What was it that you were telling yourself about not having a financial plan? You didn’t have the time? You didn’t have the expertise? You didn’t know where to begin? It’s April, the start of the new financial year. The world is under lockdown. You’re at home. Financially, you may be feeling the heat. Your cash flows may be impacted. You may not be adequately insured against critical illnesses. Your liquidity may be thinning.
Which is why this is the best possible time for you to start fixing your personal finances, so that you’re never caught unprepared and feeling vulnerable again. Here are six ideas you need to get working on.
Emergency Fund, Now
It may have struck you during the ongoing crisis that liquidity is absolutely critical to getting through such difficult periods. The liquidity isn’t just to help you get through the current problems, but also to keep providing for you in case you were to face income stress in the months to come. Financial planners call this money your emergency fund, to be used only during extraordinary situations such as the one we’re going through right now. There’s no one-size-fits-all size for this fund, but for starters, a fund that covers you for 3-6 months is good.
This fund is meant only to cover your essential costs such as rent, EMIs, insurance payments, groceries, utilities, transport, healthcare and family’s various essential needs, emergency travel and repairs, and so on, for the period you need to get back on track. This fund is not to be used for lifestyle and discretionary spends such as holidays or buying gadgets. This fund is your last resort in trouble. It can be created using a recurring deposit, fixed deposit, or liquid mutual funds.
Health Insurance for the entire family
There’s been no better time to remind you that every member of your household needs health coverage. The one provided by your employer may, or may not be enough. Prolonged hospitalisation and treatment of critical illnesses can cause severe financial strain to most households, push them into debt, and delay the achievement of life goals such as retirement or children’s higher education. The pandemic has also illustrated that multiple people in a family can be at risk simultaneously, and the financial stress this could put the family through can be crushing. So what is the reason you don’t have health insurance?
Use this time to compare your options, speak to insurance advisors, and get your coverage without further delay. Make sure every person in your household has adequate base coverage – at least Rs. 5 to 10 lakh if you live in urban areas, and don’t have any other coverage. You can boost this base coverage with a super top-up, taking your coverage as high as you want, at low costs. So if a health crisis hits your family, money will be the least of your worries.
A Term Insurance Plan, if you have dependents
Health risks have dramatically increased over the last few weeks. This is also a good time to remember that your family needs a way to keep going in case you—their breadwinner—were to pass away before your time. A term insurance plan is a great way to provide your family this financial security. There are various ways to calculate the ideal insurance coverage. But a broad requirement is that it should cover your family’s finances for the long run.
This means different things to different people. For a typical family, the coverage should take care of the spouse’s income needs and the children’s long-term education costs. The oft-used thumb rule is having coverage worth 10-20 times your current annual income.
The lockdown has given us time and space to think things through about our finances. Let’s use this time to figure out the goals that are truly important to our lives and a clear path towards achieving them. A financial goal will need you to define an end, the money you need to achieve it, the time you have left for it, the investment instrument suited for it, and the monthly contributions you can set aside for this investment.
For example, let’s say you have identified that you need Rs. 3.5 crore in 30 years to be able to retire comfortably. Working backwards, you realise that if you invest Rs. 10,000 a month for 30 years in a mutual fund scheme that could provide a CAGR of 12 per cent, you’ve hit your goal. There are many such goals you need to identify and start working on. This isn’t an easy task, but you have to do it. Get a professional investment advisor on a video call if you need to.
Building the all-weather portfolio
Recent weeks have driven many investors to despair. Equities have been crushed. Interest rates have fallen steeply. Gold has taken a beating on the selling frenzy. Profiting from real estate investments is unthinkable during the ongoing crisis. So how do you create the perfect, all-weather portfolio?
The truth is the ideal portfolio composition differs from one person to another. It depends on several factors such as age, income, life goals, risk appetite, liquidity needs, and so on. You must do what’s ideal for you and your life goals. Most investors will benefit from having a combination of deposits to manage immediate liquidity needs, equities for long-term wealth appreciation, real estate for self-occupation and security, gold for periods of uncertainty, government-backed investment schemes for assured returns and capital safety, and insurance for protection against health and life risks. These options in a ratio suited to your unique needs should cover you in most economic weathers.
Time to choose your tax regime
From April 1, a new, optional income tax regime starts. You now have the option of paying a lower rate of tax but forgoing most tax deductions, or paying the older tax rates and availing deductions. You must find which option works best for you.
For this, you need to do the math for both regimes based on your income expectation for the year. Claiming deductions is a good option to have. There are deductions in the Income Tax Act that can be availed even without buying tax-saving investments and insurance products. For example, you get deductions for rent paid, children’s tuition fees, eligible healthcare expenses, and PF deductions. You may also have home or education loans which provide more deductions. Therefore, take stock of your various deductions and calculate if it makes sense to give them up.