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Financial Planning: Six money lessons from year 2022

The year 2022 is drawing to a close, and it is time to take note of the many money lessons it held for us. The year was marked by geopolitical unrest, resulting in widespread economic instability. Rising inflation, layoffs, cryptocurrency crash, and a looming fear of recession affected people globally this year.

As a result of the events that unfolded, 2022 has given us many financial learnings. Here are some important financial learnings from this year that we can take into the New Year.

Crypto crash: Avoid unregulated investments

Cryptocurrency, with its unprecedented gains, became one of the most popular investments in 2022. Offering high returns in a very short time, it became wildly popular among younger investors. However, cryptocurrency, being an unregulated investment, was a risky one. The massive crash in its value sent shockwaves among cryptocurrency investors worldwide, thus cementing the risk that experts associated with the instrument.

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Adhil Shetty, CEO, Bankbazaar.com, says, “The cryptocurrency collapse offers a vital financial lesson – all that glitters is not gold. Invest your capital in instruments of which you have a fair understanding. Evaluate your risk appetite and financial goals when choosing investments.”

Volatile equity market: Aim for the long term, be patient

The stock market witnessed some of its sharpest declines in the first half of 2022. Amidst rising uncertainties due to geopolitical unrest and negative market commentaries, many investors let go of their holdings. But in the second half, stocks made a strong recovery, pushing the markets well past their previous peak levels. As a result, investors who remained invested despite the volatility gained the most. The key lesson here is that market fluctuations are an ideal opportunity to invest more; the longer you stay, the higher the reward.

Interest rate hike: Prepayment of loans is key

After nearly two years of stagnation, starting May 2022, key interest rates have increased sharply by 225 basis points. As a result, EMI went up, making loans considerably expensive. New and existing borrowers continue to feel the pinch of rate hikes on their monthly budgets, which have been upset due to EMI and interest payments. This situation makes an excellent case for prepayments and how they can help you tide over the rate-tightening cycle. Besides reducing your interest outgo, prepayments can help lower your loan tenure.

Rising inflation: Invest to raise purchasing power

This year’s inflation has upset many households’ budgets. Costs of essential goods and services such as food, medicines, clothing, transportation, education, and utilities saw a significant uptick. This situation offers a key lesson: When inflation rises, investments are the best way to maintain or increase one’s purchasing power. Review your investments and redirect your capital to adequate growth-oriented investments. Don’t just rely on your savings to tide you through.

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Rising FD rates: Laddering FDs to get better returns

Following repo rate hikes, loans have certainly become costlier. However, deposit rates, which haven’t kept pace with the repo rate hikes, are now also spiking. As of December 2, 38 banks offered FD rates of 7% or more on select tenors. Take advantage of the higher rates and ladder your FDs to enjoy higher returns.

Layoffs: Have an adequate emergency fund

In the past few months, looming fears of a recession have led to layoffs worldwide. A job loss is a challenging situation to be in, especially given the loss of a steady income. However, the best way to lower the monetary impact of a layoff is to have an adequate emergency fund. Plan and build a corpus to cover at least 12 months of expenses. Maintain these savings in an easily accessible instrument such as a savings account or start a recurring deposit. Also, ensure you are adequately insured to avoid dipping into your savings during an emergency.

Despite the best intentions, mistakes may sometimes be inevitable when it comes to financial planning. But, learning from these mistakes and taking corrective action in your future planning is the most important lesson to be learnt here. 2022 was a turbulent year, but the lessons it has given us will help us plan better in the coming years.

TESTING TIMES

  • Loan prepayments can help you tide over the rate-tightening cycle
  • When inflation rises, investments are the best way to increase one’s purchasing power
  • Build emergency fund for 12 months of expenses