COVID-19 has hit the professional life of many people and has affected the long-term financial plans for many. The pandemic has brought attention to the fact that it is only our savings that will ultimately save us during times of crisis.
They say, learning from others’ experiences is the best way to avoid the same pitfalls yourself. So, you can learn many financial management lessons from the crisis and out of the experiences of the people who suffered.
Here are nine important financial lessons from the pandemic:
1. Save as Much as you can
Savings should be an essential part of your life. The long period of lockdown due to COVID-19 has further taught us the importance of savings. Developing the habit of saving early on will gradually build financial independence in life.
Want to know how much you need to save? Understand the 50:30:20 budgeting ratio:
a) 50% of your income must be for your essentials and regular lifestyle expensesb) 30% you should save for your long-term goals such as child’s education, marriage, etc.c) Rest 20% of your income is sufficient for meeting short-term goals like home renovation, car upgrade, etc.
Going by the above ratio, you can easily proportionate your savings. Thereafter, you can allocate them into various savings schemes such as PPF, Bank FD, or a ULIP where you can multiply your savings.
2. Maintain Low Survival Expenses
Besides savings, COVID-19 pandemic has also taught us the importance of minimalism. An effective way to ensure financial security in these crisis-hit times is to limit your survival expenses.
Remember your lifestyle expense is all about habits. They are built over some time and they take a similarly long period to change. Thus, you may want to build only those habits you can live with over a long period.
Here’s a list of things you would want to work on for crisis times:
a) Figure out the lowest amount of money you need for running all the important things in your householdb) Eliminate unsecured debt as far as possiblec) Have credit cards but ensure their limits are always open in full after the due periodd) Explore the ways to reduce your mortgage interest expenses
Good times, nowadays, are often synonymous with bad debt, or at least a lot of debt. So, you may want to contact a financial planner to consolidate and resolve this before the crisis hits.
3. Create an Emergency Fund
The emergency fund is a pool of liquid investments. Liquid investments are savings account balances, super saver deposits, liquid mutual funds, etc. In other words, any investment that keeps your money safe and easily available.
You can even count your credit card in this category, as it is also easily usable for transactions.
Why do you Need Emergency Fund?
It’s easy to get this question if you have already created a large pool of long-term investments and real estate. So, for one the purpose of an emergency fund is to support you at a time when nothing else is available.
For example, in the case of job loss or loss of income from profession. The reason you need this emergency pool of funds is that, in such situations:
- Your insurance plans will not work- You may not get a loan- Your family and friends might be in the same boat of crisis
How much Emergency Fund you Need?
Ideally, the emergency fund should take care of the following expenses:
- Kitchen expenses- Child’s school fee- Loan EMIs- Insurance Premiums- Utility Bills
The amount of money you will need depends not only on the amount of these expenses per month but also on the length of time.
Ideally, for any profession and any age saving six to nine months of your income should be enough for emergencies. But, you can increase or decrease the time as per your professional experience and industry.
Click to use : Power of Compounding Calculator
4. Buy a Family Health Insurance
Covid has had many families who got affected, scrambling for medical support. Health insurance is a financial plan that is purpose-built for such emergencies. Thus, a family health plan which can take care of a large part of your medical expenses is a must.
You need the following two types of health insurance plans:
a) Mediclaim cover for hospitalisation and treatment costs and daycare expensesb) Critical health cover against life-threatening diseases like cancer and heart failure
5. Budget Preventive Medical Care
Covid pandemic has also forced us to realise the importance of good health and vitality. With preventive healthcare, you can avoid many large medical expenses and most of all emergencies.
Thus, budget the regular health checkup in your expenses and maintain God’s gift without hiccups.
6. Diversify your Investments
The next financial lesson from the pandemic is to invest your money into appropriate schemes that can build your wealth.
a) The most effective way to achieve this is to invest in diversified investments, that include both equity and debt.b) A smart way to do this is to invest your money in a ULIP, such as the Canara HSBC Life Insurance Company Life Insurance Invest 4G. It offers you a multiple-asset portfolio including equity, debt, and hybrid mutual funds.c) Apart from that, it offers you 4 different automatic portfolio management strategies that work in a pre-defined manner.d) Besides, if you opt for the century option in this plan, your plan will continue till 100 years of your age.
7. Have an Adequate Term Life Cover
The pandemic saw many affluent families suffering financially due to the sudden demise of the primary breadwinner. Term life insurance cover is one small investment that will help you avoid such a situation for your family.
a) Have an adequate term insurance cover, i.e., 10-15 times your annual income is sufficient to take care of the following for the family:
- Ongoing debt
- Household expenses
- Important future goals
b) You can look for the regular income + lump sum payout feature in the plan
- The regular income feature allows your family to rest easy
- They can use the lump sum to pay off any debts and invest in long-term goals
Term insurance premiums are the lowest among all the life insurance plans for any age. Therefore, whether you have life insurance or not, ensure the long-term financial safety of your family with a term life cover.
Click to use : Term Insurance Calculator
8. Long Term Investment
Long-term investments are the mainstay of your financial life. The pandemic forced almost everyone to look at their finances in a new light. While we have talked of all the short-term investments and emergency needs, long-term investments are also equally important.
With the modern-day lifestyle expenses and demanding work environments, it's easy to miss long-term investments. So, you need to have a few trusted, tax-efficient and long-term investment options:
a) Public Provident Fund (PPF)
- Invest for 15 years, then extendable in 5-year tranches
- Withdrawal allowed after 5 years
- Completely tax-free
- Maturity money cannot be repatriated
b) Unit Linked Insurance Plans (ULIPs)
a. Invest up to 100 years of age. Eg., Century Option of Invest 4G from Canara HSBC Life Insuranceb. Partial withdrawal allowed after 5 yearsc. Withdrawals and maturity are completely tax-free if the annual investment does not exceed Rs 2.5 lakhsd. Bonuses for long term investorse. Invest in both debt and equity funds or hybrid fundsf. Systematic investment and withdrawal optionsg. Life cover and premium protection option
c) Guaranteed Savings Plans
a. Another long-term life insurance savings schemeb. You can estimate the maturity benefit beforehand due to guaranteed benefitsc. Long-term investors are rewarded with additional bonusesd. Life cover and premium protection option
Apart from these, you can also consider Sukanya Sammriddhi Yojana, Guaranteed Income4Life and similar investments.
9. Learn to Save Tax
If you want to save money and reduce your expenses, saving tax becomes your natural goal. Most long-term investments allow you to claim deductions from your taxable income for up to Rs 2 lakhs and more.
Health insurance premiums and medical expenses of your 60+ parents can give you a deduction of up to Rs 75,000.
Apply these nine financial lessons from COVID to stay prepared for any situation in life, at least financially.