Financial planning review: 6 steps to take at the end of the year

Adopt budgeting

Budgeting helps you to allocate your income towards expenses, savings, and investments. If you don’t follow budgeting, you can start with 50/30/20 budgeting from next year. It helps you allocate your income as follows:

a) 50% towards needs that are essential for survival. Some of these include food, clothing, utility bill payments, medicines, transport, rent, EMIs, school fees, etc.

b) 30% towards wants that make you thrive. Some of these include dining out, shopping, entertainment (movies, sports, OTT, subscriptions, etc.), vacations, spending on hobbies, gadgets, lifestyle expenses, etc.

c) 20% towards savings and investments to achieve your financial goals.

The 50/30/20 budgeting method helps you maintain a balance between enjoying the present by spending on wants and securing the future by investing towards financial goals. If you are already following the 50/30/20 budgeting, during your year-end financial planning review, check if you can increase the 20% amount going towards savings and investments. It will help you achieve your financial goals earlier than scheduled.

Build and maintain an emergency fund

Once the budgeting part is sorted out, focus on the emergency fund during the year-end financial planning review. An emergency fund helps you tide over any unplanned or unexpected financial emergencies. You can have an emergency fund with 3 to 12 months of expenses. The amount depends on your current financial position, whether you are salaried or self-employed, the financial position of your company or business, economic environment, etc.

If you already have an emergency fund, check if the amount in it is adequate or whether you need to enhance it.

Insurance planning

Before you turn your attention to goal planning, you should take care of your insurance needs. You should ensure all the family bread earners have life insurance. If they already have life insurance, check whether the cover amount is adequate or needs to be enhanced. Consider buying a term plan, as it is the simplest form of life insurance. It gives you a higher cover at a lower premium.

Buy a comprehensive health insurance plan for the entire family. While choosing a health insurance plan, consider factors such as coverage amount, network of hospitals, restoration feature, co-payment clauses, limits on room rent and others, low waiting periods, health check-ups, AYUSH treatment, etc. If you already have health insurance, check whether the cover amount is adequate to keep pace with medical inflation. For health insurance, consider buying a family floater plan so that all members can share the cover.

Make sure you buy insurance for your assets, such as home, vehicle, etc.

Goal planning

During the year-end review of your financial goals, take a systematic approach. For example, while planning for your child’s higher education, you may take the following steps:

a) Find out the current cost of the course and the number of years you have in hand for planning.

b) Calculate the future cost of the course based on the inflation rate and the number of years.

c) Now that you have the goal amount, calculate the amount required to be invested every month based on investment tenure, expected rate of return, and goal amount.

d) Start investing in mutual funds, preferably through a systematic investment plan (SIP) route.

e) Review the goal plan progress once every six months or a year till the goal is achieved.

You may take the same goal-planning approach for other financial goals such as a retirement fund, a fund for starting a business, accumulating the down payment for a house purchase, etc.

Tax planning

In the earlier section, we saw how you should take the goal planning systematic approach for your financial goals. While investing towards your financial goals, you should ensure the financial products chosen are tax efficient. Use all possible deductions available under various sections of the Income Tax Act. Some of these include:

a) Deduction up to Rs. 1,50,000 under Section 80C of the Income Tax Act for life insurance premiums, PPF, EPF, ELSS, NSC, SSA, home loan principal, tax saver fixed deposit, etc.

b) Deduction up to Rs. 50,000 under Section 80D for health insurance premiums paid for self, spouse, and children. Additional deduction up to Rs. 50,000 for health insurance premiums paid for parents.

c) Contribution towards the National Pension Scheme under Section 80CCD.

d) Interest paid on home loan under Section 24.

While doing the year-end review of investments, you should check whether you are availing all or most of the deductions available to maximise your tax savings.

Succession planning

You are making investments towards your financial goals in a tax-efficient manner. However, what if you meet an untimely death? Make a will to ensure your assets are passed on to your intended beneficiaries after you. During your year-end review, make a will to include all your assets. If you have already made a will, make sure it is updated to include any new assets you have invested in during the year.

Plan ahead for a smooth journey during the new year

The year-end is a good time to take a break from your regular work. You can evaluate how far you have come with your financial goals. If any new financial product has been introduced, check if it has to be added to your portfolio. If some financial product in the investment portfolio is not performing on expected lines, check if it has to be replaced with another product.

Once you review the year gone by, you should lay the roadmap for the coming year regarding the milestones to be achieved. Thus, you can use the year-end review to ensure you are on track in your financial planning journey to achieve your financial goals.

Gopal Gidwani is a freelance personal finance content writer with 15+ years of experience. He can be reached at LinkedIn.

Milestone Alert!Livemint tops charts as the fastest growing news website in the world 🌏 Click here to know more.

Updated: 02 Dec 2023, 11:19 AM IST