At the turn of every year, we make several resolutions to improve our physical, mental, and professional health. However, the one thing most of us tend to overlook is our financial health. Many of us have developed the habit of procrastinating when it comes to improving our financial health. In 2021, let us make a few resolutions to improve our financial well-being.
Resolution 1: Create a budget and stick to it
To attain financial freedom, just increasing our income isn’t sufficient if your expenses also increase in tandem. We can get one step closer to our financial goals by keeping a track of our expenses and reigning them in.
At the start of every month, create a budget of all your incomes and expenses. At the end of the month, plot in your actual incomes and expenses, and analyze the variance between the two. This will help you to classify your expenses into necessary and unnecessary ones and will help you cut out the unnecessary ones over a period of time.
Resolution 2: Invest at the earliest
The right time to start investing is NOW! Let no one tell you otherwise. Start investing no matter how small the amount. It is impossible to time the market and predict the future and wait for the right opportunity. A slight delay of a few years can impact your wealth creation goal in an unimaginable way. Let’s look at an example.
Steve starts investing at the age of 25. He invests $100,000 in a fund that provides a return of 7% interest compounded annually. Michael starts investing at the age of 30. He too invests a sum of $100,000 in a fund that provides a return of 7% compounded annually. Both withdraw the sum when they attain the age of 60. How much do you think would be the difference in the amounts earned by both?
Michael on his 60th birthday gifts himself a handsome amount of $814,511. Not bad right? However, Steve on his 60th birthday gifts himself a mammoth $1,142,394. Steve by investing 5 years earlier has managed to accumulate $327,882 more than Michael! That’s the power of compounding.
Resolution 3: Become financially literate
The more literate you become, the more you increase your chances of becoming financially independent. Try to learn financial and investment jargon. One word or term a day, over a period of time can really help improve your literacy and open your mind to new avenues.
Read books of famous investors and businessmen. This would empower you to make informed financial decisions.
Resolution 4: Portfolio Diversification
2020 has been a tough year for several of us, with several portfolios having taken a huge hit due to over-concentration on one particular class of asset. In 2021, let us make a resolution to diversify our portfolio and practice asset allocation.
As the famous American business author Michael LeBoeuf once said, ” The most important key to successful investing can be summed up in just two words – asset allocation”
Resolution 5: Reduce Debt
Debt if left unmonitored can become a millstone around ones neck and kill a person. In the current scenario of EMIs, credit cards easily available loans, most of us have one debt or the other hanging over our heads.
Complacency tends to set on over a period of time due to easy repayment options and we do not focus much on clearing off debts at the earliest. To avoid this make a list of all your debts. Pick the largest debt, and aim to clear it off at the earliest by paying a bit more than the EMI. while paying the EMI amount for all the others. Once that debt is cleared, turn your focus on the next debt. This sort of focus can help us become debt-free very soon.
Resolution 6: Invest in yourself
The one investment that provides the best returns is investing in yourself. Upskill yourself in your current job. Pursue a hobby that can provide another source of income. In 2021, let one of our resolutions be to take up as a hobby the one thing we have been putting off all this while. This would open up new avenues for you and ensure you have more than one source of income.
Apart from the resolutions mentioned above, which can be tailored according to each ones need, ensure you always have sufficient health and life insurance. Let us follow the resolutions we make in 2021. Let 2021 be the year that we turn our financial health around.