I have a confession to make. During this time of the year, along with millions other, I too write my New Year’s resolutions and number them one to ten. Normally, I keep an account of them for a couple of months, but as the year progresses, they gather dusts in a corner of my study. This time, I tried to dig out some of my old resolutions. Some written in the first page of my diaries and the last three as self-addressed email to me.
What made me happy is that the patterns have remained the same, though the targets have changed. Something like,‘marry the love of your life’, written 15 years ago, later became ‘take her for a vacation to Bali’,or ‘buy your dream off-roader’ has turned into ‘buy a small driver-friendly hatchback’. Some new additions have also been made. Last year, it was: ‘introduce my six-year-old to swimming and the 11-yearold to Sattriya dance’.
A few resolutions have, however, remained the same. Primary among them is the – ‘write my first book’. Well, maybe that constant will remain the same. And the second is –‘never to procrastinate’. Well, let’s talk about it some other time. And since I am supposed to only talk money matters, let me tell you what resolutions you can take to make the coming year and your future more financially fruitful and content.
Make a budget
The first step towards getting a grip on your finances is by making a budget. Now since it is the single most important task to financial discipline, take your time –a couple of days or even weeks. First, add all your income into it. Salaries, house rents, interest earned, etc. Then make a list of all the expenses, without missing anything out. Microsoft Excel has a “family budget” excel sheet. Fill up all the relevant figures and make a cash flow worksheet. Check where you can fine-tune your cash flow to improve your finance. Redo it again with your life partner and print and post it on your refrigerator.
Internationally, financial planners follow some thumb rules for a healthy cash flow budget. And they are:
• Thirty per cent goes to household debt, like rent, or home loan EMI, Auto loan EMI, etc.
• Twenty-six per cent goes to living expenses, like food / groceries, cloths, entertainment, petrol, mobile bill, medicines, etc.
• Twenty-five per cent for tax, like income tax, municipal property tax, etc.
• Fifteen per cent on savings and investment for retirement, like your mutual fund, Provident Fund, NPS, etc.
• Four per cent on insurance, like-life insurance, health insurance, house hold insurance, etc.
Financial ratio
Another thumb rule which is internationally followedis ratio of affordability. They are as follows:
• Internationally, the affordability of a house you own is 2.5 times of your annual gross income. But in India, we have modified it to be five times of your annual income. This was changed keeping in mind our culture and consumer preferences.
• To have a healthy cash flow, your total loan EMI should not be more than 35 per cent of your income. These EMIs can be home loans, car loans, education loans or credit card payment.
• Your retirement corpus should be 20 times of your annual income. If your current annual income is five lakhs, than on the day of your retirement, you should have one crore in your retirement fund.
Emergency fund
Have an emergency fund ready at hand for any unseen eventualities. Again, the thumb rule tells you that you should keep atleast three months’ expenses aside for emergencies. The emergency fund can be stashed in a money market instrument, instead of a regular savings account for a superior return.
Leave the card
In my experience in studying the spending pattern of consumer behaviour, I have come across many compulsive spenders as slaves to plastics. Leave that card behind. It is difficult to spend your hard-earned money physically counting them at a billing counter than through a card. Instead, take out your weekly expenses every Saturday and avoid impulsive spending.
Hope the New Year brings joy to you and your loved ones. Wishing you all a very Happy New Year!
