Budget-proof your personal financial plan

Ankit believes that his personal financial plan for the next year depends on announcements in Union Budget 2022. He devours every printed word and every TV discussion on the subject.

His brother has already met his financial planner for a review and done whatever was needed to be done.


What are the expectations of the common man from Budget 2022?

  • Drop in income tax rates
  • Raise in standard deduction limit from the existing Rs. 50,000/-
  • Increase in ceiling of Rs. 1.5 lakhs for investments under Sec 80C
  • Increase in tax exemption of Rs. 2 lakhs on home loan interest and Rs. 1.5 lakhs on principal amount repaid.
  • Additional tax exemption on health insurance.
  • Work-from-home allowance of Rs.50,000/-
  • Financial literacy being made a compulsory subject in schools.

We need to bear in mind that the budget deficit due to additional sops is financed by additional printing of money, or external borrowings by the government.

Printing money fuels inflation. The inflation rate was pegged at 5.6% in December,2021. The rise in food inflation during the same month is drastic from 1.9% to 4%.

An ex-RBI governor opines that RBI should consider issue of Covid bonds instead of printing money. This helps in raising money from the public in lieu of external borrowings. It reduces external borrowings to a certain extent. At the same time, it gives investors the benefit of a higher interest rate, than those prevalent in the economy.

Reserve Bank of India is likely to hike interest rates by 100 bps in 2022.

How will your personal financial plan be impacted by the moves?

  • Tax exemption will decrease your tax burden.
  • Interest rate hike can increase your loan EMIs.
  • Only fresh bank deposits will gain from interest rate hike. Your existing investments will continue at the same rate, not giving any extra benefit.
  • Increase in savings account interest rate can make it worthwhile to park emergency funds in savings accounts. The rate of interest for balances in savings accounts above Rs.10 lakhs are higher. Simultaneously, the interest rates on fixed deposits below 120 or 180 days are pegged below the savings rate. It encourages parking short-term funds in savings accounts.
  • (We are not comparing returns with liquid funds here, as those can fluctuate).
  • Work-from-home allowance is likely to be received by a few. It will cover the costs of internet, furniture. It may also compensate for inflationary impact on food prices.

What can you do to budget-proof your personal financial plan?

  • Calculate the probable tax-saving if some concessions are given.
  • Take a rough estimate of the amount you save, which can be taken up by increased EMIs or inflation.
  • Plan to invest the balance amount, in instruments of your choice. Small amounts should not be overlooked. They add up in the long run.
  • Freshers who have not invested in tax-saving instruments yet can opt for new income tax rates. This leaves them free to choose investment vehicles of choice, rather than opting for those with tax benefits.
  • Do not increase monthly expenses, just because you have more freedom of outward movement.
  • Shore up on health and life insurance, irrespective of tax benefits.
  • Do not dilute the emergency fund.
  • Explore options of balance transfer, if the rate of interest offered by your lender increases uncomfortably.

Why is your financial plan important?

Changes that look big on a macro-level may have a very small impact on your personal budget.

It is important to know the percentage impact on your monthly and annual budgets. The financial plan process involves checking if you need to curtail some other expense to pay an inflated EMI. You may have spare cash at the end of the year saved from taxes, which can be invested or used to reduce debt.

The national GDP does not matter here. Your financial goals do.

And last but not the least… financial literacy subjects being taught in schools will benefit the kids. Step up efforts to make your entire family financially literate, and include them in your financial planning.

It ensures success of your financial plan in the long run.

Who do you think is the wiser person – Ankit or his brother?

Inculcate the right money habits for the success of your financial plan.

Check your financial quotient to assess the health of your financial plan.

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