The new financial year brings us back to the same old things. You realise that you struggled to meet your tax-saving objectives. You promised yourself that you would do better in the new year. It is a vicious cycle that needs brute force to disrupt. You need to shake things up and force changes. Just like many of us discovered some valuable things when pushed into confinement during the pandemic, you need to push yourself to take a new approach towards your financial habits.
Daniel Kahneman, a Nobel laureate, passed away last week in the US. He was a psychologist whose work brought facets of our financial behaviour to light. He won the Nobel Prize for explaining human judgement and decision-making under uncertainty.
This column touched upon his 2011 book ‘Thinking: Fast and Slow’ while discussing the issue of investment behaviour. The book explains how impulsive decisions are driven by intuition and emotions. A slow-thinking approach is more logical than a fast-thinking one. His work can inspire you to organise your finances.
The last-minute rush to meet the taxation deadline is an impulsive decision. You end up listening to insufficient advice. There is a good chance that you could put all your money into an equity-linked tax-saving scheme at the peak of the stock market valuation. You could buy a guaranteed return fixed deposit or a post-office scheme that barely covers the inflation. Your lump sum investment at the last minute could turn into a dud in the long term.
The hype around tax planning is exaggerated primarily in the last quarter of the year. There are about eight crore people in India who file tax returns. That is just over 5% of the population. The government has made it amply clear with the following tax regime. India is not a tax-haven country where you can save significantly on taxes.
If you have an income, you will have to pay tax. The government will likely strengthen the tax collection mechanism over the next few years. If you are following the new tax regime for your income tax, you are not interested in the exemptions offered by the old tax regime. You may want to think and act differently as you plan for the new financial year.
Investing in an equity-linked tax saving scheme, the National Pension Scheme, or NPS, makes sense, as you get an upfront tax benefit. At the same time, these market-linked return schemes could help you beat inflation consistently if you hold on to those investments for 15 years or more. The long-term benefits of investing in equity assets are well-established. If you are serious about creating wealth, a systematic investment in ELSS or NPS is a way to go.
You can take your first step in the first month of the financial year rather than scrambling towards the end of it. An essential step in the new year would be to seek professional help. You can pay a small fee to a registered financial advisor for advice on goal planning and asset allocation during the year. Your ability to earn more income will determine the future of your wealth. However, proper asset allocation will ensure you automate investments monthly and create long-term wealth without worrying about short-term returns.
To maximise your engagement with your financial advisor, you must resolve the new fiscal to invest in knowledge. Reading regularly about personal finance macro and micro events could make your meeting with your advisor meaningful. You can ask pertinent questions and generate more out of your financial advisor. The agenda in the new financial year should be to build a team. Your advisor would be your coach. However, your performance on the field will matter the most. You may want to make your family members your teammates. You need to engage with them regularly about personal finance matters. Your spouse and children can help you stay on course to achieve your financial goals.