2024 is about to conclude and now would be the perfect time to reflect on the year gone by. One of the most important tasks you should consider carrying out is reviewing your financial health. Much like an annual medical check-up, a financial review serves as a progress map, helping you assess where you stand on your financial journey, account for any changes over the year, and adjust your finances for the year ahead. This exercise should ideally include everything from savings and investments to insurance coverage and can help you plan more efficiently for the year ahead.
Why is year-end financial planning essential?
Financial planning is an evolving process, just like your goals. Whether it is reducing your tax burden or revisiting your budget, an annual year-end review can help you identify the areas that need adjustments so you can stay on track to achieve your financial goals. For instance, a review of your budget will help you identify and cut back on unnecessary expenses. By evaluating your investments against your goals, you can readjust your portfolio to optimise your returns and also mitigate risk. This is also a good time to revisit your retirement planning strategy.
Year-end financial review checklist
Review your budget
Review your spending habits for the past year to identify expenses you can cut back on or need to spend more on. For instance, you can save on OTT subscriptions or gym memberships by finding alternatives for both while utilising the money towards nutritious food or upskilling. This will also help you create a suitable budget for the coming year.
Take stock of your financial health
Make a list of your income and debts, including savings, investments, and liabilities, such as loans or credit card dues. Assess where you stand on debt repayment and capital growth. If the numbers don’t look promising, rework your financial strategy with the aim of going debt-free while increasing savings.
Tax planning
Tax planning is a crucial part of financial planning. With changes being announced to tax regimes in the last 2-3 years, it has become increasingly important to plan your tax-saving strategy carefully. Start by comparing the old and the new regime to determine which offers more savings. If you choose the old regime, plan your investments such that you can take maximum advantage of available sections to minimise your tax liability.
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Evaluate your investments
Assess how your investments have performed over the last year. Evaluate their performance against your financial goals and risk tolerance to ascertain if they have delivered the anticipated returns. If your goals or risk tolerance has changed, you may need to rejig your asset allocation to balance your portfolio.
Revisit your insurance policies
Insurance coverage is also an important part of responsible financial planning that must not be ignored. Review your insurance coverage to ensure it aligns with changes in your life. For instance, if you’ve recently married or become a parent, you may need to increase your coverage. So, a term insurance policy of Rs.20 lakh from your 20s may be inadequate now that you have more responsibilities. Also, review your health insurance to ensure it is adequate for inflation-driven medical expenses. Use online calculators to compare premiums for higher coverage options.
Review your emergency fund
Your emergency fund is meant to support you during financial contingencies, such as job loss or medical emergencies. This fund should ideally cover 6-9 months of your current living expenses. Review this fund annually and top it up to ensure it meets your current and future needs.
Estate planning
The year-end is an excellent time to revisit your estate planning such as documents pertaining to your will, trust, or beneficiary nominations.
A year-end financial review gives you an update on your financial standing and arms you with the essential knowledge to address gaps in your planning, and plan more effectively for the future. With clarity and control over your finances, you can step into the New Year with confidence and peace of mind.
(The author is the CEO of BankBazaar.com. This article has been published as part of a special arrangement with BankBazaar.)