Many of us make grand plans for the year to save and invest. But those plans can be properly implemented only if you know where you stand at present. Just as material possessions clutter our houses, our finances can also get cluttered—an insurance policy you do not need, or a high-interest lingering loan that you can easily pay off, too many bank accounts… the list can be long. The beginning of the year is a good time to take stock of your assets as well as liabilities. Doing so will straighten up your finances and give a long-term view of your goals and needs.
Getting Started
Cleaning up finances is not a one-day activity; it is a process. Separate into “assets” and “liabilities”. Analyse each side and consider the need of the products in it to see which are performing and non-performing assets. On the liability side, get clarity on how the debt planning can be done effectively.
Consolidate Your Loans
Too many loans means a big portion of your income is going into EMIs and not enough into savings and investments. So, make a list of all the loans, including credit card debt.
One method is the ‘debt avalanche method’ in which the most expensive debt, such as credit card dues or personal loans, is tackled first. Another reason to clear high-debt loans now is that with interest rates at an all-time low, using a low-interest loan to pay off high-interest dues may save you money. But take stock of your credit score and eligibility before taking this step.
Evaluate Your Insurance
We have all witnessed the wreckage caused by Covid and with the Omicron and Delta threat looming large, having adequate health and life insurance is a must.
But many people go overboard, buying a life insurance policy every tax-saving season. After a few years of this, there may be too many policies in your portfolio. The fact is that only those with dependants need to buy life insurance.
The purpose of insurance is to ensure financial protection for the family in case of the breadwinner’s untimely death. If you have misunderstood the purpose of taking insurance, you may have too many policies, especially the traditional and endowment variants, in your portfolio. Check how much cover your policies are giving and how much you are paying for that cover. Financial planners advise that a life cover should be at least 10 times the annual salary. If the sums assured from your policies do not add up to a suitable amount, and you have dependants, you may need to take additional cover.
If you have excess or expensive cover, do a cost-benefit analysis to check if getting rid of extra policies is worthwhile. If you are starting with a clean slate and have dependants, buy adequate term insurance. Use the surplus to invest in mutual funds or other suitable avenues.
Streamline Your MF Portfolio
A lot of millennials now invest in mutual funds. But having too many mutual fund schemes isn’t a good idea either because that bloats the portfolio without adding to the diversification. Having five-six schemes in a basic portfolio is usually fine. One can add a few more based on liquidity, short-term goal fulfilment needs, etc. While there is no thumb rule on how many mutual fund schemes one should have, six-eight schemes each in equity and debt categories is recommended.
To declutter your portfolio, set clear objectives, which includes understanding your financial goals, risk tolerance, suitable asset allocation and investment time horizon. Any scheme that is not aligned to your objectives should be redeemed. Select schemes around specific financial goals. Diversify across mutual fund categories like large-cap, mid-cap, small-cap, ultra-short, money market, and low duration funds, depending on your needs.
Organise Your Documents
If you still have the receipts or policy copies of insurance plans you no longer have, remove the physical copies and keep only soft copies if needed. Keep soft copies of the frequently needed documents such as PAN, Aadhaar, health insurance, car insurance etc.
Remember that less is more when it comes to managing your finances effectively.
