We are all told to build a solid financial plan for ourselves. Since it’s the new year, we are going to tell you how you can get started.
A solid financial plan is a must for everyone, but most financial advisors are neither affordable nor accessible. So, we choose to save money here and thereby following the advice of our friends and relatives. However, when the pandemic began, many were pushed to take their financial situation seriously. In a Standard Chartered survey, 48% of the respondents said that COVID-19 has diminished their confidence in their finances.
You might be someone who recently started a full-time job or someone who runs a successful small business, but the important thing is we all need to have a financial plan. Finding the right financial advisor takes a lot of time and money, so we tend to postpone this activity as long as possible. But here is a guide to help you out and we have broken down the steps into four short blogs, and this is the first one in the series.
Firstly, Evaluate Where You Stand
The first step is to analyze where you stand financially, and you can find out your financial status by determining your net worth. So, how do you do that? Subtract your liabilities (what you owe) from your assets (what you own) and the result is your net worth. Why do you need to do it? A Credit Suisse report on global wealth in 2019 said, 78% of the Indian adult population have personal wealth less than $10,000 or around ₹7,30,000. However, the pandemic made the situation worse. A report called, ‘World Inequality Report 2022‘, authored by Lucas Chancel, co-director of the World Inequality Lab, said that the average national income of the Indian adult population is ₹2,04,200.
With the average personal wealth of Indians declining, this year is the right time to take a hard look at your net worth. This step will help you know where you are and how to get where you want to be. You might be thinking that your savings and investments, which lack direction and are spread across the board, will be enough to help you when time comes. However, you will be surprised how much your finances need reorganizing and a new direction until you find your net worth.
As much as we love having a travel bucket list, we don’t put much effort in creating a list of financial goals. Indian families rarely have an open conversation about their finances. But it is important to set short-term and long-term financial goals. Your short-term financial goals could be building an emergency fund, paying off a credit card debt, redecorating a part of your house etc., Your long-term financial goals could be retiring comfortably, saving for your marriage, paying for your kids’ college, buying a house etc.,
Your financial goals should be SMART (specific, measurable, achievable, relevant and time-bound). So, what does that look like? Let’s see an example.
Specific: I want to build an emergency fund of ₹1,50,000.
Measurable: I want to save ₹75,000 per year, which is ₹6,250 every month.
Achievable: My budget includes up to ₹15,000 of *disposable income that enables me to save the amount of ₹6,250 per month. (*disposable income is the income that someone has available to spend or save after taxes have been taken out and they have paid for food and other basic needs)
Relevant: According to my income and expenses over the past year, I should be able to achieve this goal.
Time-bound: I want to save ₹1,50,000 in two years.
The idea behind setting goals is that they will inspire you to take action and get your financial life on track. You have to make sure your goals are SMART, so that you can achieve them without any difficulty.
Tracking What You Spend & Starting To Budget
Most of the adults in our country have ‘save more’ as one of the top things to achieve every year. YouGov’s research in 2020 found that increasing one’s current savings was one of the main financial goals for more than a third of urban Indians. Saving was stated as the most important financial goal in 2019 as well. We all want to save more but how do we do it?
The best option is to track your expenses and create a budget. Tracking your expenses helps you identify serious problems in how you manage your money. It can also help you gain insights about how and where you spend your money. For example, if you have a Netflix, Prime Video, or Zee5 subscription, you can get a bundle subscription, which gives you access to all these streaming platforms at a much less cost.
Setting a budget will also help you spend within your means and save more money. When you start earning money and no one is there to hold you accountable, you tend to spend over the limit, because no one is there to question you anyway. You are not alone, we all tend to make impulsive purchases sometimes. It could range from splurging on a night out, to buying expensive gadgets and luxurious skincare products.
The ‘End of year sale’, ‘End of reason sale’, ‘Black Friday sale’ all sound very tempting but if you have a strict budget, and if it is constantly reminding you and holding you accountable for your money, you will think twice before buying unnecessary things.
Pro Tip: Does tracking and budgeting sound hard? Try Koshex today. 20% of Koshex customers who tracked their expenses through the platform were able to save more money and make investments in financial products, which helped them achieve their financial goals, easily and efficiently.
In our next blog, we will be discussing how to create an emergency fund and manage your debt. Sounds interesting? Make sure to mention your top financial goal for 2022 in the comments!