The last week of December and the first week of January usually attract people across the world to create a long list of New Year's resolutions. Over the next couple of weeks, these end up in the trash bins, mainly because the targets are too hard to achieve.
Resolutions in personal finances are no exception. You should not set the bar too high, as you would not have the motivation to reach it. Similarly, you shouldn't set the bar too low, or you'll procrastinate. Let us find the perfect balance in goals with four simple steps and lay out a disciplined plan so that your 2026 turns out to be better than you anticipate.
1. Emergency savings
The first step is to create a three-month emergency savings fund. If your monthly expenses are, say, ₹50000, then consider ₹50000 x 3 = ₹1.5 lakh as a decent savings fund. This would be your go-to option when you run into problems like a medical emergency, car breakdown, or house repair. Once you have used up the funds, make a point of topping them up for future use.
The best way to handle this is via liquid mutual funds. If you are totally new to mutual funds, you may keep this in your savings account as well.
2. Check debt-to-income ratio
The biggest villain in your financial journey is not debt, but the debt-to-income (DTI) ratio. The ideal DTI ratio should be around 30 per cent. It is fairly easy to calculate this: add up all your monthly debts (EMIs) and divide that by your monthly income (post-tax). For example, if the sum of EMIs is ₹30,000 and your monthly income is ₹70000 (after tax), then your DTI ratio is 30000/70000 = 42.8 per cent.
To bring this below 30 per cent, there are two options. The first is to bring down your debt to ₹21,000, i.e., reduce it by 30 pc. The second option is to increase your income by 30 per cent to 1 lakh per month. The sooner one does this, the more peaceful their financial journey becomes. Debt keeps mounting if something happens to the primary income and you miss a few repayments.
3. Check protection level
Protection is made possible by Insurance, which is a leveraged instrument and is entirely in the insured's favour in the initial years. There are three insurances that you should consider. The first is a term life insurance policy. The premium-to-protection factor would be around 0.1 per cent to 0.15 per cent if you are in your 20s and 30s. The second is a health insurance policy that covers your family’s hospital expenses. The premiums would be pretty low if you are young and healthy. Finally, you should have motor insurance for the vehicles you own. The total of all insurance premiums may not exceed 6 per cent of your monthly income.
4. Build assets with mutual funds and equity
Mutual funds are the darling go-to investment option for the salaried class. This was made possible with an innovative product — SIP (systematic investment plan). A subscriber could buy assets by investing a portion of their salary each month. With time compounding, they end up owning portfolios that would otherwise be unthinkable.
The ideal investible amount should be at least 20 per cent of your monthly income, so that you can plan for retirement 20 to 25 years from now. If you are totally new to investing, start with 10 per cent of your income and gradually scale up to 20 per cent over the next 12 to 24 months.
Once you build a stable portfolio, have the faith to invest in direct equity. Plan to buy one good stock this year, but take your time researching it well. Equity builds generational wealth, but you need to invest in the right company. Seek expert help if you do not have time for research. Plan to invest 4 per cent of your monthly income in that single stock, which you believe could be the winner 10 to 15 years from now.
Let us summarise the total cash flow to ensure it's achievable. If your annual income is ₹10 lakhs post-tax, then
1. ₹1.5 lakhs or 15 per cent goes into the emergency fund
2. ₹3 lakh or 30 per cent into debt
3. ₹60,000 or 6 per cent into Insurance
4. ₹1 lakh or 10 per cent into mutual funds + ₹40,000 r 4 per cent into direct stocks.
The sum equals 65 per cent of your income, leaving you with a sizeable disposable income for other activities like travel, food, and shopping. If you carefully assess, you may notice that we haven't invented anything new. We’ve just optimised the spending and savings to help you gain better control over your finances.
Wishing you a Happy New Year 2026.
(The author is a research scholar in applied economics, CUSAT and NISM-certified research analyst and investment advisor. He is the author of ‘How to join the top 1% options traders club’.
The opinions expressed in this article are those of the author and do not purport to reflect the opinions or views of THE WEEK)
