Financial Planning for FY 2023: Strategies for a Secure Future

Although financial planning is essential for our well-being, it's a peculiar taboo to discuss. We often boast about profitable investments, but we overlook how our lavish spending can harm our financial security. Moreover, the financial jargon makes it difficult for laymen to navigate through the world of finance. However, the good news is that financial planning is not rocket science as long as one has access to reliable information sources such as this article. Keep reading to discover the best strategies for efficient financial planning in 2023.

6 Strategies for Better Financial Planning in 2023

Cash Flow Management

When it comes to financial planning, there’s one thing we often don’t talk about — Habits. Our spending and saving habits are just as important. These habits often derail us from our financial goals if we don't have a reliable cash flow system in place. While creating a detailed budget and monitoring every single expense can be tedious and ineffective, there is a simple alternative. You can divide your money into three categories: income, spending, and saving. Rather than keeping track of everything in one account, consider setting up three separate bank accounts. Your salary account can be labelled as your "Income Account," the second as your "Spend-it Account," and the third as your "Invest-it Account."

Shortly after receiving your salary, you can transfer estimated monthly expenses from your Income Account to the “Spend-it” account. The remaining funds in your ‘Income Account’ should then be transferred to your ‘Invest-it’ Account.

Since salary accounts are typically zero-balance accounts, you can easily move all the money. Although it is advisable, you keep some cash in your ‘Income Account’ as a reserve if you want some extra money for your expenses. You should use your Income Account as a central repository for all incoming funds, like salary, gifts, bonuses, refunds, rent, dividends etc.

As a rule of thumb, you should ensure the following:

• Living costs: Not more than 45–50% of your income
• EMIs: not more than 25–30% of your income
• Savings: At least 15–20% of your income.

The ultimate aim of this strategy is to establish a hassle-free system for managing your finances, which can be executed quickly and easily.

Clear Your Debts

To plan your finances better, you need to pay off the maximum of your debt amount. If you are planning to borrow new credit options, ensure that you are not paying more than 25% of your income as loan EMIs. Increasing your debts can put a financial burden on you and lead you into a financial crisis. So, try to pay your EMIs on time and clear your debts within a specific period.

Prepare an Emergency Fund

You never know when an emergency may arise, and you might be forced to spend a huge amount on it. So, once your basic needs are taken care of and your debts are paid off, start saving some amount in an emergency fund or contingency fund. A general rule of thumb says keep aside six months’ living costs in an emergency fund. Include everything in it – rent, EMI, school fees, utilities, premiums, credit card charges, club memberships, and others. The cash flow system that we created earlier will tell you what your monthly transfer to your ‘Spend-it account’ is. Multiply that by six

However, while preparing your emergency fund, make sure that you can easily withdraw the amount whenever required. So, opt for an option offering a short notice withdrawal facility. It is wise to set it up in a fixed deposit (FD) account. If your bank offers flexi-FDs, which allow you to withdraw only the required amount without breaking the entire deposit, that's a good option. Alternatively, you can split your emergency fund into smaller FDs to avoid losing interest on the entire deposit. Those familiar with mutual funds, can use short-term debt funds to park their emergency fund.

Opt for Health and Life Insurance Policies

Health Insurance 

Investing in insurance is one of the best ways for financial planning as it helps cover unexpected medical expenses and hospital bills in your hour of need. Medical emergencies may occur without any prior notice, and spending on treatment of critical illnesses may drain you financially. Health insurances are one of the best ways to overcome such financial crises. 

Consider the purchase of a health insurance policy as a three-part decision:

1. Firstly, evaluate the policy's performance in terms of price. 
2. Secondly, assess the policy's benefits. 
3. Thirdly, examine the policy's claims process.

Even if you have a policy with the lowest cost and best benefits, it may not be very helpful if the company rejects many policy claims.

Price: Unlike life insurance, where the premium remains constant throughout the policy term, the premium for medical insurance varies as we age. Understand the current as well as future price of your policy, ideally at ten-year intervals. For e.g., if you are 40, ask your agent to provide the policy prices for 50, 60, and 70-year-olds.

Benefits: To ensure that your policy covers all the necessary benefits, you should conduct the following checks:

1. Look for a policy that does not have a co-pay clause. A co-pay clause requires the policyholder to pay a certain percentage of the bill, which can be expensive during hospitalization. 
2. Check for a pre-existing disease clause that may exclude coverage for certain conditions for few years. 
3. Check for ‘disease waiting period’. Many companies offer a cool-off period of 30-90 days during which they will not pay any claim. There are also some specific illnesses like cataract or hernia that may have a waiting period. To avoid this, you should ask your agent to list down all the illnesses that are covered under this clause.
4. Check for ‘sub-limits’ that impose a limitation on what the company will pay out for specific things, such as room rent. There are two types of limits on room rent - either a limit on the price or a limit on the type of room you can get. Sometimes policies will only cover up to a certain amount for a room or only cover a certain type of room. Try to find a policy without sub-limits if possible.
5. Check for exclusions.  Policies list out various medical services and treatments that will not covered by the policy. 
6. Ask how much of the costs before and after hospitalization the policy will cover. E.g: In case of Knee replacement, one may incur MRI expenses before the surgery and physiotherapy charges post surgery. Check if your policy allows you to claim these costs. 
7. Ask for a list of day-care procedures that do not require a twenty-four hour hospital stay. 
8. Check for "no-claims bonus". In case you do not make any claims in a year, the insurance comapnies offer a reward in the form of "no-claims bonus" (NCB). usually teh reward is given in terms of an increase in your policy cover. Eg: Increase your cover by 10% for the same premium. If you had a coverage of Rs 15 lakhs and a premium of Rs 25,000, a claim-free year would result in an upgraded coverage of Rs 16.5 lakhs for the same premium.

Lastly, disclose your medical history to the insurance company to avoid claim refusal.

Life Insurance

If you are the only earning member in your family, don’t overlook the importance of a life insurance plan. It can protect your family financially in case of your untimely demise. Insurance policies ensure proper financial planning both during your lifetime and after it. 

In the event of the policyholder's death, their family will need a significant amount of money to cover expenses and generate regular income, usually around eight to ten times their take-home annual income or fifteen to twenty times their monthly expenditure.

Save for Your Retirement

Individuals employed in private limited and government firms are eligible to open Employee’s Provident Fund to meet their expenses after retirement. However, self-employed individuals do not get such options. Moreover, the amount employees receive as PF after their retirement may not be sufficient to meet their needs. 

So, you can also start investing in mutual funds, ULIPs, equity funds, etc., to earn a decent amount after retirement. You can research or take the help of a financial advisor before investing your money for better returns.

Opt for Various Tax-saving Investments

Not all investments are exempt from income tax liabilities. So, you need to diversify your investments to save taxes. You can park your money in multiple tax-saving investment options like tax saver fixed deposits, ELSS funds, voluntary PFs, etc. 

However, keep in mind that the new tax regime has revised the tax exemption limit for salaried and pensioned individuals. Individuals earning an annual income of up to Rs 7,50,000 will not have to pay any tax. Under old regime, you can invest in Senior Citizen Savings Scheme, IPO, RBI Savings bonds, etc., to claim deductions and save tax.

Final Word

Financial planning is essential to ensure a safe and secure future. You can create a comprehensive financial plan for FY 2023 by setting a budget, tracking your expenses and investing in the right avenues. Do not skip reviewing and adjusting your financial plan whenever required to ensure that you are on track to achieve your financial goals. You can also seek expert suggestions from financial advisors if needed.