Financial Planning: Five tips to handle financial uncertainties

The life cover you decide on should be adequate to help your family maintain the standard of living you would have provided for them always.

By Pallavi Seth

The Covid-19 pandemic has forced us to take a relook at our personal finances and prepare for future uncertainties.

Save for a rainy day
An emergency fund helps you to financially face a medical scare, unavoidable household repairs, sudden loss of job or salary, pay cut or something that impacts the community such as wars, social unrest or a pandemic such as the current one.

The general rule of thumb is to have anywhere between three to six months’ worth of essential household expenses. If yours is a family with children and only one earning member, the amount should ideally cover your expenses for 12 months.

There are three crucial aspects to look at when deploying an emergency fund: security, accessibility, and liquidity:

Security: The money in this fund is to help you through a tough situation; hence, do not deploy it anywhere where there is risk of capital erosion in the short term.

Accessibility: If you do not have timely access to your emergency fund, it is pointless. Ensure that the funds are conveniently accessible so that you can take care of immediate expenses.

Liquidity: Liquidity refers to how quickly your investments can be converted to cash. Liquid cash, bank deposits and short-term investment should be the part of your emergency fund portfolio.

Life and health coverage
The fear around Covid-19 has pushed people to buy life and health insurance. Having a health insurance policy is a basic requirement, but it is equally important to understand what is the right coverage. While there is no ideal sum assured for a health insurance policy for an individual, most personal finance experts recommend a minimum health cover of Rs 5 lakh.

The life cover you decide on should be adequate to help your family maintain the standard of living you would have provided for them always. The thumb rule is to have sum insured that should be minimum 20 times of annual income.

Less on debt, live on budget
High interest debts like credit card or personal loan are harmful for your financial health. If you are unable to pay on time, the piling interest rate can increase the debt amount further. And even if you are using a credit card, spend as much as you can pay by the next month. Living on a budget helps in the long run. It makes you aware of what your basic needs are and can pull you through the tough times.

Don’t put all your eggs in one basket
When you diversify your investments, even if one investment fails at any given time, your other investments may remain strong, potentially lessening your overall loss. To be truly diversified, your portfolio will need to hold more than one kind of asset class including equities (stocks), fixed income (bonds), cash and cash equivalents, and real estate and commodities.

Living too long
Life expectancy in India has increased from 56.2 years to 70.8 years between 1970-1975 and 2013-2017.This demographic trend brings longevity risk with it. Longevity risk is the risk of living much longer than average and, hence, exhausting one’s savings during one’s lifetime. While planning your retirement, it is always advised to plan as early as possible in your earning years.

In a nutshell
A financial plan is made based on your financial goals which are assumptions considering your current situation. Now with time and situation, priorities in life change. These are the times when you should revisit your financial plan and make necessary adjustments. This will ensure that you are not financially stressed but at the same time able to achieve your life goals in a timely manner.

The writer is faculty, Amity School of Insurance, Banking & Actuarial Sciences