Now is a good time to create a financial plan! Here’s a guide to help you

May 2020

3 min read

 

In India Lockdown 4.0 is about to end; but the uncertainty around various aspects of our day to day life is still there. But we can find a silver lining in this situation also. If you are trying to get hold of your finances and wish to create a financial plan, then this is the best time to do so. As Winston Churchill once said,

Never let a good crisis go to waste!

 

You can use this Corona Virus Pandemic to create an airtight financial plan. Here’s our guide to help you:

Life & Health Insurance: The most important aspect of the financial Plan

Normally, we have seen many people putting insurance on hold. But with a global pandemic, the importance of life and health insurance doesn’t need any extra emphasis. Use this time to buy adequate term insurance and health insurance. If you already have one, check if there any need to enhance the amounts.

Especially in the case of Health Insurance, with increasing expenses, we recommend a minimum cover of 5 Lakhs. Any amount more than this is always preferred. Important factor to note here is that you need health insurance even if your employer provides one. Because the employer cover will cease to exist if you change the job.

Revisit all the unnecessary expenses and cut down on those

With the lockdown in place, most of the regular expenses like daily coffee from coffee shops, outside lunches are no longer there. In regular circumstances, these might be unavoidable but now it is easier to revisit these expenses. Divide the expenses into Essential and Lifestyle expenses. In most cases, lifestyle expenses make up a major chunk of expenses.

Find ways to cut down lifestyle expenses and increase your investments to that extent. This will help you reach your goals faster.

Create a list of all liabilities with their interest rate

If you have multiple liabilities, make a list of outstanding loans with their applicable interest rates. High EMI outflow affects the financial plan adversely. Hence, You can use this time to create a strategy to pay off the loans with higher interest rates.

A simple way to do this will be to divide the loans into two parts, Useful Liabilities, and harmful liabilities. Useful liabilities can be home loans as they are low-interest loans that also get the tax benefit. Harmful liabilities are credit card debt, personal loans since they charge very high interest without any benefit. Prepay all the harmful liabilities to the extent possible and reduce your interest outflow.

Prioritize emergency fund over other investments

Financial emergencies can be very difficult to deal with if it is not part of your financial plan. The COVID 19 pandemic made us realize that emergencies come unannounced and we need to be well prepared to deal with them. Hence, before planning for retirement or any other goal, first priority should be given to the Emergency Fund.

Ensure that this fund is easily accessible and kept separate from the savings account. Liquid funds are ideal to create the emergency fund. If you have not already created an emergency fund, start now. Keep aside at least 6 months of expenses and then move on to other goals.

Review your portfolio and rebalance it to make it more efficient

Most of the investors have a lot of funds in their portfolio and it becomes practically impossible to track so many funds and take action on laggard funds. This time can be used to rebalance the portfolio to create a concise and efficient portfolio.

As we have mentioned a lot of times while creating a mutual fund portfolio focus on reducing the risk. High-risk funds undergo a lot of volatility and take longer to recover. You can reach out to us for any assistance regarding the fund selection.

Last but not the least, you can simplify the process of financial planning using Optimo. Among other things, It will help you in figuring out exactly how much insurance you need, how your expenses are divided, and how you can create an emergency fund. Create a customized financial plan using Optimo and stay on top of your finances.