Freedom from financial woes

Mumbai: In the last two years, the Covid-19 pandemic has played havoc in people’s lives. While some lost their loved ones, many lost their jobs or had to adjust with steep salary cuts; there were also many who went under debt to pay for the hospital bills of their loved ones, while many are still reeling under post-Covid complications and paying for the treatment with shrinking savings.

One key factor why situations became tragic, more than they should be, was the lack of financial planning. While those who had been saving rather than spending managed to somewhat sail through, the worst affected were those with slack financial planning.

With the country celebrating its 75th Independence Day, here is a broad plan that one could follow to achieve ‘independence’ from financial worries. Financial freedom is described as a state where you simply don’t need to work anymore because you have enough money coming in from your investments to live on in the foreseeable future.

The first step is to identify and finalise your financial goals—for example, child’s education, marriage, buying a house or creating a retiring corpus,—decide the timeframe for achieving the goals and arriving at an estimated cost to achieve each goal. Then comes saving, investing, growing the money and reviewing it periodically.

Says Balwant Jain, a tax and investment expert, “One should plan for achieving financial independence early in life. For example, saving 10 per cent of your pocket money every month when you are still studying.

The actual planning should start when you receive your first pay cheque. Though you can plan yourself, you should ideally take professional advice because everyone cannot master every field.”

You should know what is your income and how much is the outflow due to expenses. Your household expenses should not be more than 30-35 per cent of your income. The idea is to set a minimum savings target of 25-30 per cent of one’s monthly income to meet your future goals.

Create an emergency fund to take care of your six months of expenses in case you lose your job.

Buy life and health insurance: A serious injury or a disease can wipe away all your investments and savings and derail you from the path to financial freedom. Therefore, buy a term life insurance with a sum assured at least 12 to 15 times your annual income. You should also insure yourself and your family for medical emergencies by buying a health cover that covers each family member for minimum Rs 10 lakh, or insure all the members through a family floater health insurance of minimum Rs 15 lakh and buy a Super Top-Up plan (that comes cheap) to supplement your base cover. Similarly, a personal accident insurance cover, a critical illness policy is a must. And yes, don’t buy these as riders.

Become debt free: Repay your debt using your existing assets. For example, if you have money invested in fixed deposit, bonds or gold, then you could look at liquidating them to pay your existing loans. Pre-pay loans with the highest interest rate first. Banks charge an interest rate ranging between 24-48 per cent on credit cards and these should be paid first, next would be personal loan, followed by home loan.

Review your portfolio: This is equally important, says Anil Rego, a certified financial planner, “Continue working towards your goal and periodically review the progress. Any significant life change such as change in a job or marriage should also take into account the necessary change in the estimated cost in achieving a goal. Several investors do not review their investments in stocks and lose the right opportunity to sell their investments and book profits.”

Diversify: Equity helps in providing inflation-adjusted return if held for a long term. Go for a Systematic Investment Plan in equity mutual fund and put some portion in debt and gold.