ARTICLES

April 2021 has started off and with it, a new financial year has also started. The last financial year was a topsy-turvy one with the COVID-19 pandemic playing havoc with the finances of many. Many individuals lost their jobs, some suffered a pay cut and for entrepreneurs, the lockdown was a curse to their business as it slowed demand. Now that the COVID vaccine has been developed and the economy is once again looking up, it’s time for you to make some healthy resolutions for this financial New Year.

Do you know where to start?
While your resolution list might be more personal, here are some resolutions that resonate with everyone –

Start Saving 

OK so this one might be a no-brainer for many but if you are among those who have not yet developed the habit of saving, this is the first principle that you should incorporate. Create a habit to save. 
As you get your salary or income at the start of the month, save at least 10% of it and then plan your expenses. This would prevent overspending and would also create a corpus for the future.

Tip: Ideally, you should follow the 50/30/20 rule of thumb, wherein 50% of your income can be used for necessary expenses like food, rent, clothes, etc., 30% of your income towards discretionary expenses like vacation, eating out, buying a gadget, etc. and the remaining 20% needs to be saved!

Invest your savings

Only saving is not enough if you don’t invest. Investment is necessary to grow your savings and modern-day millennials understand this sentiment. For instance, in 2020, ever since the Government announced lockdowns, the importance of investment was emphasized. According to CDSL, there was a 20% surge in the opening of Demat accounts during the pandemic. There has been a rise of 3.39 lakhs SIP accounts from Oct-2020 to Nov-2020. Investments are, therefore, important since they promise a return on your investments. So, invest your savings in suitable avenues to generate returns that would help you create a corpus for your financial goals. 

Tip: When choosing investment avenues, assess your risk appetite and financial goals. Every avenue has a different risk-return profile and you should pick avenues that suit your investment needs and preferences.

Create an emergency corpus

If the pandemic taught us anything, it was the importance of an emergency fund. According to the Union Labour Ministry, salaried individuals withdrew an aggregate of Rs.39, 400 crores from their EPF accounts to battle out the financial effect of COVID. What if they had planned for emergencies? This withdrawal would not have been necessary!

Emergencies might strike anytime and when they do you need to have a financial corpus at your disposal to battle out the challenges. Thus, having an emergency corpus is essential. 

Tip: Set aside at least 3 months’ worth of your income in an emergency corpus. Invest the corpus in a liquid avenue, like a bank savings account or a liquid mutual fund, so that you can withdraw the funds instantly when needed.

To know more about emergency planning, write to us

Maximize Tax saving

The Income Tax Act, 1961 has listed various sections that allow you tax-saving benefits. So, while you need to pay a tax on your income, you can reduce your tax liability considerably by utilizing the income tax provisions available. So, plan your taxes effectively and start now to spread it over the entire year instead of hurried last-minute decisions. Utilize the full limit of the following sections of the Act:

a) 80C – 
A deduction of up to Rs.1.5 lakhs by investing in ELSS, EPF, PPF, Sukanya Samriddhi Yojana, life insurance premium, the principal component of the home loan, etc. In fact, if you invest in a suitable life insurance policy, you can save tax on the premium outgo while at the same time getting financially secured under the plan.

b) 80CCD (1B) – 
An additional deduction of up to Rs.50, 000 if you invest in the NPS scheme

c) 80D – 
A deduction of up to Rs.1 lakh if you invest in a health insurance policy for yourself and your parents

i) Rs 25,000 for health insurance premium for self, spouse, and children
ii) Additional amount of Rs 25,000 for health insurance premium for parents
iii) If you and/or your parents are more than 60 years, the limit is enhanced to Rs 50,000

According to a report by health insurance companies, 11% of their claims were due to COVID. Since health plans cover COVID-related contingencies, they are a must for possible emergencies. So, invest in health insurance for financial protection and also to save tax.

d) 80TTA – 
A deduction on interest earned from savings accounts up to Rs.10,000.

e) 24B – 
A deduction on home loan interest up to Rs.2 lakhs

f) 80EEA – 
An additional deduction on home loan interest payment up to Rs.1.5 lakhs

Check whether you are utilizing these and other sections of the Income Tax Act, 1961. You would also be able to invest and insure yourself while reducing your tax liability at the same time.

For any help in tax planning, read this article to know more.  

Pay off high-interest debts

If you have any loans, you need to manage them effectively. Do not miss any EMI payment as it hampers your credit score and also incurs additional interest charges. Also, try and pay off high-interest loans like credit card debt, personal loans, etc., to reduce the interest burden. 

Tip: Opt for good loans like home loans that not only allow you to finance your dream home, they also allow tax benefits under Sections 80C, 24B, and 80EEA of the Income Tax Act, 1961. So, if you have a home loan, continue it for availing of tax benefits but pay off high-interest debt ASAP.

Start Saving and Investing for retirement 

Don’t be surprised to hear about retirement. Though it might be far off, it is still a reality and you need to plan for it. You would need a sufficient retirement corpus, considering inflation, and if you start planning for it from an earlier age you can create a substantial amount for retirement. When you start investing early, you can save little amounts over a considerable period of time and let compounding do its miracles. Compounding would multiply your returns over time and give you a considerable corpus when you retire. 

Tip: So, if you are young, start small but start building a retirement corpus. Remember, slow but steady wins the race.

To wrap it up, It is a famous saying that man is the creator of his own destiny. Thus, you are responsible for your financial health and if you plan your finances effectively, you can achieve financial independence. Moreover, planning finances has become easier with technology. You can use various online tools and calculators to plan your finances effectively and also to stay updated about the latest changes in the market. So, start this financial New Year on a positive note. Use these tips and plan a financially healthy year ahead.

It is never late to start. Start taking control of your finances and your financial dilemmas would be a thing of the past.