Personal finance is all about managing your budget intelligently and devising and implementing strategies to meet your financial goals by extracting the maximum value out of our income. However, the moment the word ‘budget’ pops up, we think it’s just about constraining our spends. The truth is, budgeting is the most important way to keep track of our income and manage our monetary allocations efficiently. Smart and consistent budgeting is the cornerstone of a financially disciplined life and helps us significantly in our journey to achieve financial freedom.
As such, it is crucial you prioritise budgeting in your financial planning. And there’s no better time than the beginning of a new year to build or review your annual budget factoring in the changes in your income, lifestyle, debt situation and financial goals. Here are a few crucial pointers to consider while chalking out your yearly budget.
Impact Of inflation On Your Expenses
Check the inflation level for the year that has just ended. It would help you ascertain the general price rise of essential goods and also arrive at a figure required to meet the expenses for the current year. For example, you spent Rs. 1,000 for ‘X’ item in 2019 but in 2020 that ‘X’ may cost you Rs. 1,050 i.e., Rs 50 more due to inflation. So, you need to factor in the impact of inflation in your budget and make necessary adjustments.
Changes In Your Financial Responsibilities
Your financial responsibilities may change in 2020 vis-a-vis the previous year, so you should make the required adjustments in your new budget. For example, your financial responsibilities will grow significantly if you plan to get married or start a family or make a big-ticket purchase like a home or a car in 2020. You’ll be well-advised to factor in the financial implications of these new developments while you make your annual budget.
Changes In Your Income
2020 may translate to a hike in your income through an appraisal or activation of other income sources. The rise in your income can allow you to expand your budget to be able to accomplish financial targets which you weren’t able to meet in the previous years. At the same time, a rise in income could also accelerate your journey to meet important financial goals like raising adequate investment capital, boosting savings or even getting rid of debt. However, try not to exhaust all of this surplus money on discretionary spends and use it judiciously to address high-priority financial requirements first.
Your Debt Situation
If you are planning to take a home loan in 2020, your bank is likely to offer a loan product whose rates are linked to an external benchmark like the repo rate following the RBI’s October 2019 directive. More importantly, the rates of such repo-linked loans are currently touching record-lows following the central bank’s decision to cut the key policy rate in 2019, which is translating to lower EMIs for the borrowers. However, you’ll be well-advised to try to maximise the advantage of these ongoing low-rates by making considerable prepayments to lower your loan burden. So, make necessary provisions in your annual budget to accommodate the prepayment funding requirements. Do note that these repo-linked loans will become dearer whenever the key policy rate sees a hike in the future, so it makes sense to prioritise prepayments while the rates are low. Read your loan fine-print carefully to get complete clarity on the other important terms and conditions associated with prepaying your home loan.
Your Emergency Fund Status
It’s advisable that your emergency fund should be worth at least 6-8 months of your expenses to tackle any unexpected event like a sudden job loss or a family emergency. However, the changes in your financial responsibilities should lead to proportional adjustments to your emergency fund too. For example, if your monthly expenses are likely to go up by 10% in 2020, your emergency fund size should also increase to that end. Make sure you factor in these changes while you plan your annual budget as building and maintaining an adequate emergency fund is extremely important.
Your Insurance Requirements
Medical emergencies are one of the most common reasons behind draining of precious savings and investment returns, so make it a point to make provisions in your budget to buy a comprehensive health insurance policy with an adequate coverage amount in 2020 for yourself and your dependent family members if you haven’t already. And if you already have one, review your policy and make plans for budgetary allocations if you want to increase your coverage amount or include important add-ons like critical illness protection – things that would increase your premium amount as well. The same goes if you want to start or top-up other critical insurance products like life insurance, car insurance and home insurance this year.
Your Investment Requirements
Smart and consistent investments are keys to growing your wealth and meeting your short and long-term financial goals on time. Thus, if you want to make new investments or top-up existing ones in 2020, ensure you factor in the investment capital requirements in your financial budget. Don’t hesitate to consult your financial advisor if you find it difficult to chalk out a pragmatic investment plan on your own.
The writer is CEO, BankBazaar.com, India’s leading online marketplace for loans and credit cards.