There has been a drastic impact of Covid-19 on the personal finances of many individuals. For some, the pressure on money matters has been on different fronts. Several people are incurring expenses related to the treatment of coronavirus after facing pay cuts and job loss during the pandemic. Medical exigencies and financial emergencies may arise anytime. It is better to be prepared so that the long-term goals are not impacted and one has the cash to meet the short-term needs at the time of an emergency.
In order to manage short-term and long-term goals even while having funds to meet emergency situations, you need to have a financial plan in place. Financial planning and analysis for individuals is an exercise that everyone must complete before investing. A typical financial plan will have exhaustive coverage of all your income, expense, risks, and goals amongst others.
But, few things in a financial plan can be considered to be more essential than others. One may use the opportunity arising out of lockdown to have a close look at the finances and re-work if required.
Here are five key things that should be the homepage of your financial plan.
1. Put plans to paper
Even before you start investing in the shares of Reliance, HDFC or any other top Nifty 50 companies or even in equity mutual funds, you need to have a financial plan ready. It is better not to invest a single rupee before you have a financial plan in place. Investing on an ad-hoc basis without a goal in sight and the right amount will not serve the purpose well. A proper plan will help you save the right inflation-adjusted amount towards all your goals based on your risk profile. Further, a plan will help you to build an asset allocation before starting to save for goals.
2. Prepare a budget
Having a household budget planner in place helps in the long run. It lets you know the various sources of income and expenses and the break-up of each of them. Without getting into micro-expense heads, account for some of the major heads of expenses. The ideal is to get a grasp on the cash inflows and cash outflows and manage them accordingly. The aim should be to cut down on non-discretionary expenses. Prepare, analyze and keep monitoring your personal household template as a part of your financial planning.
3. Save funds for emergency
A financial emergency may arise anytime and put pressure on your existing savings. So, it’s better to keep emergency funds that can meet at least 6 months of your household expenses. Whether it is a medical emergency that may require some cash to be used upfront or a job loss, an emergency fund should be your friend during such times. One may keep half of the fund requirement in a savings account or a sweep-in fixed deposit while other half of emergency funds in mutual funds that can be short-term or liquid mutual funds.
Once you have an emergency fund and a household budget in place, it’s time to put shape to your life goals.
4. Identify goal-posts
Sit with your spouse to identify your life goals such as children’s education, marriage, home buying, and your own retirement. Put a mark on the number of years for them to be achieved. Estimate their inflated cost and find out how much you need to save towards each one of them at a conservative assumed growth rate of 10 per cent per annum. Your savings towards these goals will come out of your income hence follow the approach of ‘Income minus Savings is your Expense’ and do not save what is left after expenses.
5. Managing Risks
First things first and the very first step in a financial plan has to be taking care of risks. Even before you start investing, providing for medical and life risks is important. If you have financial dependants take adequate life insurance preferably through a term insurance plan. To meet hospitalization costs especially in these times of Covid-19 pandemic, buy health insurance plans with adequate coverage for self and family.