The start of the New Year is a great time to put in place practical resolutions

for your personal finances. Here are 3 simple resolutions that are within the re
ach of everyone, irrespective of your knowledge of finance or your current incom
e level.
1. "I will be a smart saver to protect myself against inflation"
Inflation is a hidden tax that eats away into our money. For example, food infla
tion is currently being reported as running at approximately 14%. That means tha
t assuming your income stays the same, your money will only be able to buy lesse
r food than it was able to in the past. The purchasing power of your money is be
ing eroded.
The best thing for you to do is to put your money into instruments that generate
a long-term rate of return that is higher than inflation. Only then can you mai
ntain the purchasing power of your money. As far as possible, avoid fixed deposi
ts and fixed income instruments, especially if you are young. Rather, invest in
equity mutual funds or instruments where the after tax-return is higher than the
long-term inflation rate.
2. "I will prioritize productive assets over consumptive assets"
All of us are tempted to buy the latest mobile phone, fashion accessory, or use
our money towards eating out and going to the movies every other day. After all,
we work hard so we deserve all the pleasures of life. However, by spending our
money this way, all we are doing is "consuming", with no real asset to show at t
he end of the day.
No one is suggesting that you totally stop the discretionary spending that gives
you pleasure. Rather, recognize that if you prioritize building assets that can
give you income, in just a few months you will likely have more sources of inco
me to spend on discretionary items. So, before you use your bonus or pay rise to
buy that hot new gadget which will get obsolete in no time anyway, use these fu
nds to invest. Thereafter, use the returns from these investments for whatever c
onsumption you still want to do.
3. "I will spend 1 hour this January reviewing my financial goals for 2011"
History suggests that those who take time to identify their goals in life are us
ually better prepared to achieve them. It should be obvious that if you don't kn
ow what you want to achieve, you might just wander directionless, and you might
not be happy with where you end up.
So, if you want to buy a house, upgrade your car, get out of debt, or pay for yo
ur child's education - whatever the goal, spend at least 1 hour in January revie
wing what you want to achieve, and then consciously create a plan to achieve thi
s.
All of us have busy lives and chances are that most resolutions don't last beyon
d January. But, if you stay realistic about the above, come December you will be
financially much happier.
Plan to combat inflation
1) If you are an investor primarily investing in bonds or fixed deposit, then th
is is high time you rethink your investment plan. As inflation erodes the value
of money, high inflation would eventually lead to low real returns. Under high
inflationary conditions, the interest rates ate expected to move up which means
new investors will get higher returns. Therefore, it is advisable you put your
money in short term funds instead of long term deposits or government bonds.
2) Going by the same concern, you should also get rid of the long term debt fund
s. As interest rate increases, the bond prices fall this in turn reduces the NAV
(net asset value) of bonds. Hence, you should move to the short term funds whic
h is not very sensitive to interest rate risk
3) Reconsider your investment decisions. As inflation increases, it is better to
invest in equities which give superior returns in long term. Hence, if you are
a long term investor then you are better off investing in mutual funds which are
run by adept fund mangers.
4) As interest rates move up, it is better to invest in properties. It is expect
ed that during times of high interest rates, the property rates will also move u
p.
5) Also, it is important that you have diversified your risks by investing in di
fferent asset classes.
How inflation is measured in India
Every week, RBI comes out with an inflation number. This number is measured by u
sing an index called WPI (whole sale price index). WPI is the average price leve
l of goods traded in wholesale market. These are divided into different categori
es viz. primary articles (Food articles, non food articles and minerals.), Fuel,
Power, Light & Lubricants and manufactured goods. The average price level is th
en measured on a weekly basis with the respective weightage given to the differe
nt categories. The percentage increase with respect to a base year is referred
to as the inflation rate.
The government has shifted the base year for the official wholesale price index
to 2004-05, from the earlier 1993-94, and added as many as 241 new items to its
basket of commodities. Earlier there were 435 commodities. The weightage given h
as also been changed. This will help in getting a more realistic picture of infl
ation.
Let's calculate WPI for a commodity like wheat. Assume that the price of a kilog
ram of wheat in 2005 was Rs. 20 and in 2010 is Rs. 25
Then WPI of wheat for the year 2010 is,
(Price of Wheat in 2010 - Price of Wheat in 2005)/ Price of Wheat in 2005 x 100
which comes out to be (6.10 - 5.75)/5.75 x 100 = 6.09
Since WPI for the base year is assumed as 100, WPI for 2010 will become 100 + 6.
09 = 106.09.
As the inflation figure is an average increase in price levels of goods and serv
ices, the actual increase in cost of a good cannot be correctly estimated. For e
xample if you want to estimate the increase in housing prices, the inflation fig
ure won't be the correct measure. The housing prices have increased astronomical
ly over the past few years. The housing price would primarily depend on the loc
ation and the expected development in the region.
India's annual food inflation dropped a tad to 16.24 percent for the week ended
Sep 25 compared to 16.44 percent the previous week. The index for fuel remained
constant at 10.73 percent during the week.
Are you the person in the family with the sole responsibility of maintaining the
household finances? Is your spouse completely oblivious of what's happening?
God forbid, but what if for some reason you can no longer manage the budget? Or
what if you're just tired of managing everything yourself, and want your partner
 to become more involved in your household's finances? How do you teach her ever
ything you know?
This is the time to sit down and stress on the importance of your partner needin
g to be aware of all important financial information. This may not be the most e
ntertaining of activities, but it is the key to taking the best possible care of
one of the most important people in your life.
1. Make a list of everything and where they are located.
While you may be an open book for each other, don't assume your other half posse
sses the intuition to know where you keep sensitive information.
While you may think your filing system is the most organized one that one can ev
er come across, and that your financial records are in a pretty obvious location
, your partner may not think so.
So what is the first thing you should do? Present your partner with a list of lo
gins, passwords of all of your accounts making it easy to see everything that ne
eds to be addressed. Keep it of course in a safe and secure location.
2. Discuss transparency regarding investment info, emergency funds and bank acco
unts
Your partner may be under the false impression that not knowing the details of y
our family finances will reduce stress.That's not the case. Explain to him/her t
hat sharing knowledge and responsibility for your financial life reduces stress
as it makes you ready for any situation that may arise when one is unable to ope
rate. In times of emergency like a long absence or medical emergency or death -
this info then becomes the most important thing.
3. Awareness of all financial dealings is a must.
Your partner should know all your financial dealings so that there are no rude s
urprises. So sit down and review your financial situation together - cash in the
bank, investments, equity in your home, mortgages, credit card debt, and any ot
her liabilities you may have. Review your budget together.
Being aware of all financial dealings has a couple of benefits. First, you make
better decisions when you collaborate. Second, you share responsibility for the
outcomes - good and bad - which means that he/she is never in the dark about whe
re you stand. And this eliminates a lot of the tension that inevitably results w
hen one party knows a lot less than the other.
4. Have your partner watch you handle the finances.
Educate your partner on how to handle finances. Let him or her watch and learn.
Explaining things is helpful, and written instructions/checklists/spreadsheets a
re even better, but nothing beats sitting down with your partner and talking thr
ough actually managing the finances. Let your partner observe the process while
you explain it, and then have him or her practice it with your help and guidance
.
5. Gradually give your partner some financial responsibility.
If your partner hasn't handled the money at all, start off with a small, managea
ble task - preferably one with low stakes. As he or she becomes more adept, give
additional tasks to manage. Eventually, have your partner handle all the financ
es for one month (with your supervision, of course). Then, try switching off mon
ths, with your partner handling the finances every other month until you both fe
el completely comfortable.
6. Discuss contingency plans.
Make sure your partner knows what you would do in an emergency or unplanned fina
ncial event. Don't keep it conceptual - discuss actual, concrete strategies to h
andle unplanned events. If there is a sudden loss of income, which bills would n
eed to be prioritized, and which expenses could be reduced or dropped altogether
? What are your savings priorities? If there is an accident which account do you
access before you get benefits from your insurance? Is there any charity to whi
ch you would donate a significant sum? On a lighter note, if you win a lottery (
the ticket of which you have just bought with his/ her consent) which debts do y
ou clear?
7. Maintain a household budget.
You may not be the type who needs to write everything down to successfully manag
e your money, but a budget is an excellent way to give your partner a big-pictur
e idea of all the money in play - the income, the debts, the recurring expenses,
the investments and so on. It can also help your partner pick up where you left
off in managing the household's finances if you die or become incapacitated.
So, start encouraging him/her to start making a budget plan. Soon you will find
that both of you are enjoying it and life is becoming a real partnership.