- Date : 13/02/2023
- Read: 7 mins
Financial planning involves being prepared for uncertain times by having an emergency fund, life insurance for self, and health insurance for all family members. Once these are sorted, you can focus on financial goals by investing in tax-efficient products and putting in place a succession plan.
The start of a new calendar year is a good time to review the previous year and lay the roadmap for the year ahead. We usually set goals for improvement in our personal finance, career, health, relationships, etc. In this article, we will restrict our discussion to improvement in personal finance.
6 fundamental money moves in 2023 for financial freedom should include:
- Building and maintaining an emergency fund
- Buying term life insurance for family breadwinner(s)
- Getting health insurance for all family members
- Pursuing goal-based financial planning
- Investing in tax-efficient financial products
- Making a will for passing on the assets to intended beneficiaries
Let us discuss each of these in detail.
1) Building and maintaining an emergency fund
An individual should build and always maintain an emergency fund. It comes in handy during unexpected situations such as job loss, delay in salary, hospitalisation of self or family member, or any other adverse situation that requires money urgently. The size of the emergency fund could vary depending on your situation or stage in life.
If you are a salaried individual with a stable job in a company that is doing well financially, the emergency fund can be 3 months’ worth of expenses. If you are working in a company that is not doing well financially or in an industry that is vulnerable to downturns, the fund size can be increased to 6 months of expenses. If you are a self-employed individual with uneven monthly cash flows, try to maintain an emergency fund that can defray 6-9 months of expenses.
If you still haven’t built an emergency fund, do it on a priority basis. If you already have an emergency fund, review the amount in it and make changes if required. The emergency fund balance can be maintained in either a savings account or a liquid mutual fund.
2) Buying term life insurance for the family breadwinner(s)
Every individual has various financial goals, such as saving for a child’s higher education and wedding, their own retirement, etc. Many of them also have financial liabilities, such as home loans or other personal loans. What if you meet with an unexpected and untimely death? Who will pay for your loans and financial goals in your absence? The answer is life insurance.
You can start with a term insurance policy. It will give you a bigger cover with a lower premium. If you already have life insurance cover, review the cover amount. Check whether the cover amount will be able to pay for all your financial goals and loans in your absence. If not, you need to buy additional life insurance.
3) Getting health insurance for all family members
In India, many families are just one hospital bill away from falling into poverty. The scenario was aptly demonstrated by the COVID-19 pandemic, during which many families refused to claim the dead body of family members due to the high hospitalisation bills.
You can buy a family floater health insurance plan for the entire family. The cover will be shared by all the family members. You may have health insurance from your employer, which is good. However, it is even better to buy your own health insurance plan. The corporate cover can be reduced or withdrawn at any time. Also, when you change your job, the new employer may or may not provide you with health insurance.
4) Pursuing goal-based financial planning
You can start by listing down all the financial goals. The next step is to make a goal-based financial plan for every financial goal you have. Evaluate the current cost of the goal and calculate the future cost based on inflation. Now that you know the goal amount, work backwards to calculate how much you need to start investing every month to reach the goal.
Consider the investment time horizon, your risk profile, the expected rate of return, etc., and accordingly choose the mix of financial products. You should invest through the systematic investment plan (SIP) mode. Review the plan regularly and take corrective action whenever required till the financial goal is achieved.
5) Investing in tax-efficient financial products
When choosing products for investing towards your financial goals, an important consideration is the tax benefit you are eligible for. Evaluate the tax benefits at the time of investment as well as at the time of maturity/redemption. For example:
Emergency fund: Keeping emergency fund money in a savings account gives you a tax benefit on the interest. Under Section 80TTA of the IT Act, you can avail deduction from taxable income. In a financial year, the maximum deduction allowed is the interest amount or Rs 10,000, whichever is lower.
Life insurance: The premium paid for life insurance qualifies for deduction from taxable income under Section 80C. You can avail of the deduction for the premium paid for yourself, your spouse, and your children. In a financial year, the maximum deduction allowed is the premium paid or Rs 1,50,000, whichever is lower. The death benefit received from a term life insurance policy is tax-free.
Health insurance: The premium paid for health insurance qualifies for deduction from taxable income under Section 80D. You can avail of the deduction for the premium paid for yourself, spouse, and dependent children. In a financial year, the maximum deduction allowed is the premium paid or Rs 25,000, whichever is lower. If you or your spouse (or both) are senior citizens, the maximum deduction allowed is Rs 50,000.
Section 80D allows you a separate deduction for health insurance premium paid for parents. In a financial year, the maximum deduction is the premium paid or Rs 25,000, whichever is lower. If one or both parents are senior citizens, the maximum deduction allowed is Rs 50,000.
Goal-based financial planning: While investing towards your financial goals, you can choose from various financial products that are tax-efficient. For example, investment in an equity-linked savings scheme (ELSS) gives a deduction of up to Rs 1,50,000 under Section 80C. Debt products like EPF, PPF, NSC, 5-year tax saving fixed deposit, etc., also give a deduction of up to Rs 1,50,000 under Section 80C.
6) Making a will for passing on your assets to legal heirs
We all work hard to achieve financial goals by building assets. But we don’t want our legal heirs to run around government offices and courts for certificates/orders to transfer the assets after we are gone. Hence, it is important to make an estate plan during our lifetime. You can make a will in which you can specify how and among whom should your assets should be distributed after your demise. It will ensure a smooth transfer of assets to the intended beneficiaries. So, if you still haven’t made a will so far, it should be one of the priority new year money resolutions on your bucket list.
The calendar year 2023 has just begun. If you have still not made any financial resolutions, you can start with the six resolutions listed above and get going. These resolutions will improve your personal finances in 2023 and the years ahead. These will make sure you achieve your financial goals and financial freedom in the long run.
Also Read: All You Need To Know About Making A Will
- Have an emergency fund to tide over unexpected financial situations.
- Purchase a term life insurance policy with a cover amount that is adequate for your loans and financial goals.
- Purchase a health insurance plan with an adequate cover amount for your entire family.
- Follow a goal-based approach for every financial milestone.
- Align your tax planning with your financial goals and choose financial products accordingly.
- Make a will on how and among whom your assets should be distributed after your demise.