At this time, most of you must be making plans for the new year celebration. However, it is also important to reflect on the past year and take the lessons to the next year.
Many individuals worldwide are worried about inflation, rising interest rates and an impending recession. 2022 was a tumultuous year, and various global events impacted the finance world, influencing many people’s financial conditions. The impact of some of these affairs will also be felt in the coming year as well.
Here are some of the 6 financial lessons that 2022 taught us that you might want to apply in the coming year.
Layoffs taught us the importance of emergency fund
In the last few weeks, mass layoffs by big companies have made the headlines. There have been growing recessionary worries in recent months.
And a job loss in such an economic scenario might be difficult for many of us to navigate. While we have limited control over such decisions, we can make sure that we have a cushion to fall back on if things go south.
This makes an emergency fund a must-have in these circumstances. If you work in the tech sector or any other sector that is highly volatile, you can look at saving up to one year of your expenses in an emergency fund.
A separate savings account, fixed deposits or liquid funds are ideal options to park your money for emergencies. It is because these options are extremely liquid.
You can create a plan to save a certain amount of money every month towards your emergency fund. You can route any additional income or monetary gifts towards your emergency fund to reach your goal faster.
Investing can tackle rising inflation
In 2022, we also saw an uptick in the inflation rates. The high inflation made everyday necessities like food, clothes, and transportation expensive. In addition to that, inflation also diminishes the buying power of money. High inflation rate also impacts the real returns that we can hope to achieve from an investment option. The real rate is the rate of returns of an investment option after removing the impact of inflation. So, it becomes very important to invest in such investment options that can help us to get a higher real rate of return.
Equity is an asset class that has outperformed other asset classes over the long term. Hence, investing in equity through mutual funds or direct equities can help to tackle inflation over the long term.
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Reduce spending on luxurious items to invest more
Do you spend much money on luxurious items such as new clothes or fancy gadgets? While it is not wrong to splurge occasionally, making this a regular affair can deteriorate your financial life.
Healthy savings and investment portfolio makes us feel confident under these trying circumstances. And one of the easiest ways to build a bulky investment portfolio is to reduce your expenses on ‘wants’ or ‘good to have but not essential’ items.
Look at your bank statements or credit card bills to determine where you spend the most. Figure out the items that are unplanned expenses or non-essential ones. Once you do that, you can devise a way to reduce your spending in that area or stop in one go.
Importance of prepaying loans
In 2022, the Reserve Bank of India increased by repo rate by more than 200 bps. This has increased the lending rate of different banks across their loan offerings. The steep increase in interest rates has disrupted many borrowers’ monthly budgets. It is because new and existing borrowers had to pay more interest on their loans.
This shows us the importance of prepaying loans during the rate-tightening cycle. Prepayments can assist in shortening the length of your loan in addition to lowering your interest expense. So, if possible, you can always look at prepaying your loans.
Laddering of fixed deposits
The spike in the interest rate has increased the attractiveness of fixed deposits. Many banks have increased their interest rate on Fixed Deposits.
In this scenario, you can benefit from parking money in FDs in different batches. So, instead of opening a deposit of, say, ₹10 lakhs for 5 years, one can segregate it into three or four FDs with different maturity periods such as one year, two years or three years. In this way, a bulk amount doesn’t get locked away for a longer time frame, and you can take advantage of raising interest rates.
We hope these lessons will help you have a better year in 2023. Happy New Year, 2023!
Padmaja Choudhury is a freelance financial content writer. With around six years of total experience, mutual funds and personal finance are her focus areas.