5 steps for enhancing your financial education in 2023

"An Investment in Knowledge Pays the Best Interest"

Legendary investor Benjamin Franklin's quote highlights the importance of personal finance knowledge. December is an excellent time to reflect on 2022 and prepare a roadmap for 2023. You need to build a solid foundation to achieve your long-term financial goals. So, for 2023, make financial education your motto.

In this article, we will discuss some financial education topics and money management tips that you should focus on. It will help you excel in your financial planning journey in the years ahead.

Let us start by tracking money, i.e. inflows and outflows.

1) Cash Flow Statement
 

Rajesh receives his salary on the 7th of every month. He goes about his routine expenses. By the 15th of the month, his Savings Account is running on a low balance. He is left scratching his head, wondering where all the money went. Sounds familiar? Well, this happens to many of us. First, we spend, and later we wonder where did we spend.

The first financial education topic you should focus on in 2023 is managing your cash flows. The simple solution to knowing where and how much you spend is making a cash flow statement. A cash flow statement helps you record all your sources of income and expenses.

Income sources can include:
a) Salary,
b) Business income,
c) Interest,
d) Dividends,
e) Rent, etc.

Expenses can be categorised into:
a) Groceries,
b) Daily use household products,
c) Utility bills,
d) Education,
e) Medical,
f) Eating out,
g) Entertainment, etc.

You can make a cash flow statement by recording all the incomes on the left side and expenses on the right side. The itemised expenses will give you an insight into the categories you are spending and how much. If your expenses are higher than your income or your savings are not enough for investments, you need to reduce expenses. The cash flow statement helps you identify categories where you may be spending more than required and hence need to scale back.

As an IDFC FIRST Bank Savings Account holder,  it is easy to segregate your cash flows. There is no need to prepare a cash flow statement manually. Log in to your IDFC FIRST Bank Savings Account NetBanking or mobile app and head to the transactions list. You can categorise each transaction into a specified category. Head to the "Money Manager" section to see how much you spend in each category. You can then decide which areas you have the scope to scale back to free up money for investments.

So, now you understand that the cash flow statement tells you where you are spending and how much. Once you decide the categories where you need to cut down expenses, you can do that through budgeting.

2) Budgeting
 

After cash flow management, budgeting should be your next financial education area to focus on in 2023. The budgeting process involves allocating your income to expenses, savings and investments. If the amount allocated towards savings and investments is insufficient, get started with one of the simplest yet effective budgeting methods, such as 50-30-20 budgeting. It involves allocating your income as follows:

a) 50% towards needs
b) 30% towards wants, and
c) 20% towards savings, income, debt prepayment, etc.

If you are already following some other budgeting method, you may consider shifting to 50-30-20 budgeting. Once you get comfortable with 50-30-20 budgeting, you should upgrade to pay-yourself-first budgeting. It involves allocating money towards savings and investing first. You can use the remaining amount for expenses. It ensures you are able to fulfil your financial goals and achieve financial freedom.

Once your budgets are in place, the financial education focus should shift to comprehensive financial planning.

3) Comprehensive Financial Planning

Your cash flows are sorted. You have aced the art of budgeting and setting aside money for financial goals. Now, it is time to invest your surplus towards comprehensive financial planning. At a broad level, it involves:

a) Emergency Fund: Set aside 3-6 months’ income for unexpected financial emergencies. You can park your emergency fund money in a savings account or a liquid mutual fund. They allow access to money at short notice whenever the need arises.

b) Life Insurance: Purchase adequate life insurance cover for all family bread earners. The cover should be able to take care of all financial liabilities and financial responsibilities in your absence.

c) Health Insurance: All family members should be covered with an adequate amount of health insurance.

d) Financial Goals: Adopt a goal-based financial plan approach for every financial goal. Calculate the amount you will need based on inflation. Accordingly, prepare a financial plan and start investing. Review the progress regularly till you achieve the financial goal.

e) Tax Planning: When investing towards your financial goals, choose financial products that are tax efficient. Make the most of all the deductions and exemptions under various sections of the Income Tax Act.

f) Estate Planning: Make a Will that lists the details of how you would like your assets to be distributed after your demise. Make a nomination whenever you invest in a financial product.

4) Asset Allocation
 

Just like you make a list of goals related to various aspects of life, such as health, career, etc., make a list of your short and long-term financial goals. For long-term financial goals, such as building a fund for a child's higher education or own retirement, you should follow appropriate asset allocation. Diversify your investments into asset classes such as domestic equity, international equity, fixed income, gold, real estate, etc. It helps you spread risk.

The proportion allocated to each asset class depends on risk profile, age, etc. For example, Shirin is 25 years old and has just started working. She is unmarried and doesn’t have any loans. She has an aggressive risk profile and has taken the following asset allocation approach:

Asset allocation for an aggressive investor

Please note the above is just an example. Everybody's situation is different. The recommended asset allocation may change accordingly. IDFC FIRST Bank offers a wide range of financial products, including mutual funds, trading and Demat account, Sovereign Gold Bonds (SGBs), life and health insurance solutions, etc. You may get in touch with the experts at IDFC FIRST Bank to get recommendations on creating a customised investment portfolio based on your risk profile and financial goals.

5) Educate and Empower Yourself Against Financial Fraud
 

Digitisation has brought most investments within the comfort of our computers and mobiles. But that has also given rise to a lot of online financial frauds.

So, in your financial education journey, make sure you understand the precautions you should take to avoid any online financial fraud in 2023 and beyond. Some of these include:

a) Never share your confidential details, such as account number, card details, OTP, personal details, etc., with anyone on the phone, email, social media, etc.
b) Don't click on any suspicious links on SMS, social media, email, etc.
c) Don't install any software or apps on your computer/mobile that can give access to your device to others.
d) For any banking transaction, use only the bank website or app. Don't rely on any third-party websites. If you feel your account/card details have been compromised, call the bank customer care immediately and block the account/card.

Make 2023 your year of financial education
 

The article has discussed how you can identify where and how much you are spending using a cash flow statement. You can then use budgeting to allocate money towards savings and investments. Once you have the surplus money, you can focus on comprehensive financial planning. While investing towards your financial goals, you should avoid falling prey to financial fraud. Lastly, enhancing your financial knowledge should be ongoing and not limited to just 2023. As you gain financial knowledge and become self-dependent, you should use it to accomplish your financial goals.

Dr A.P.J. Abdul Kalam said: "Knowledge with action converts adversity into prosperity". So, make sure you enhance your financial education in 2023 and take actionable steps towards prosperity.

Disclaimer

The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.