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Plan your finances in 5 simple steps

Muktha Tavane|3 min read|06 October, 2022

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We’ve all reached a point in our lives when we have wanted to save and invest our money but somehow never got around to actually doing it. This World Financial Planning Day, start inculcating discipline in your financial plan. If you’re wondering how, here is a simple five-point checklist to help you build the desired discipline in your financial plan and in turn get closer to your financial goals.

1. First things first — Buy Health Insurance!

A common mistake that most people make is to think that corporate health insurance provided by the employer is adequate. While corporate health insurance may be useful, it is equally important to buy a separate health cover for yourself and dependent family members to ensure that you and your loved ones are covered adequately even when you are in-between jobs.

Medical inflation in India is the highest among Asian countries at ~14%*

With such high inflation, adequate health insurance cover is a must to ensure financial constraints do not get in the way of availing the best medical treatment during medical emergencies.

2. Protect your family’s future with a Term Insurance

While health insurance will take care of expenses you incur during medical emergencies, term insurance will help you secure your family’s future in case of your untimely demise. Term insurance is one of the cheapest life insurance policies that you can buy to get a higher life cover.

The objective of a term insurance policy is to replace your active income in your absence. So, as a thumb rule, you can get a term policy of 15 to 20 times your annual income. It is also advisable to increase the cover as your income increases.

3. Create an emergency fund to deal with unforeseen financial situations

Having an emergency fund could help address uncertain financial challenges such as those experienced during the pandemic over the past few years like job loss, business stagnation, delay in salary payment, etc. Having a safety net in terms of an emergency fund to deal with such uncertain situations is important. It will not only help you overcome these financial challenges better but will also protect your long-term investments from early withdrawals.

The ideal emergency fund amount is at least 6 months of your monthly expenses which can be accumulated in highly liquid and accessible investment options such as liquid funds which have the potential to deliver better returns than a savings account.

4. Be mindful of your expenses and borrowings

Once you have the necessary insurance cover and emergency fund in place, your next focus should be to manage your expenses and debt well. You can broadly segregate your expenses into two categories:

  • Essential expenses that include rent, EMIs, utility bills, commute expenses, and so on
  • Non-essential expenses such as entertainment, eating out, gadgets, etc.

There are some simple rules to manage your expenses. One such interesting rule is the 33–33–33 rule which asks you to break your in-hand income into three equal parts — 33% of the income goes towards essential expenses or needs, 33% for non-essential expenses or wants, and 33% to savings and investing.

When it comes to borrowing, it’s best to avoid or keep it at a minimum, unless you are availing a loan for buying an asset such as a house. Remember that when you borrow, you are indirectly spending from your future income.

5. Invest for your future

When it comes to investments for your long-term financial goals, it is best to invest regularly i.e. every month. The rule of 33–33–33 can be a great way to maintain monthly investing discipline. Creating long-term wealth is a function of three factors: how much you invest, how long you invest, and how much return you generate

So make sure that you invest more and invest in the right mix of investment products with a long-term view. It is always advisable to diversify your long-term investments across different asset classes such as equity mutual funds, debt mutual funds or fixed deposits, gold and so on. The exact allocation to each of these asset classes will depend on (a) your investment horizon, (b) your ability and willingness to stomach short-term ups and downs in the value of your investment and (c) your return expectations. Equity mutual funds, for instance, are more suitable if you are looking for long-term goals such as retirement whereas debt mutual funds make sense if you are risk averse and are looking for a relatively steady return.

Remember, if you come across any investment product with a promise that is too good to believe, ask yourself these questions before you take a plunge. Is this investment regulated? What is the risk involved and is it aligned with your risk appetite and investment needs? Does it have a long term track record? Having answers to these questions can help you make an informed decision.

This checklist should put you in good stead to bring your finances on the right track, no matter what your age group, salary range or investment goals are. Happy financial planning day!

*Source: Livemint

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