scorecardresearchHow do you check if you have your finances on track? MintGenie explains
How do we check if we are on the right financial path?

How do you check if you have your finances on track? MintGenie explains

Updated: 04 May 2023, 02:02 PM IST
TL;DR.

Treading the right financial path is not easy unless you are sure of why, how, and where you are investing your money.

It’s not enough to earn and invest money alone. You must frequently check if your money is growing or if your finances are on track. To assess this, you must first gauge the financial path you have chosen. Is it a path riddled with risks or a journey free of unwanted volatility? Indeed, you cannot avoid market fluctuations all time unless you have committed yourself to invest only in bank deposits and post office schemes. However, you can mitigate the sudden risk to your finances by putting money in instruments that secure your loved ones’ future in the long run.

It may not be easy to check if you are on the right financial path, especially, if you have invested based on hearsay. However, evaluating simple factors can help you check if you have worked on your finances correctly. 

Some of these include:

Have you bought health insurance?

The Covid-19 pandemic proved to be an eye-opener for many, especially, those who disregarded the importance of buying health insurance early in their lives. Recurring hospitalization and subsequent medical treatment caused many families to lose out on their lifetime savings.

With the costs of medicines and related paraphernalia shooting through the roof, it makes sense to buy health insurance coverage of at least 10 lakhs. You may also opt for a higher cover or at best buy a super top-up health insurance policy.

Do you have life insurance?

Security must always precede wealth creation. This is why you must first buy a life insurance policy before deciding on your further investments. All money is wasted if you do not secure your loved one’s future with the much-needed insurance amount. Many people disregard the importance of life insurance or misconstrue it as a mere tax-saving instrument. You must buy adequate life insurance coverage depending on how you envisage the future of your dependents.

Many people opt for 1 crore coverage without verifying how much their loved ones might actually need. Considering the effect of inflation and how money is getting devalued over the period, it makes sense to opt for higher coverage. You may start with basic coverage and then move on to buy a separate insurance plan promising increased coverage at nominal premiums.

Buying the right term insurance plan does not have to be difficult. You just must be vigilant about the following three facts.

  • How much life cover should you have?
  • What is the ideal term length?
  • What riders should you opt for while buying the policy?

Choose a sufficient coverage amount to cover the following

  • Your financial goals
  • Your outstanding loans or liabilities
  • Your family’s daily expenses
  • Enough money to provide adequate financial support to your dependents.

If calculating the ideal coverage after considering all possible expenses, debt, and financial goals seems complicated, you can adhere to the following thumb rule to calculate the cover amount.

Your life insurance cover = Any existing loan + 20 * Annual expenses – Value of any existing life cover

How big is your emergency fund?

True, the heavens won’t fall if you do not set aside enough money for emergencies. However, this does not mean that you refrain from the idea of having a decent emergency corpus. To start with, your emergency cover must be equal to your yearly expenses. For those new to the world of earning, saving and investing, visualize an emergency fund as an oasis that you can dip into during need and something which will help you tide over tough times.

Of all the pillars in personal finance, an emergency fund is the most important but also the most underrated, especially, by youngsters unaware of the vagaries of life and, thereby, visualize the world with rose-tinted glasses.

How big is your debt?

Of all kinds of debt, home loans are the biggest and hence the most burdensome. A home loan can go up to 20-30 years depending on the amount of debt you have incurred to buy your dream home. However, there may be other kinds of debt including vehicle loans, personal loans, credit card debt, etc., that we cannot leave unpaid.

A loan is a liability that must be rid of, irrespective of how small it may seem. Barring the home loan, do you have a plan in place to get rid of the other loans that you have sought? Also, do you plan to continue paying the home loan for eternity? What if interest rates go up forcing you to either pay more through equated monthly instalments (EMIs) or opt for a higher loan tenure? Do you have a plan to get rid of the loan early or rather prepay the loan to get rid of the brunt of the increased interest burden due to higher interest rates in the future? Ensure that you plan your finances well to reduce or get rid of all kinds of debt other than home loans within the next few years.

Have you planned your goals before investing?

Failing to plan equates to planning to fail. This means that you cannot blindly invest without understanding why you are investing in the first place. Unless you have planned your financial goals, you cannot decide the basis on which you choose your investment options. Your financial goals can be both long-term and short-term.

This explains to what extent you must allocate your earnings to equities, debt, fixed-term plans, and other investment options depending on how long you wish to stay invested, the returns you are expecting, and the tax benefits you seek on your investments. Also, if you are unaware of why you are investing, there is no way you can assess the quality of the investments made.

Do you follow disciplined investing?

Do you invest regularly? Did you delay your systematic investment plans (SIPs) in case of sudden job loss or while facing a shortage of money? Do you make up for your shortage of investments as and when you get money in hand? Do you ensure that you continue investing the entire tenure as planned? Do you track your investments’ progress regularly and weed out the underperformers or do you cling on to losers inadvertently?

Many investors react emotionally to market trends and chase performance than resort to disciplined investing behaviour. The tendency to hop investments or suddenly get rid of one to pay attention to another has caused many people to lose out on their hard-earned money. Earnings are not as desired as the returns on investments are not in sync with financial goals. Good discipline is the key to winning investing behaviour, without which any and every kind of investment is futile.

 

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First Published: 04 May 2023, 01:41 PM IST