2021 and financial planning: Lessons to adopt, mistakes to leave behind

The combination of key financial lessons from the pandemic year and mistakes to leave behind will offer you lasting value for a financially safe and secure 2021.

2021 and financial planning Lessons to adopt, mistakes to leave behind

A crisis as pervasive as the pandemic tends to affect every aspect of our lives, even how we plan our finances. The most significant learning 2020 brought along was how unpredictable life can be, and that it doesn’t hurt to prepare for the worst. With 2021 just around the corner, here are some lessons to remember and mistakes to avoid in the new year.

1. Create an emergency corpus

The biggest realisation of 2020 was probably that the only thing truly certain is uncertainty. As the year unfolded, you would have created an emergency corpus to cope with the situation. Carry on with the trend in the new year. Apart from health and medical considerations, also cover uncertainties and fluctuations in monthly income and provide for such shortfalls. This applies to all income classes – from businesspersons to salaried individuals. Your emergency fund should be at least five times your total monthly expenses. 

Related: TomorrowMakers' guide to building an emergency fund

2. Continue buying online 

In 2020, online shopping and purchases increased significantly, and it is expected to double next year. E-tailers and e-commerce companies sweetened their offerings with deals, discounts, offers, promo codes, and other incentives to attract customers during the recession. For the consumer, the benefits multiply if they pay with wallets or other apps that have their own schemes. Be it utility bills or groceries; you  would definitely have gained through online purchase experiences in 2020. Take the trend to 2021 and make it a habit. Saving with online shopping is real, and it undoubtedly improves your financial health.

Related: Effects of the lockdown on online and offline stores

3. Curb your credit card spends

Spend money only if you have it in your pocket. You would no doubt have adopted this golden rule in 2020, and for good reason. Credit cards are convenient and they help you spread out payments, but they also make you overspend. According to a survey, you could end up spending up to 100% more with a card. In 2021 too, avoid impulsive and aspirational purchases and use plastic money prudently. Apart from overspending, you also end up paying very high interest on late payments and cash withdrawals. What's more, payment defaults bring down your credit score, hurting your creditworthiness. So, it is best to leave your credit card at home while stepping out.

4. Save. Resave. Repeat

The combination of work-from-home and the lockdown offered an unforeseen benefit – it filled your piggy bank! Thanks to minimal travel and shopping, no outings or dinners, no picnics, and no kitty parties, the COVID-impacted lifestyle enabled many of us to put aside tranches of money that grew to substantial savings. Don’t slack off in 2021 even if your financial situation improves. Rather, aim for a bigger piggy bank. And once it is full, don’t spend the money, resave it for longer-term financial goals using a good savings calculator. In 2021 and beyond, that’s the way to be wealthy and wise. As Warren Buffet observed, don’t save what is left after spending, spend from what is left after saving.

5. Continue with strict budgeting

Tightening of purse strings and strict budgeting remained key survival tactics for households in 2020. You too would have set certain thresholds and remained within those boundaries. In 2021, maintain the practice even if the situation eases. You can not only avoid the peril of overspending with mindful financial planning but also achieve your short- and long-term goals easily and feel empowered to cope with responsibilities that could arise in the future. To help you further with your financial planning for 2021, here’s a piece of friendly advice: stick to the 50:20:30 golden rule. That is, allot 50% of your income to monthly and fixed expenses, 20% to savings, and 30% to other expenses including lifestyle and social outlays. 

Mistakes to avoid

1. Increasing your fixed expenses

Monthly fixed expenses include your EMIs, utility bills, loan instalments, house rent, and the like; you have to incur these regardless of your income levels. In 2020, many thought the recession was a good time to take advantage of the relaxed payment terms and buy white goods or a car on instalments. After all, the offers were so irresistible. Those who went ahead with this decision would have realised their mistake. They only succeeded in increasing their fixed outlay while their family income remained uncertain or subdued. 

Multiple markers indicate that India’s economy may not be able to achieve pre-COVID levels in 2021. The International Monetary Fund (IMF) has forecast a 10.3% contraction of India’s economy for FY21. And the estimated 21 million jobs lost in 2020 are not going to come back in a hurry in 2021. All said and done, do not uptick your fixed expenses in 2021. Remember, second and third waves of COVID-19 are a real threat, and they could pose harsher financial realities next year. 

Related: How to regain control of your expenses during a pandemic

2. Overlooking financial planning for 2021 

COVID-19 perhaps made you delay your income-tax planning for fiscal 2019-20, considering that the extended deadline is 31 December 2020. However, remember that your FY 2020-21 liabilities remain unchanged. All moratoriums and relaxations will end by the end of this calendar year. Hence, do not overlook your tax planning for the current fiscal. This may lead to laxity in making tax-saving investments and other provisions, which may disrupt your 2021 financial planning. This is especially true for high-net-worth individuals, C-suite salaried class, and other categories in the higher-earning bracket.

3. Delaying buying health insurance for COVID-19

COVID-19 is proving to be stubborn. Its second and third waves are likely to hit the world in 2021. Worse, there may be mutated variants of the virus that will be difficult to deal with. Although the vaccine is in sight and could be made widely available early next year, its effectiveness, long-term efficacy, and ability to fight different mutations are in question. So do not forget to get a special COVID-19 focused health insurance plan or add a relevant rider to your existing plan.

Related: Insurance cover for COVID-19 in India

4. Not redesigning your investment portfolio

COVID-19 may bow out in 2021, but the recession will not. India’s GDP contraction is projected at 10.3% next year, and retail inflation will hover around 3.6%. You may have delayed redesigning your investment portfolio in 2020. Considering the uncertainty surrounding the pandemic and market scenarios, you may have felt it is unwise to disturb the financial planning you had undertaken so painstakingly. However, you must churn your portfolio in 2021 and try to make it recession-proof. Your focus should be on easy access to liquidity rather than long-term or greater gains. Focus on equity and open-ended mutual funds, and balance these with term deposits, precious metals, and insurance-cum-investment instruments, among others. 

The asset allocation technique outlined above prioritises greater liquidity over greater returns. If you are lucky, you may get both! Keep a safe distance from real estate if you are in the middle-income bracket. That said, investment is a specialist subject. Don’t try to D-I-Y your 2021 portfolio; consult a financial expert who can guide you correctly through the process. Look at these 7 Money mistakes to avoid during the COVID-19 pandemic.


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