How to be in better financial health in 2022 – Forbes Advisor INDIA
A new year is a good time to review our financial decisions. It’s time to track our spending habits, our investments over the past year and whether those decisions were in line with our overall financial goals. The intention here is not to criticize or regret what has happened, but rather to understand our own financial behavior. It can help us align our behavior with our life goals or rethink some of our financial decisions.
Regular review is also an important part of financial planning. Managing money isn’t easy, and it requires an honest examination of your own financial habits, biases, expectations, and cash flow. But it is essential if we are to instill financial discipline and understand our own behavior. Ultimately, this is the first step towards improving your financial health.
Steps to improve your financial health in 2022
Financial health refers to your monetary state. Good financial health is characterized by a steady income stream, a growing cash balance, a strong portfolio, and regular spending that does not show sudden spikes. Getting to this point can seem difficult, especially when you are starting out with limited income and heavy expenses.
This is where financial planning comes in. A good financial plan should help keep you on track to achieving your overall financial goals.
1) Review your investments
It is essential that you periodically review our portfolio to assess the condition of your assets, their maturity and to keep an eye on your cash flow. With age, your investment portfolio will also change depending on your risk profile. For example, you are more open to high risk, high return investments at a young age when you have few dependents. On the other hand, you are likely to be more careful in your 40s where you may have multiple responsibilities and cannot afford to take high 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, EPF, and stocks. The next step is to track the returns on your investments throughout the year and see if they are meeting your expectations. So if you were expecting a 12% return from a mid-cap stock, where is your investment now?
At the same time, you can compare an asset’s weighting against its returns to determine the balance between high return and stable investments. The portfolio review gives you an accurate picture of the weighting of each asset, the overall returns of your portfolio and re-evaluate this distribution based on your current risk tolerance.
2) Consider unnecessary expenses
One of the main goals of a review is to understand our spending habits. While we may aim to follow predefined spending goals, most of us are often unaware of our actual buying habits. This is usually why our end-of-month savings are sometimes lower than expected. Fortunately, we have the means to control our actual spending more reliably.
The first would be to try and maintain a budget spreadsheet each month that you record every purchase or release from your account. If managing a spreadsheet seems too difficult, check your bank account, including all credit card purchases. There’s a good chance you’ll find unnecessary spending or unhealthy spending habits, like an annual subscription to a magazine you no longer follow.
Harmful spending habits could include the tendency to buy high-end electrical gadgets or overspending in restaurants. Identifying these patterns is the first step in dealing with them. Cut back on dining out and carefully review your subscriptions. On the flip side, it can also help you plan for unforeseen expenses like 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 investment
One of the safest ways to ensure sufficient cash flow for savings or investments is to automate it. This can be all the more useful for those who find themselves spending more than they should. The annual review can help clarify your spending habits 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 seem small today, but are needed in the long run. This includes investing in a retirement fund in your 30s or health insurance when you are 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 in sync with your income cycle to ensure these allocations are made as soon as you have sufficient funds in your account. It also ensures that you are never behind on your payments or premiums. It also ensures that you have a clear limit on your spending potential, it helps you maintain financial discipline.
4) Channel the money in different avenues of investment
How diverse is your portfolio? You must have a pretty good idea by now, thanks to the portfolio review. When you take a close look at your overall monetary situation, this is a perfect opportunity to expand it further. But a portfolio reallocation should be mindful of current financial conditions and your own risk profile.
For example, while pharmaceutical companies took the lead last year, in 2022, sectors like fintech, real estate, manufacturing, logistics and autos are expected to pick up. A wave of IPOs are also expected to hit the market this year, providing attractive investment opportunities in high growth companies. The growth of startups and the flow of investments into the digital economy can help you expand your portfolio to include more small-cap, high-growth companies. With the recovery of some of these stocks, this is the perfect opportunity to further diversify your assets into stocks.
At the same time, investments in large corporations, government securities and mutual funds will ensure a more stable balance. Likewise, you can consider expanding into different markets, such as the United States, to limit your exposure to a single economy. It can also help you avoid the impact of the depreciation of the rupee.
2022 also offers the opportunity to work towards investing in long-term investments like real estate or to further strengthen your retirement corpus by investing in retirement funds.
5) Strengthen emergency funds
The past two years have shown us the importance of savings and a nest egg that can help you get through tough times. An emergency fund is designed to provide us with a financial alternative in the event of an adverse event, such as a sudden loss of income. It can also include big unforeseen expenses, such as major repairs to your car.
Loss of income or sudden expenses can not only impact our overall lifestyle but can also put our wallet at risk as we fail to make timely payments or are forced to cash out some of the money. between them in order to face our debts. An emergency fund is intended to cover all these short-term expenses. This can represent three to six months of your salary depending on your income and expenses.
For many of us, our debts can often increase with age as we have to think about children’s school fees, IMEs, loan payments, or the rent on the house. People with a high number 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 is best to put it in a separate savings account, especially if the fund is small enough. For a large fund, it is best to invest in a very liquid fund such as mutual loan funds where your money can grow while allowing you to quickly cash out 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 life. And in some cases, it may even be better than making large cash payments for every purchase. That said, it’s always best to know your debts at the start of the year. Prioritize your debt based on interest rates. It is always best to pay off high interest debts first. However, low or zero interest debt can be paid on schedule and can help you manage your finances in a more planned way.
Examining your debts and payments is necessary to establish your budget. As you browse through last year’s finances, you will see a clear pattern of expenses, investments, and income. These will help you set a more realistic budget that you can stick to. You can continue to tweak it as you rework your investment decisions throughout the year.
Finally, let 2022 be the year you work to improve your financial literacy. Good financial health has a direct impact on our well-being. It can help us meet our basic and non-basic needs, fully explore our potential, and enable us to lead lives on our own terms. As we age, this allows us to take time off when needed, to provide for the needs of our loved ones and to ensure good medical follow-up.
Financial literacy is the first step in learning 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, your goals, and how to align the two.