How To Audit Yourself And Make A Financial Plan

By Manika Premsingh

Not sure how to audit yourself and make a plan for the next year? 4 questions to help an Indian woman evaluate her financial position.

We are headed towards the start of a brand new year, a new chance to start over, make new plans and make those big purchases – that long-pending holiday, the gorgeous piece of jewellery, the high-tech gadget or even buying a house! The question is – how do Indian women ensure that they achieve these objectives?

Specifically, here are 4 questions about your finances that will help you take a better look at your financial position and also help you plan better:

What is the worth of your assets at year end?

Here we are speaking of assets with financial value, like home ownership, investments across debt and equity and bullion holdings (including jewellery). You might not need to, want to or be able to monetise your assets, but figuring out their value can definitely help you assess where you stand and also plan for next year, particularly if you wish to take on debt next year (which is discussed more in detail below).

For instance, Indian equities have picked up speed since around August end, gaining close to 20% ever since. If you entered the equity markets at the start of 2013, there is a chance of investment picking up in the past few months. Similarly, the real estate market has continued to grow even if at a moderated pace. For reference, in 2012-13, the real estate market grew by almost 23% across major Indian cities, suggesting the kind of growth possible.

What is your income and spending expectation in the next year?

According to media reports, Indian companies will offer their employees raises of 11% in the coming year. While the raises will vary across industries and might not apply to you if you are in business, for instance; this forecast does provide some indicative guidance on how to project your incomes.  Do keep in mind, though, that consumer inflation in India remains in double digits, with the November figures coming in at 11.2% on an annual basis. As a result, increases in expenditure (due to increases in prices) may well be equal to or even above the increase in income, leaving you with little change in spending power. While the Indian central bank, the Reserve Bank of India (RBI) is trying hard to keep prices down with its monetary policy tools, do make adjustments for his fact when planning your expenses for next year. Planning your expenses can be especially useful if you have any major lump sum expenses or a significant permanent increase in expenses lined up for next year – from a holiday to planning for a child!

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Should you take on debt?

If you have one and two figured, this is a relatively straightforward answer. If the value of your property or investments increased last year, for instance, you now have a greater value of collateral and can thus allow you to take on a bigger loan. As a thumb rule, as a young earning adult ideally your debt payment, however, should not be any more than 30% of income and should come down to zero by the time you reach retirement. Additionally, when planning for 2014, it can help to keep in mind that the direction of interest rates in India can impact the outgo from your pocket. With inflation still being high, while growth is quite slow, the trajectory for interest rates remains to be seen. However, initial signs are encouraging, with major banks like SBI and HDFC bank having recently reduced home loan rates, ostensibly on account of the RBI refraining from increasing policy rates recently. If you are planning to take on a loan in 2014, for, say making a real estate investment among others, keep a close watch on developments at the RBI front since this can help you in timing debt to take advantage of lower interest rates.

Should you review your savings style?

With an understanding of your financial standing, as well as one of developing economic conditions, you can be well placed to plan savings in a manner that allows the best returns. Since savings are incomes less spending, once you have figured out how much you will likely earn and your actual spending, including any equated monthly instalments (EMIs) on your loans (which, themselves might be based on the value of your collateral), the savings are simply the residual. Of course, you might like to work out your savings first and determine your consumption patterns from there, but the process of determining either will be the same.

Based on expectations of returns across asset classes, you could want to shuffle or otherwise change your saving patterns. As a rule, if you are closer to the starting track of your career, then you have higher risk-taking ability and can take on riskier investments like those in stock markets that could as well offer high returns as a dwindling of savings to nothing. On the other hand, if you are nearing retirement, then it is best to invest in capital protected and/or inflation protected investments. With the world economy and indeed the Indian economy not showing clear signs of high growth, even if we can anticipate some comeback on riskier asset classes, diversification of savings is a good idea. A good financial advisor can however help you manage you plan your investments better in the coming year based on your personal conditions.

Once you have figured out your financial situation – present and forthcoming, you are well placed to see through the year confidently in charge of your future. It is thus now time to put your plans into action, and attain those life goals. Happy New Year!

*Photo credit: davebarger (Used under the Creative Commons Attribution License.)

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