By: Tavaga Research
The year 2020 will probably go down in history as one of the most challenging times for humanity as a whole. The sheer scale of the agony that the pandemic has caused and the dangers that it has revealed, imply that 2020 will be remembered as the year when everything changed. When the future generations will reflect on the past to guide them in their endeavors, lessons learned by humankind today will correspond to a gold mine for those generations.
Together, we fought (and are still fighting) a parasite that threatened to upend families as well as economies, across the world. In the process, the year saw the worst economic slump in almost a decade, reversing much of the economic progress made over the past couple of years. Stock markets went into a free fall, crude oil futures turned negative for the first time ever, the bond market yields skyrocketed and volatility touched levels last seen during the financial crises.
However, much of that is now past us, thanks to the unprecedented and unconventional responses by the governments and the central banks, to support the economies. As the year draws to a close, the stock markets have reached their all-time highs, volatility has receded from the March levels and the bond market yields have softened.
All these developments could scare away the investors that, in turn, could hamper the development of the financial markets, which are often touted as the plumbing of an economy. Therefore, such an outcome is bad for the economies as well as the people who populate them.
To avoid these situations, we discuss below a few resolutions that individuals can make for the new year to ensure financial security.
- Try to avoid taking on debt: This could probably be the best new year’s resolution for any individual. Avoid taking on newer debts or loans in 2021. More importantly, it is essential that you keep a track of the current debt levels and if they seem too high, make necessary amendments. You could, for example, consider making additional payments for a few months, create an emergency fund or tap into your retirement fund, though this might hurt your retirement plans
- Estimate what you need to save: It is essential that you correctly bifurcate your savings over the short term, medium-term and long term. Most experts advise that you save at least 20 percent of your annual income and about 15 percent towards securing a comfortable retirement. The earlier you start saving, the better
- Maintain a good credit profile: Very important aspect of personal finance is the credit score that most individuals don’t pay much attention to. These scores are used by lenders to assess your creditworthiness while making loans. Therefore, maintaining a healthy credit score is in the individuals’ interest. The most important advice regarding this is to pay your bills on time, use only 30-40 percent of the available limit on the credit card, etc
- Adopting the 50/30/20 mantra for prudential financial planning: This rule dictates that 50 percent of your after-tax income should be reserved for the necessities, 30 percent for the wants and the remaining 20 percent should be saved. Savings are difficult and life often throws up unexpected expenses at up.
By following the 50/30/20 rule, individuals have a framework about how they should manage their after-tax income. If they find themselves spending more than 30 percent on the wants, they can always find ways to reduce expenses on those things
- Pay attention to your investment portfolio: Keep up to date about the performance of your portfolio by calling your financial advisor. Some of the investments might have over-performed, while others might have under-performed.
The intention here is to be aware of the difference between your desired corpus and the current investment value. If the portfolio is underperforming investors can always increase the risk that they take, to ensure that the portfolio reaches the desired corpus
- Carefully choose your insurance policy: Insurance is an essential tool in financial planning. Therefore, being aware of the policy that suits your needs is important. These risk-mitigating instruments are often sold as an investment vehicle, people should be aware of this. Insurance should only be looked at from the perspective of protection against risk and not as investment vehicles.
- Create an emergency fund: As mentioned above, the year 2020 has thrown many surprises at people, distorting their finances and leaving them out to dry. Individuals, to avoid being caught napping in the future again, should develop a fund for such uncertainties.
Emergency funds are funds that are kept aside for unexpected expenses. These expenses arise out of the thin air such as an injury or critical illness. A rule of thumb while planning for such funds is to have a minimum of 6 months of expenses.
- Save and invest before spending on discretionary items: Savings are referred to as keeping aside the money we don’t spend or plan to spend on emergencies, and channelizing these savings for purchasing financial instruments (Stocks, ETFs, Bonds, etc.) are referred to as investments. Parking money in these financial instruments before spending lavishly on discretionary items helps a person to secure and safeguard the changing lifestyle expenses
- Project the cost of essential big-ticket items: If you have a big expense in the near term, like painting your house, start putting the money aside or increase your savings and assume that as spent. If you already know that you’ll need that money within a few years, keep it in relatively liquid and safe investments like ETFs and index funds
- Calculate your personal net worth annually: List down all your assets and liabilities. To calculate the net worth, just subtract liabilities from the assets. Don’t panic if your net worth declines during tough market conditions. What’s necessary is that the overall trend in new worth is upwards
Tavaga is everything you need to start saving for your goals, stay on track, and achieve them in time.