New Year resolutions for your hard-earned money

What are your resolutions for the New Year? Exercise regularly? Pursue your hobbies? Take more time out for the family? Why not make some financial resolutions for 2020 and be on top of your finances.

Many don't think about their finances on the New Year because they feel they don't have enough disposable income. The equated monthly instalments (EMIs) and systematic investment plans (SIP) leave little in their hands at the end of each month. Stick to a few financial resolutions, and over the next few months, you might stop thinking this way.

Create an emergency fund

The country's economic growth has slowed down. Economists don't expect much change at least for the next three quarters or until the first half of the financial year (FY) 2021. Employees in many sectors continue to fear job losses. Business owners are witnessing lower sales. In such a scenario, it's imperative to have an emergency fund.

The emergency fund should be able to cover at least six months of your expenses. Before you start saving, calculate your monthly non-discretionary expenses such as EMIs, rent, children's school fees, grocery bill, utility bills and so on.
Keeping six months' expenses aside is just a thumb rule. "The amount that a person needs to save also depends on his industry. Those working in industries where job opportunities are not easy to come by should keep 12 months' expense aside," says Malhar Majumder, a Kolkata-based financial planner and partner, Positive Vibes Consulting and Advisory.

Cut down unnecessary expenses

If you are wondering where to get the extra money to save for an emergency fund; it could be right there in your pocket. Cut down on unnecessary and non-essential spends to squeeze out extra money from your income. See if you can make some lifestyle changes.

Say, you drive to work or take an app-based taxi. You can change this lifestyle by either pooling with friends or taking public transport one or two days a week. Similarly, you can cut down on online shopping, reduce eating out, going for a domestic vacation instead of a foreign one, and so on.

But you can only cut down on unnecessary spends once you track your expenses. For a month, keep a tab where do you spend every rupee. Then, make a list of what is essential and what is not. You will be surprised to discover how cutting down on small items like can help you save a lot.

Say no to borrowing

Most do realise that loans are not good for their financial health. But individuals still borrow to fulfil their wishes or maintain a lifestyle or when there are offers such as zero interest loans. Such loans impact the monthly budget and sometimes lead a person into a debt trap. Make a resolution that you will not take any loan in 2020.

But if you already have ongoing loans, the resolution should be getting out of them. Some loans are fine; especially those that help you build an asset, like a home loan. But most are not. Prioritise paying up loans based on their interest rates. You should, therefore, first clear credit card dues that carry monthly interest rate of 4% (or 48% annually). Then pay up personal loans that are typically come at 18-24% interest rates.

It makes little sense to invest while keeping card dues or paying EMIs on personal loans. The outgo on loans would be higher than what you can make through investments. If your credit card outstanding is higher than your one month's salary, you can redeem some investment to clear it.

Adequate insurance for financial security

The last resolution is about tackling unforeseen and unfortunate events. Most surveys point out that most individuals are aware of the benefit of life insurance but they still continue to remain under-insured. According to the thumb rule, you should have life insurance at least 10 times your annual salary.

If you want a more appropriate approach, you can also visit an insurance company's website and use their calculators to know your insurance requirement. These calculators are based on the concept called Human Life Value. Also, avoid buying unit-linked insurance plans (Ulips) or traditional plans. Avoid combining insurance with investment.

Similarly, ensure that you have a health insurance policy other than what your employer provides. Buy at least ₹10-15 lakh individual plan or a family floater, depending on your need. As the cost of treatments rises, you can buy a top-up plan to keep pace with medical inflation.

In a nutshell

Start small and slow. Convert each of these resolutions into a habit over time. Even if you pick one this New Year, it will go a long way.