While resolutions related to health or inter-personal relationships are most popular on the onset of a new year, those related to financial health often lacks due attention. However, taking care of one’s finances and creating a solid financial plan have become more important now, particularly in view of the Covid-19 like situations, which can turn our lives topsy-turvy.
Let’s look at financial resolutions to ensure better financial health in the New Year:
An emergency fund helps meet unforeseen financial exigencies or loss of income arising from unemployment, illness or disabilities. Without an adequate emergency fund in place, unforeseen financial emergencies can force you to default on existing loan repayment obligations, redeem investments kept aside for crucial financial goals, or sacrifice important lifestyle expenses and/or avail loans at much higher interest rates.
Ideally, an emergency fund should be big enough to cover your monthly mandatory expenses for at least six months. Apart from your unavoidable daily expenses, an emergency fund should include insurance premiums, existing EMIs, monthly contributions to your financial goals, among others.
“As financial emergencies like accidents, illness, job loss, etc can strike any time, make sure to keep your emergency fund in high-yield savings bank accounts. Doing so will allow you to make withdrawals instantly without having to pay extra charges for such withdrawals. Those comfortable with mobile or internet banking can park their emergency fund in fixed deposits of scheduled banks,” says Radhika Binani, Chief Product Officer, Paisabazaar.com.
A financial plan can help you strategize your money management moves for achieving your financial goals as per your risk appetite, investment horizon and cash flows. Start the process of creating a financial plan by estimating the amount needed to attain each of your financial goals, assumed inflation rate and rate of returns and the time horizon left to achieve those financial goals. Once you have a clear number for these factors, take the help of online SIP calculators to figure out monthly contributions needed to achieve those financial goals.
Apart from providing your investments with a proper direction, financial planning also helps in creating appropriate asset allocation strategy to achieve financial goals. With a proper asset allocation strategy in place, you can strike a balance between risk and rewards by diversifying investments across various asset classes like equity, fixed income instruments, debt, gold, etc, on the basis of your financial goals, risk appetite and investment horizon.
Systematic Investment Plans (SIP) allow mutual fund investors to invest a predetermined amount in mutual funds at periodic intervals, say, monthly, quarterly, etc. As the amount for an SIP is automatically debited from your savings bank account on a predetermined date, it ensures financial discipline and regular investment. Moreover, as the minimum ticket size for SIP investments in most equity mutual funds starts from Rs 1,000 (Rs 500 in case of tax-saving funds), opting for the SIP mode allows investors with limited investible surpluses to avail diversification in their equity investments and simultaneously benefit from the power of compounding.
Such automated and regular investments through SIPs also allow investors to benefit from rupee cost averaging during market corrections and bearish market corrections by purchasing more units at lower NAVs. This removes the requirement to monitor and time the markets.
Credit score holds an important place in today’s financial lives. Lenders and credit card issuers factor in your credit score while approving loan and credit card applications. Some lenders also charge lower interest rates to those with good credit scores. “Since there can be no credit score without a credit history, those without credit history can build their score by availing credit cards. Transactions made through credit cards are considered as equivalent of taking loans and hence, are reported to the credit bureaus. Bureaus use this information for evaluating your credit score. Those denied credit cards owing to inadequate income, unserviceable locations, etc can opt for secured credit cards to build their credit history,” says Binani.
We often confuse insurance with investment products. As an outcome, many end up investing in money back plans, ULIPs, endowment policies, etc, which provide inadequate life cover while yielding sub-optimal returns. Ideally, one’s life insurance cover(s) should equal 10-15 times of one’s annual income. The most cost effective way of buying large life covers is to purchase term insurance plans. Besides this, one should also buy sufficient health insurance policy to safeguard from rising medical costs.
Increased credit access and urgency to make lifestyle expenses propel many to avail multiple loans at higher rates of interest, leaving them with little funds to make long-term investments. “Consolidating one’s existing multiple loans into a single one at a lower interest rate and for longer repayment tenure, if needed, can help in saving interest cost and reducing repayment burden. While top-up home loans are one of the best consolidation options for existing home loan borrowers with multiple loans, for others, a personal loan or loan against property, etc, can be suitable choices,” informs Binani.
