‘Saving’ the New Year’s Resolution – 8 Pointer Guide to a Smart Savings Year

Mumbai: Having celebrated over the New Year’s night, we have flown into 2019 already. Now that you have spent enough on partying last night, off to a slow start of your day, lunch time already and probably thinking about next party but worrying about savings? Here we come to your rescue. We also hear a common question every year end: “So what’s your New Year’s Resolution?”

You may want to travel, you may want to develop some skills, some may want to do something for the society and as trend suggests some may want to ‘Save’ some money. The question is why do we need to save? One may soon connect this question to phrase ‘Winter is Coming’ from the famous televised series – Game of Thrones’. We often save for any uncertainty or emergency that may arise. One may have been surprised when on announcement of Demonetisation, Indian Homemakers handed over quite some cash to their husbands to deposit at the Bank (pun intended). There may be certain things that we desire to achieve which may be buying a house or a car or may be for travel. These things may be termed as ‘Saving Goals’.

Often seen, we have over and over again missed out on achieving the savings resolution either due to some unforeseen expenses or lack of will to save. Ironically, among those who do save, the ‘Saving Goal’ is often not defined. It is usually seen, we simply transfer a certain amount from an account to another or let it lie in the same bank account as that of salary or income accrual thus end up expending it.

Here are some smart 8 Personal Finance ideas or tips to help you ‘Save the New Year’s Resolution’.

1) Define your Goals well!!

It may be saving for a house or higher education or for travel. Consider each of them as a ‘Pot’ and allocate funds based on time horizon on hand in each Pot. However, the amount of investment or installment to be paid may be slightly lower as returns accrue to investments made in these pots regularly. This is because of Compounding effect (explained further).

You may note, there need not be just one pot for one Saving Goal. For example, for buying a Car, you may create a single pot of Recurring deposits to allow you to save for down-payments. Also, you may create multiple Pots such as Recurring Deposit being one, Equity investments being another to balance the risk and achieve higher rewards.

Also, based on your time horizon of funds requirement, allocation of investment may be varied across various asset classes as explained below.

2) Understand the Asset class suitable to you – Risk Appetite

It is well understood fact that Risk and Rewards go hand in hand. Higher the risk, higher should be the reward and lower the risk, lower will be the reward.

Let us consider Mr. A who is 55 Years of Age. He may consider it too risky to invest in Equity or Equity linked investments. He may resort to investments in Gold, Fixed Income securities, etc.

On the other hand, Mr. B who is in mid 20s may consider to invest in equity as the shock absorbing or making a comeback on income earning is high. Also, no substantial capital outflows are expected at this age.

So, based on your Goals and Time Horizon in hand (for liquidating funds) investments may be made broadly under following categories:

  1. Equities
  2. Debt
  3. Mutual Funds – a) Equity Oriented, b) Debt Oriented, c) Balanced Funds
  4. Gold
  5. House Property, etc.

3) Diversify, don’t Over Diversify

Well known advice given by many experts is to “Not put all the eggs in one basket”. By doing so, you diversify your risks and in case of disaster in one Pot, the other Pot still remains safe. Having said that, over diversification may also be a curse where returns of one investment pot are offset or nullified by other investment pot/s. One such example could be investing small amounts in multiple stocks, which makes it difficult to track, review and update your portfolio.

4) Don’t just let it be – Review your portfolio on regular intervals

Many a times, I have come across people who comment “I have invested in Equity Mutual Funds, they are long term investments, I have invested and forgotten about it”. It may turn out to be a wrong approach. You should revisit your portfolio at regular intervals depending on the amount invested and current situation in economic environment. One such thumb rule which may be considered to review is/are ‘Expected Major Event/s’ during the year. One such event during the year in India is 2019 Lok Sabha Elections which will have major bearing on the Financial Markets including Stock Markets, Gold, Debt and other asset classes which could be volatile.

5) Don’t just walk away – Averaging Out

Due to uncertain market conditions, we may lose some money to the market often referred to as Market Loss. However, if it is perceived that further investment is justifiable, additional funds may be introduced. This averages out the Cost of earlier investment thus avoiding notional losses.

Considering the beaten down markets and positive outlook towards the Indian Economy at present, those facing losses in Mutual fund SIPs may increase the investment amount (top up) to average out the NAV of investments till date. Emerging markets such as India may wobble on account of volatility or clouds of uncertainty over Developed markets. However, it may be sane to not walk away from the markets on losses till the time fundamentals continue to remain strong. Probably, these times could be considered as best time to bottom fish or value pick.

6) Start Early

The earlier you start, the better it is!! The power of compounding could be immense towards wealth creation over a long period of time. Through this phenomena, the money earned on your investments makes you more money hence, slightly lower investment installments are required (based on return percentages).

Another point we could touch base is ‘Public Provident Fund Account commonly known as PPF. We often open the Account in the year in which we want to save Tax by investing under S. 80C of the Income Tax Act, 1961. However, the account has a lock in period of 15 Years. Best way to take advantage of this is to start very early, say when investing for yourself or your children are young. Minimum investment per Year is as low as Rs. 1,000 per year to keep the account operative. By starting early, the lock-in period of 15 years starts early and thus funds become liquid sooner on completion of 15 years.

7) Read Insurance/ Investment clauses carefully

To prevent yourself from mis-selling or false promises, read Terms and Conditions of Insurance/ Investment policies carefully and obtain independent advice on suitability of the same for yourself. You can cancel a life insurance policy within 15 days from the date of receipt of the policy document, if you disagree to any of the terms or conditions in the policy.

8) Have a Buffer Savings fund

Maintain a buffer savings pot to cover any exigencies or unforeseen expenses so that you do not have to liquidate your long term savings pot to meet a short term exigency. One such trick you could use is to Sub-Divide a Savings Pot. For example, instead of opening a Rs 5,000 Recurring Deposit (RD), 2 RDs of Rs 2500 each may be started, so in case of urgent liquidity crises, partial amount from Rs. 2500 RD Pot may be thus used while continuing the other Sub Pot.

Well to wind up, those looking to a fresh start, “Don’t wait for your ship to come in, swim out to meet it” as said by Dr. Gary Woods in his book.

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