3 essential finance resolutions for 2011

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 reach of everyone, irrespective of your knowledge of finance or your current income 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 inflation is currently being reported as running at approximately 14%. That means that assuming your income stays the same, your money will only be able to buy lesser food than it was able to in the past. The purchasing power of your money is being 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 maintain the purchasing power of your money. As far as possible, avoid fixed deposits 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 the 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 income 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 funds to invest. Thereafter, use the returns from these investments for whatever consumption 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 usually better prepared to achieve them. It should be obvious that if you don’t know 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 your child’s education – whatever the goal, spend at least 1 hour in January reviewing what you want to achieve, and then consciously create a plan to achieve this.

All of us have busy lives and chances are that most resolutions don’t last beyond January. But, if you stay realistic about the above, come December you will be financially much happier.