Five ways to prepare for a personal financial crisis
Five Ways To Prepare For A Personal Financial Crisis Photo credit: BCCL
New Delhi: Since Covid-19 hit, it has drastically changed our lifestyles, our thought process, our outlook, our approach and even the whole scenario across the world. This can be taken as a red flag to make sure things related to money and finances are taken care of properly. Whether it’s maintaining an emergency fund, allocating funds for long-term goals, maintaining adequate risk coverage, or having an appropriate appointment, make sure you and your family are financially secure for pandemic situations.
1. Emergency fund: Having an emergency fund is essential because bad times never come without warning. With the uncertain times, you can no longer afford to deplete your monthly income without saving anything for the future.
Having an emergency fund ensures that you don’t have to seek help from others in an emergency like hospitalization, job loss, or a pandemic-like situation.
When an emergency suddenly arises and you are not financially prepared to deal with it, you need to either take out a loan from friends and relatives or from a bank. But if you have an emergency fund, you don’t need to seek help from others in difficult situations. It also saves you from getting into your investments such as stock mutual funds, stocks, or long term investment products that have been made for the purpose of achieving a particular long term goal.
The size of your emergency fund will vary depending on your monthly expenses, EMI loan, income, and dependents. According to financial experts, it is ideal to have an emergency fund worth six to nine months of monthly expenses. If you still haven’t put money into an emergency corpus, you need to start now.
2. Insurance: Another important aspect is to have health insurance and life insurance coverage. The pandemic has highlighted the need for health insurance as well as life insurance. Having a health insurance policy is a basic requirement, but it is just as important to understand what the right coverage is. While there is no ideal sum insured for an individual health insurance policy, most personal finance experts recommend a minimum health coverage of Rs 5 lakh.
The life coverage you choose should be sufficient to help your family maintain the standard of living that you would always have afforded them. The rule of thumb is to have an insured sum which should be at least 20 times the annual income.
3. Credit Score: Sometimes emergencies can leave you with no choice but to borrow money from banks or NBFCs. That is why it is advisable to establish and maintain a good credit rating. In an emergency when you need cash, a credit score can help you get pre-approved loans fast. If you have a good credit rating and need to borrow money in an emergency, you can easily get pre-approved small loans online through online banking. The higher your score, the better your chances of getting a loan.
4. Liquidity: In a liquidity crisis, and especially in situations such as the one we are currently facing, it is not possible to completely depend on others for financial support. That is why it is extremely important for you to have money in instruments that offer good liquidity so that in a financial emergency where you need money immediately, you can liquidate your investment quickly and get the amount as soon as possible. Therefore, individuals should invest their money in such media or instruments which can be easily liquidated when needed.
5. Debt: High interest debt like credit cards or personal loans is bad for your financial health. If you are unable to pay on time, the cumulative interest rate can further increase the amount of debt. And even if you use a credit card, spend as much as you can afford the next month. Living on a budget helps in the long run. It makes you aware of your basic needs and can help you get through difficult times.
It’s worth adding that creating a budget is another thing you need to do. Even if it sounds tedious and boring, start creating a monthly budget. Usually, the excitement of making money and getting paychecks results in unnecessary spending and people often go on a spree of impulse spending. In order to make sure that you don’t spend money on unnecessary things, it’s best to create a budget first and set your priorities.
This budget will help you to know your spending habits and your aspirations. You can mark short financial goals and set a budget in order to achieve those goals. If you stay on budget, you can significantly manage your cash flow because you will know where you are putting your money. A budget also helps you track all recurring expenses as well as infrequent expenses. This way you can better manage your money.
Finally, make sure that the proper appointments are made in all of your investments and insurance plans. After all, the purpose of investing and insurance plans is to benefit your family. Without an appointment, family members may find it difficult to claim the product. And, even after making appointments, you can create a will for a smooth transfer of your assets to your legal heirs.