Once you know the simple steps to start someone’s financial journey, then you need to think about how to know about it.
Why does the best player also wear pads before a match? Because they want to be well protected in the event of a hit.
In personal finance too, this should be the first step. You need to start with a safety harness.
The safety harness
The 3 basic areas to protect your finance are as follows:
* Create an Emergency Fund: Keep the funds for 6 to 8 months of your monthly expenses in an easily accessible place like FD. This will help you to prepare for life’s uncertainties and it is equally important to prevent you from derailing your investment plans.
* Buy insurance: When selecting insurance, make sure that the cover is not only comprehensive but also that it is sufficient. It should be calculated to fit a person’s own needs such as the number of dependents in your home, your lifestyle, whether you are living in an expensive city, require coverage, co-payment options, etc.
If all the details in the document are correctly filled in, then to ensure that many important aspects are overlooked. Even a small mistake can cause conflict at the time of claim.
* Write the will: It is very important for everyone to write a will and it has come up a lot during COVID-19 these days. Writing a will ensures that your property passes as you wish.
Today one can write a will sitting at home. It is not compulsory to register but it is preferable, especially if one anticipates a dispute. Check online for other points to be included in the will.
What are your financial goals?
Classify each of your financial goals in the short, medium or long term and then look for appropriate assets. Investing for short term goals is ideally in FD / RD or liquid funds; The medium-term goals can be found in bonds, ELSS etc. and the long term goals should be centred around equity funds, PPF, NPS or direct equity.
Such asset allocation helps to diversify your investment in property according to the goal, rather than in a bucket or other random way that we usually adopt.
Don’t make these mistakes
While these are very basic steps for a structured financial plan, we need to avoid some common and costly mistakes. In some cases, it is just a change of mindset.
Even though some of us plan our finances well, we make the basic mistake of not including Inflation in our calculations.
If our child is about to go to college in 10 years, we should not only look at the current cost of college, but also add education inflation to achieve future costs.
* Many people do not give much importance to inflation or do not know that the inflation number we see in the papers is not a figure to be considered for each target. Currently, CPI figures say inflation is close to 7%, in fact, education, healthcare and lifestyle inflation are in double digits.
* Insurance and Emergency Fund is not an investment to raise funds. They are there to help you overcome shortcomings and difficult times.
Do not look for returns. This is a big reason why we are mis-selling ULIPs and insurance products like ULIPs.
* Beware of a debt trap. Some goals of our life are fixed or known. Like, we know that in 18 years we will need money for our child’s college education. We know that we will retire at 58 or 60.
We also know some of our short term goals, such as having a nice vacation next summer, buying a new phone soon. So why not change a small mindset and save for this goal instead of taking a loan or buying a credit card, which is also a loan.
Again, these are no broad points. These are steps to help you plan your finances well, rectify some basic mistakes and ask the right questions.
It is important to remember that working towards financial freedom is the best way to live a stress-free and happy life.
(Photo courtesy: Shutterstock).
Read Also: Best Business Ideas For Diwali With Low Cost And High Profit