take a much deserved breather.
However, the new financial year is also the best time to plan and evaluate all matters involving finances, accounts and taxation for both individuals and businesses alike. It is the time when you should reflect on how much progress you made in the financial planning journey and to take appropriate steps to successfully manage finances in the short and long term.
This article lists few essential things that you can do at the start of every financial year.
- Budgeting
This helps to allocate income towards expenses. Budgeting helps to keep control over the finances. It helps you to track if you are spending as per your plan and take appropriate steps if need be.
One of the common budgeting methods that you can adopt is the 50/30/20 method in which the income allocation is as given:
- 50% for needs
- 30% for wants
- 20% for savings and investments
This helps to strike a balance between monthly (for example groceries and daily needs), quarterly (for example school fee, maintenance charges), half yearly (for example insurance premiums) and annual expenses (for example other premiums).
2. Emergency Fund
After finalizing the budget, the next step you should take is to set up an emergency fund. This is beneficial at the time of uncertainties and other unfortunate incidents like job loss, losses incurred in business etc. An emergency fund should be equivalent to at-least 3 months of your total expenses.
You must evaluate the adequacy of the Emergency fund at the beginning of the financial year and replenish it as per need.
3. Life Insurance
You need to make sure that your life cover is sufficient to cover all the liabilities and responsibilities like home loan, child’s higher education, marriage, retirement etc. It is important to evaluate the cover amount of your life insurance at the beginning of the financial year. This will ensure that the family and dependents are financially secure in case of untimely death.
4. Health Insurance
To have health insurance is equally important as having a life insurance. You must have personal family health insurance even if you are covered under an employee health insurance plan as different employers might have different policies in case of any job change. If you do not have an insurance plan it should be a priority to get one at the beginning of the financial year. If you have one, it is better to evaluate if the cover is adequate and take additional coverage if required.
5. Goal Planning
You can plan and differentiate your financial goals as the below mentioned goals depending on the tenure.
- Short Term (within next 3 years)
- Medium Term (within 3 to 7 years)
- Long Term (beyond 7 years)
Some of the common financial goals that an individual might have are:
- Child’s higher education
- Down payment for House or Vehicle
- Retirement plan
- International Vacation etc.
The start of the financial year is a good time to review your progress towards your goals. It is a good practice to recalculate the amount you will need to invest every month to have the amount you need when the time comes. While investing for the long-term is the key to wealth creation, that doesn’t mean you should invest and forget. A periodic review of the portfolio is essential, and the start of the financial year is the perfect time to do it.
6. Tax Planning
It is best to start tax planning at the beginning of the financial year. This gives enough time to select the financial instruments that are tax efficient and give maximum benefit. At the same time you can choose to file returns under Old or New tax regime and plan accordingly. More importantly, since you have the entire year to invest the amount, you can spread these investments. Another reason this is the right time to do so is since there is no rush or pressure of deciding something quickly and thus you are less likely to make any mistakes.
When your tax planning is sorted out at the start of the financial year itself, you can make appropriate investment declarations to your office HR so that there are no unnecessary TDS deductions from your salary.
7. Succession Planning
It is an important aspect as life can be very unpredictable. You must take care to add nominees in all your financial products and review them at the beginning of each financial year. It is a good practice to review all your investment plans and financial products in your portfolio at the start of the financial year and make any modification/changes. It is also recommended to make a Will listing all your assets and how you would like them to be distributed among the beneficiaries after your demise and to review it for any modifications at the beginning of the financial year.
We welcome the start of a new calendar year with great zeal and excitement and set new goals and resolutions for ourselves. The start of the new financial year should be seen as equally important in the financial sense. So why not set some new financial resolutions?
This is a great time for self-assessment in monetary terms. Let us resolve to be better and well informed investors in the coming year and to follow a clear financial path.