“I started building this little snowball at the top of a very long hill,” the legendary investor Warren Buffet famously remarked. The secret to having a very long hill to climb is to either start out very young or live a very long time. The obstacles of being a Non-resident Indian are numerous. You must balance the taxes and financial obligations in two nations: India and the one where you now reside.
Early preparation might help you accomplish both long- and short-term objectives, pay off debts, and amass a corpus. One year at a time, it might assist you in getting closer to financial freedom.
Benefits of Financial Planning for NRIs
A small pebble that tumbled down from the snowy hilltop collects and forms a large snowball. The snowball effect elegantly summarises the advantages of beginning to practise something early.
No one can guarantee the duration of your investment or the rate of return you will receive. Even a modest amount can grow into a large snowball if you begin investing early and continue investing for a long period of time.
2. Beat Inflation
Inflation also compounds, much like compound interest. The yearly increase in general prices is the main measure of inflation that is mentioned in the news. It multiplies rather than accumulating.
Let’s say something costs Rs. 100 in 2020, and since then, there has been 5% inflation in 2021 and 7% inflation in 2022. If so, the cost of the item in 2023 would be Rs. 112.35 (100*1.05*1.07) rather than Rs. 112 (100+5+7).
Even while it may appear to be a rounding error in this instance, you will notice the impact of inflation when you scale this to your annual expenditure over a number of years. You will have a greater chance of avoiding this hidden tax if you start investing earlier rather than later in the year.
3. Increase Your Risk-appetite
Age is a significant factor in determining your risk tolerance. As you approach retirement, you cannot afford to lose your pension egg as you age. At that time, you must preserve it by investing in low-yielding securities if necessary.
You can assume a larger position in aggressive and volatile assets such as equities when you are young. As a result of having a long runway, you can benefit immensely from it.
4. Form Better Habits
Habits are recurring tendencies that are challenging to break. The savings can become investments, but for that, there must be savings. An early financial strategy can help you prioritise saving over spending. Your money can be set aside in envelopes for bills and fixed costs.
By forming positive and powerful habits, like budgeting and planning, you can turn around your lives.
5. Tax Planning
In January, newspapers and television programs in India are flooded with tax-saving strategies. In a time crunch, you choose the most convenient solution rather than the best or even the optimal one. You are forced to sign on the dotted line because of your FOMO (fear of missing out), even if you are not sure if it is the best financial decision for you.
When you start in April, you will have sufficient time to evaluate multiple options. In addition, because the advisors and distributors are not in a hurry, they will give you additional time.
6. Plan for Unexpected Events
When no food grows in fields during the winter, the ants store the food grains in their subterranean homes. Similar to this, you may set up an emergency fund with advance planning and saving. Borrowing wouldn’t be necessary.
7. Why the 1st of April?
The majority of organisations and individuals experience significant financial changes on April 1 each year. The two most important things happen – appraisals and budgetary implementations.
8. Annual increments
This time of year is when the majority of businesses and organisations schedule their annual appraisal and increment cycles. It may be both a one-time incentive and an increase in your salary.
Rather than squandering the entire incentive, invest it in accordance with your financial objectives. Similarly, a substantial portion of your increments should be allocated to increasing your recurring investments via SIPs.
9. Budget Effect
The majority of budget announcements, particularly those pertaining to income tax brackets, rates, and deductions, take effect on April 1. Therefore, you can plan your investments under section 80C and other applicable sections with greater nuance.
How can NRIs do Early Financial Planning?
1. Emergency Fund
Keep a minimum emergency fund of six months’ worth of expenses. There is no way you should begin investing until you have addressed this issue.
2. Get Health Insurance
If you are uninsured or underinsured for health and life, the next step is to acquire coverage. Even if you are covered by the company you work for, it is a good notion to obtain personal health insurance. You never know when you’ll quit the company, leaving you possibly unprotected when you need it most.
3. Pay-off Liabilities
There are poor debts and then there are worse debts. These include credit card debts, personal loans, auto loans, and other similar obligations. Ensure that you pay off your worst debts one by one.
Adopt the practice of spending only what you would if done in cash. If you are unable to control your impulses, block and discard all cards.
4. Goal Setting
The key is to establish realistic objectives and aims. People who keep their New Year’s resolutions are able to do so because it is straightforward to do so. Continue to remind yourselves why you made the resolutions in the first place.
5. Asset Allocation
With a less rocky and slick surface beneath your soles – presumably a solid one – you are now prepared to invest in the future. Consult your financial advisor now that you have sufficient leisure. Determine the asset allocation that best suits your requirements. And most significantly, which one matches your risk tolerance?