‘To err is human, and to learn from it is wisdom,’ or so it should be. The unprecedented developments of the year 2020 revealed several financial mistakes we had been making in the course of our lives. It also brought light to the fact that perhaps we should not postpone minor yet important decisions for the sake of lifestyle.
Overall, as the year ends we should take the learnings from these unforeseen times to the next year. Here are 5 financial management actions to help you amend the money management and ensure a safer future for your loved ones:
1. Retouch Your Contingency Plan
Lack of a contingency plan was one of the most important mistakes for the year 2020. With urgent hospitalization and even sudden loss of life, those who had not subscribed to health and term insurance plans felt vulnerable.
Thus, for 2021, let take a moment to plan for your family’s survival during emergencies. Here’s a list of things you should consider for a good contingency plan:
- Get Adequate Health Cover
Health insurance can support you financially in case of sudden hospitalization. Adequate health cover means that the benefit amount of the cover is large enough to allow the best medical care to you and all your family members. Yet, at the same time the cover should be:
• Affordable for you
• Should keep up with the inflation
You will need two kinds of health covers for your family. One is the Mediclaim insurance which takes care of hospital bills directly. The other health insurance protects you financially against dreaded diseases, which are unpredictable and can be financially devastating.
- What If You Already Have a Health Insurance?
If you already have health insurance, all you need to do is check the following:
• Is the coverage adequate?
• Does it cover your spouse and child?
• Do your parents have adequate health cover?
If your existing health cover is low you should try and secure a higher sum insured under the plan. While you can increase the cover under Mediclaim insurance with critical health cover you will need to buy another policy. You can also add new family members to your existing Mediclaim insurance plan.
- Secure An Adequate Term Life Cover
Term life cover is a minor cost to pay for lifetime financial protection of your loved ones. You can ensure an adequate term insurance cover for your family which will provide them with the following in case of your sudden demise:
• Large lump sum to take care of debt and invest for future financial goals
• Regular monthly income for the household and lifestyle expenses
With term life cover like iSelect Star from Canara HSBC OBC Life, you can even secure a growing monthly income for your family. Growing monthly income option is especially useful if you have a young family.
- What if You Already Have a Term Life Cover?
If you already have a term life cover, you need to check the adequacy of its time and again. You should revisit the term cover either every few years or when any of the following events have happened:
• Your income has grown substantially
• You have a new dependent family member
• You have acquired a new loan, like a home loan
• Your family’s lifestyle has changed
The best term insurance plans, including iSelect Star from Canara HSBC OBC Life, allow you to increase your sum assured on these occasions. With iSelect Smart360 Term Plan, you can also choose to increase your term cover every year automatically.
- Do You Have A Contingency Fund?
At the beginning of the year 2020, the employment market also suffered setbacks due to an uncertain future. Such an event threw many of the victims back to the planning board if they did not have enough emergency funds.
Emergency funds help you in case you suddenly lose your income. Even when you are single and have no dependents, you will need a pool of fund to take care of your expenses till you secure a new income source.
Three to six months of following expenses should be enough to help you sail through such emergencies:
- Household expenses – kitchen, electricity, water, internet
- EMIs – Although there was a moratorium scheme in 2020 for borrowers, it may not happen in future. Thus, preparation is the best solution
- Insurance Premiums – You may stop your regular investments, but you must not lose your insurance cover in such times.
- Additional Expenses – You will need to incur expenses on commutation and employment search so have some additional money for this.
2. Plan Your Annual Expenses, Savings & Taxes
Looking at the bigger picture could lead you to larger breakthroughs with your money. If you want to save more, lower your taxes, and grow your wealth faster, annual planning can give you the wings you need.
Annual planning of your expenses, savings and taxes will involve the following steps:
- Review previous year’s bank, credit card and mobile wallet statements for the items you spent your money on.
- Classify all the spending in three groups – Important, Long-term Investment and Aspirational (Aspirational expenses are momentous purchases which are more lifestyle spends than based on immediate family needs. For example, dining out, birthday parties, etc.)
- Budget Each Outflow: You can put a lid on the spending by assigning a limited budget to it, especially on the aspirational expenses.
- Automate Your Investments: Automating your investments will help you in meeting your investment needs towards your goals. This discipline is very useful if you want to be in a better financial situation.
3. Spend on Financial Education
You may be surprised at the lack of knowledge you received during schooling about the most important part of your life – money. However, you do not have to continue to suffer the same limitations anymore, and neither do your children.
You can make use of the numerous short term courses on financial management and investment. With online sessions and video lectures, you can gain more insight into how the world of money works from the comfort of your home.
Enrolling your child into one of the financial management courses will keep them abreast in financial matters. Thus, when they start earning, they can be more prudent with their money.
4. Recalibrate Credit Card Spends
Credit card is a useful tool, especially in case of emergencies or large expenditures with bonus. It is also one of the most easily misused financial tools in your pocket. If you use your credit card prudently, it can help you improve your savings and lifestyle. However, if you end up spending without checks, it can easily set you in a financial trap.
Best way to use your credit card is to have your budget divided into two parts:
- Cash Expenses Only – This is for those necessary expenses where your credit card may not work, such as vegetables, small vehicle, household repairs and similar small expense.
- Credit Card Only – For the expenses which allow you to use a credit card, use the credit card for them. Also, keep the money from your saving account aside in a liquid fund or short-term fixed deposit. You can later use this money to repay the Credit Card dues while you earn some interest on this money.
The best way to use a credit card is when you already have money in your savings account, and you need to spend it on a specific goal. For example, let’s say you want to buy large electrical appliances for your home, and have accumulated enough money already.
You can use your credit card for the transaction, earn payback points and later use the collected money to pay off the credit card dues.
5. Plan to Pay-off Expensive Debts
If you have a personal loan and similar debt on your balance sheet, you should plan to repay the debt as soon as possible. The simple reason behind this goal is that these debts usually charge a much higher rate than you can safely earn on your investments. Thus, these debts are actually draining you financially, rather than helping.
With any type of bank loan, you can start prepaying after your sixth EMI. Thus, consider paying something extra from your seventh EMI onwards to reduce your due amount faster.
With these 5 financial management steps, you can ensure to be better prepared for any emergencies in the future. Also, you will be in a much stronger financial position over the years.