Financial planning is crucial for building strong financial future. Whether you want to invest for future or avail loans to fulfil various financial needs, making well calculated financial moves can help you breeze through different aspects of financial life. Unlike popular belief, financial planning need not necessarily involve making heavy-duty expenses or investments.
Here are five financial tweaks that can go a long way towards building a strong financial future:
Create and maintain an adequate emergency fund for financial exigencies
Irrespective of your age, income, job profile, financial position etc., you must create and maintain an adequate emergency fund to tackle financial exigencies which can disturb regular inflow of income such as a sudden job loss, accident or severe illness etc. The size of your emergency fund should ideally be at least six times your monthly recurring expenses, including rent, credit card bill, etc. Also, make sure that the size of your emergency fund proportionately increases in sync with any rise in your monthly expenses.
Prioritize purchase of adequate term and health insurance
Purchasing adequate term insurance plan is necessary to guard your loved ones against life's uncertainty by providing financial assistance to them in case of your untimely demise. The assured sum, which should ideally be at least 10-15 times your annual income, would act as replacement income for your dependents, thereby enabling them to continueexisting investments and repayment of ongoing loans and credit card bills. Moreover, compared to the benefits and cover amount offered, premium involved in term insurance is also very low.
Apart from term insurance, it’s extremely important to purchase a suitable health insurance policy to tackle unforeseen medical expenses which may arise in future. With rising medical costs and a single hospitalization bill being capable enough of wiping off your entire savings, it has become increasingly imperative to have reliable health insurance policy in place. Remember that even if your employer provides a medical cover for its employees, do not solely rely on it, as this policy would only be valid until you switch your job. You may opt for a top up medical policy to cover high medical costs in case of disability or accidents.
Begin investing early for retirement
Most of us tend to shrug off the idea of investing early (in late 20s or early 30s) as we believe creating corpus for retirement is a task designated for later stages of work life, usually in late 40's or early 50's. Given that the corpus amount has to be sufficient to take care of your expenses post retirement, having an early start would provide you a longer investment horizon to accumulate the large corpus. As there are other important financial goals which need to be taken of, such as purchasing a house, children’s higher education etc., delaying your investment for retirement corpus would increase the chances of accumulating insufficient corpus. The more you delay, larger would be the monthly contribution required for accumulating the target corpus, implying higher chances of straining your finances to achieve the target corpus timely.
For example, if you start investing at the age of 25, a Rs 1 crore retirement corpus can be accumulated through a monthly SIP of around Rs 1,500, with expected average returns of 12 per cent p.a., by the time you reach the age of 60.However, if you start investing at the age of 45 years, the same amount of corpus would require monthly SIP of around Rs 20,000 to get accumulated by the time you retire at 60.
Maintain strong credit score for better deals on loans
Apart from being one of the key parameters to assess applicant’s creditworthiness, credit score is gradually being adopted by banks for extending risk-based pricing to borrowers. Those with a higher credit score can avail loans at lower interest rates, whereas those with a low credit score would either be offered loan at a higher interest rate or even face rejection. This practice, therefore, rewards borrowers who have displayed disciplined repayment behaviour, as a lower interest rate would also lead to lower overall interest cost.
Hence, it’s becoming more and more imperative for people to maintain a strong credit score to enable themselves to avail better loan deals/offers. Adopting habits such as keeping your credit utilization ratio within 30 per cent, timely repayment of credit card bills and loan EMIs, containing your FOIR within 40-50 per cent, periodically reviewing your credit report and monitoring co-signed/guaranteed loan accounts can certainly assist in building up as well as maintenance of a strong credit score.
Choose direct plans over regular plans for investing in mutual funds
Unlike regular plans wherein mutual fund investment is routed through intermediaries, investors can directly purchase funds through mutual fund houses in case of direct plans.
Direct plans score over their regular counterparts on three crucial grounds - lower expense ratios, higher NAVs and returns. The absence of intermediaries in direct plans leads to lower expense ratio, as the fund houses do not have to incur distribution costs. And as the savings made in distribution expenses continue to remain invested in your fund, it itself starts generating returns due to the power of compounding, hence leading to higher returns. Moreover, as a fund’s operating expenses are deducted from its net assets under management, the lower operating ratio of direct funds also leads to higher NAVs.
By Naveen Kukreja – CEO & Co-founder, Paisabazaar.com...