To-Do List for the new Financial Year 2022-23
A new financial year brings in a new set of goals and responsibilities. With a new fiscal year approaching, it's worth considering new opportunities to invest, take care of existing investments and align the financial plan towards financial goals.
Let’s start by considering recent events that could have a significant financial impact.
Right before the start of the new financial year, the equity markets around the world have witnessed a lot of volatility.
A lot like rising international tensions, inflation, and the possibility of a COVID-19 fourth wave in many countries, is going on. The third wave of the COVID-19 pandemic, Russia's invasion of Ukraine, the sanctions imposed to discourage Russia, the skyrocketing price of Brent crude oil, inflation kicking in, and central banks intervening to control inflation are just a few of the events.
In such scenarios, it is best advised to set a few things in place that will help make an easy transition from one financial year to the next.
1. Create a Budget
A budget can help you identify needless spending that can be cut or eliminated to help you save for your goals. It also assists in prioritizing spending and goals based on projected income. Finally, it aids in determining what financial goals are achievable given current income and savings levels.
Since creating a budget is a critical aspect of financial planning the "50/20/30 budget rule" can be followed. According to the rule, one should spend up to 50% of the after-tax income on necessities and commitments. The remaining half should be divided between 20 per cent savings or investments and 30 per cent for ‘wants’.
Note - Remember, there is no single budgeting rule that fits all.
2. Set/Review Your Goals
Setting goals and putting a financial plan for it helps you to stay stress-free for the remaining financial year. If you already have your goals set, do not miss out on reviewing them and making alterations, if necessary. Additionally, if your life stage has changed or is about to be changed, you will need to revise the priority of your goals or add new goals.
Goals are classed as short, medium, or long-term based on their duration. For example, a short-term financial goal must be accomplished within three years. Vacations, gadget purchases, life insurance, and two-wheelers or compact cars are all examples of short-term financial goals.
A medium-term financial goal must be accomplished within three to seven years. Education Loans, home renovations, and international vacations are just a few examples.
A long-term financial goal will take longer than seven years to achieve. Long-term goals can include a child's higher education, marriage, and retirement.
Note - Keep in mind, Financial goals are the key to a secure financial future and stress-free life.
3. Review Your Investments
If you have already been investing towards your financial goals, reviewing your portfolio becomes essential. While long-term investing is essential for wealth accumulation, this does not mean you should invest and forget. On the contrary, a portfolio review should be done regularly, and the beginning of the financial year is an ideal time to do so.
While reviewing your Investments, the following 4 questions can be weighed upon:
Does your Financial plan include multiple assets?
- Check if your financial investments are spread across instruments like equity, gold, mutual funds, govt investment schemes (PPF, NSC, KVP). Follow the rule of not parking all your eggs in one basket.
What has been your Portfolio’s Performance?
- Review the performance of all your investments for the previous time frame (quarter, year, and three years). In addition, comparing the return of your investments to the respective benchmark helps you measure performance more accurately.
How much commission, fees are you paying?
- Fees are sometimes neglected, but they are quite significant. When it comes to investing, there are two types of fees: advisory fees and underlying investment fees. Keep a check on how much fees you are paying and also look for options that keep fees minimum yet give a handsome maximum.
Is your Financial plan Tax Efficient?
- Ensure your investments are optimised for low taxes. Capital gains taxes on assets you've sold, as well as, to a limited extent, taxes on other income, can be mitigated by selling assets that have incurred a loss.
A review will show which investments have outperformed, performed as expected, and underperformed.
Note - While it's tempting to get rid of laggards, investing in new products, always keep your financial goal, budgeting as key drivers to these decisions.
4. Diversify Investments Across Assets
- Asset allocation, irrespective of difficult times plays a key role in keeping a check on your investments thus keeping them aligned to your goals. When you have the right combination of stock, debt, gold, and even cash in your investment portfolio, it becomes a strategy in and of itself for lowering risk and maximising profits.
Look for asset classes with low or negative correlations as it helps to deliver stable returns. Having a low correlation ensures that if one asset falls, the other tends to rise. (eg - When Equity decreases, the Gold price often increases)
You could add index funds or fixed-income funds to your portfolio. Investing in funds that mirror indices is a fantastic way to diversify your portfolio over time.
ETFs and mutual funds are simple solutions to diversify your portfolio by selecting asset classes.
Note - Diversification is not a one-time activity, contrary to common opinion, you should review it frequently and make changes.
5. Have Tax Planning in Place
It's ideal to begin tax preparation early in the fiscal year. Taxpayers are generally aware of the common tax-saving deductions available during a fiscal year (such as section 80C of the Income-tax Act of 1961). Other deductions permitted under other provisions of the Income-tax Act, on the other hand, can assist an individual reduce their tax liability even further. Some of them are given below:
|Tax Saving Deductions||Description|
|Section 80C||Most commonly used, can help save around 1.5 lakhs.Some Schemes are|
Employees' Provident Fund (EPF)Public Provident Fund (PPF)Equity-Linked Savings Scheme (ELSS) mutual funds National Pension System are some of the schemes available (NPS)
|Section 80CCD (1b)||Investing up to Rs 2 lakh in a financial year can save tax (Rs 1.5 lakh under Section 80C and Rs 50,000 under Section 80CCD) (1b).|
|Section 80CCD (2)||This deduction is available on an employer's contribution to a Tier-I NPS account for an employee. This section allows for a maximum contribution of 10% of the basic wage plus dearness allowance (if applicable).|
|Section 80D||Up to Rs 25,000 in premiums paid for self, spouse, and dependent children's health insurance policies can be claimed as a deduction under section 80D of the Income Tax Act.|
|Section 80DD and Section 80DDB||Aside from section 80D, there are two more sections that can help you save money on taxes when it comes to medical expenses for disabled and defined individuals. Medical expenses incurred for a dependant disabled person are exempt from taxation under Section 80DD.|
|Section 24||Besides the tax benefit provided on house loan principal repayment under section 80C, a maximum of Rs 2 lakh in interest paid on loan during a financial year can also be claimed as a tax benefit.|
|Section 80G||Giving to charity can also help you save money on taxes. Suppose you donate to certain government-designated funds under section 80G. In that case, you can deduct up to 100% of the donation from your gross total income, lowering your taxable income and, as a result, your tax liability.|
|Section 80TTA||Interest paid on balances in bank or post office savings accounts is taxable as "Income from other sources." However, up to Rs 10,000 in interest received from these sources can be claimed as a deduction from gross taxable income under section 80TTA.|
|Section 80TTB||This clause allows senior citizens (those aged 60 and up) to claim a maximum deduction of Rs 50,000 from their gross total income.|
6. Have your Emergency Fund in place
An emergency fund is a sum of money that you should set aside to deal with any financial setbacks that life may throw your way. It acts as a safety net, keeping you safe in an unforeseen or unwelcome incident.
Rather than being limited to medical emergencies, the term "emergency" describes a wide range of situations. Any deviation from one's routine that necessitates a considerable out-of-pocket expense not planned for in one's daily budget qualifies as an emergency. This could be significant car repairs, a sudden employment change, or even unemployment.
An emergency fund can range from three to six months of your monthly income, depending on your income and costs. Your emergency fund's primary goal is to assist you when you are in need as soon as possible. As a result, your emergency fund should be readily available in cash or a savings account. A portion of the assets can also be put into liquid mutual funds, which invest solely in money market instruments and have a low-risk profile. FDs or RDs are also viable options.
Planning well in advance sets the ball rolling for a smoother and more sorted year. But remember, to reach your objectives, you must invest as per your plan. It's the only way to improve your opportunities for wealth accumulation.
So, plan and review your finances for the new financial year, take a cue from our suggestions mentioned above and walk towards a happier, more satisfactory new financial year!
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