The past 24 months have delivered multiple gut punches and loads of surprises. Social unrest in various parts of the world, natural calamities, a pandemic that hit us in 2020 and the second wave that created havoc in 2021, and a stock market that dipped abysmally and then ferociously rose to new highs.
This period has just reinforced timeless, classic financial wisdom with a vengeance.
To avoid being financially fragile in 2022, here’s how to fortify your portfolio.
1st line of Defense: Get covered.
You never buy medical insurance because you hope to submit a claim someday. You never buy term life insurance because you hope your loved ones can submit a claim someday. You buy it to protect yourself and your family against awful misfortune.
Imagine the plight of a family where the breadwinner succumbed to the virus during the ongoing pandemic. Besides the emotional devastation, the tragedy would be compounded if there was no life insurance as a safety net. If you are the primary source of support for even one other individual, get your insurance sorted out before evaluating investment alternatives.
The same applies to adequate health insurance cover. The pandemic served a lesson in this very aspect. Even in “non-pandemic times”, just one illness of a family member can cause a major dent in your savings. Don’t depend solely on your job providing a medical cover. Should you lose your job, your cover vanishes. Get a personal medical insurance for the entire family.
7 things to note when buying medical insurance
2nd line of Defense: Have an Emergency Fund
The pandemic presented us with multi-faceted challenges: physical health crisis, mental health crisis, emotional health crisis, humanitarian crisis and economic crisis. Many lost their jobs, while few were immune from income disruptions.
At the start of 2020, your financial plan did not account for a virus. But stuff happens. You can argue that the odds of such a devastating event occurring again is pretty low. But that does not justify being lax in this area. If anything, the pandemic has highlighted the importance of having a liquid reserve as a part of your financial plan. Indeed, the emergency fund has got a PR makeover.
Building an emergency fund is NOT optional. You will always need a safety net because emergencies occur even in the best of times. Accidents. Urgent dental treatment. Travel in case of death. Sudden massive home repairs.
I used to recommend three months of expenses, if it is a dual-income household, and six months for a single-income household. After being witness to both spouses getting salary cuts and many losing their job, I now err on the side of caution and recommend 12 months of expenses in an Emergency Fund.
4 things an Emergency Fund is NOT
3rd line of Defense: Curb Debt.
Few individuals can go through life having never incurred debt. In fact, it is a near impossibility for many. How else would you buy a house or fund your higher education? Don’t be debt averse, be debt aware.
I am specifically shining the spotlight on credit card debt. The type of debt you incur when you view credit as easy access to maintain a particular lifestyle. This type of debt has severe consequences. It weighs you down. It costs you your peace. It’s a drain on your income. It hinders your savings ability.
Sporting a lifestyle with money you do not have is a dangerous way to live. Debt may get you noticed and grant you momentary satisfaction but will never help you win. I was talking to a pilot who took a substantial pay cut when Jet Airways declared bankruptcy and he had to join another airline. During the pandemic, he was subject to a further paycut. Unfortunately, he was still servicing debt that was at a comfortable level at his Jet Airways’ salary, and a source of much stress now.
When you service credit card debt of around 24% annualized, be extremely mindful of the fact that this debt costs you a lot more than you can ever earn elsewhere. Even if you are servicing a much cheaper loan – say 12% per annum, once you clear it there is an immediate return there.
In 2021, get ahead of your debt. Pay it down. Decrease your stress levels. Choose to be aggressive with your savings and conservative with your debt.
A plan to get out of debt
4th line of Defense: Kickstart your retirement savings.
Financial Independence and Retirement are not necessarily linked at the hip. They exist independently. To retire, you must be financially independent. Though I do know of individuals who are dependent on their children for support. Not a very desirable situation, but that is the unfortunate reality for many. On the other hand, you can be financially independent and choose not to retire. Plenty fall into this category.
I am not going to give any generalised suggestions with regards to a retirement corpus. It is way too personal and a myriad of factors need to be accounted for. Sources of income after retirement. Pension. Single or married. Living in a joint family or nuclear. Risk capability. Lifestyle. Debt. Age.
Having said that, financial independence is not just a number. It is not solely about having money to cover all your expenses. It is about psychological independence too. What is the corpus amount that will help you overcome your insecurity? What is the cash flow you desire that will make you feel taken care of? Your magic number may be Rs 3 crore, but for someone of the identical age and similar social status, it could be Rs 7 crore.
5 steps to making your financial goals materialise
Wish you financial success in 2022!
Larissa Fernand is Senior Editor at Morningstar India. You can follow her on Twitter.