With more Indians falling into debt traps early on in their lives, the financial health of India’s burgeoning working-age population lies in a delicate balance. Rapidly increasing standards of living and easy access to high-interest credit products are further exaggerating this problem, with the potential to snowball into a larger banking crisis in the longer term.
While the first step in addressing this problem is for affected individuals to acknowledge their financial situation, many of them lack the propensity to understand different financial terms.
Having a basic level knowledge of budgeting, investing and a repertoire of other such financial skills is the need of the hour and comes under the umbrella term of financial literacy. Financially literate individuals are better able to compare long-term costs of big purchases, make wise saving or investing decisions and plan effectively for retirement.
Yet, only 27% of Indian adults qualify above the minimum level of financial literacy as defined by the Reserve Bank of India (RBI), despite much higher general literacy rates across the country. Bridging this gap through financial literacy outreach programs, is therefore necessary to realise the vision of a financially inclusive India.
Understanding the importance of financial security
Apart from taking the right decisions when it comes to saving or investing money, it is equally or more important to purchase products that provide the necessary financial protection. This is especially true for individuals who are servicing large amounts of debt and are more susceptible to pass on this liability to their dependents in the event of their early demise. Even for young couples and those with young children, it is necessary to secure their future with financial products that can provide a lump sum benefit or regular payouts to assist in meeting future expenses.
Whether it be planning for your child’s higher education, marriage or even for one’s own retirement, it is therefore recommended to supplement investments with adequate financial protection. Longevity is a boom, but it comes at a cost and these new age phenomena also need to be well understood and planned for.
The right age to start financial planning
While it is often suggested to start early when it comes to financial planning, it is best to start as soon as one starts earning, to avoid making costly mistakes that could jeopardise one’s financial future.
Moreover, inculcating healthy saving and investing habits in your 20s can provide the right momentum to the goal of becoming financially secure, before additional responsibilities like looking after your children and ageing parents which contribute to an additional financial burden. In scenarios where there is only one earning member in a family, this becomes even more important since the entire family’s future depends on just one individual.
Irrespective of your age or financial situation, the sooner one starts planning for the future for the better, even if income or savings are at a marginal level above expenses. By investing in the right instruments early on in life, there is more time available for the invested capital to appreciate. As a result, not only can savings be augmented with the power of compounding, but an individual can fulfil more aspirations by making large purchases much earlier in life.
Financial products that can secure your future
Fortunately, there are plenty of options available in India today for those wanting to start their financial planning journey and building safeguards against the vagaries of life. Starting a recurring deposit or investing lump sum amounts in fixed deposits are basic steps that one can take.
However, it is important to complement debt savings with a mix of equity instruments like mutual funds or even directly investing in government-backed bonds, to beat the inflation rate and ensure that your capital doesn’t erode in value over time. Additionally, purchasing separate insurance covers to protect against different types of financial risks, life & health uncertainty is highly recommended,
While term insurance plans are most preferred in India, there are several other life insurance products available today that can help in prudent financial planning. Unit Linked Insurance Plans (ULIPS) provide life cover along with the potential to generate wealth by making systematic investments in market-linked products, while endowment plans are suitable for those who wish to receive guaranteed returns on policy maturity without worrying about market volatility.
Child insurance plans on the other hand are most beneficial for parents who want to build a corpus for their children’s future, with the added security of a built-in life cover for the parents. Finally, retirement insurance plans are covered for their ability to help the insured gain financial independence during the retirement stage, offering better returns than debt instruments since money is invested in a mix of debt and equity products. Health covers are critical and important as they help manage the financial burden of the unknown, given the lifestyle nowadays.
The role of life insurance in safeguarding your family
Post COVID-19, more Indians have been cutting down on discretionary spending and are instead allocating capital towards products that offer financial protection in times of need. Products that offer insurance benefits while also helping you build a corpus for specific requirements can prove to be the best financial decisions that one can make for their loved ones.
Towards this end, child insurance plans and retirement insurance plans are suggested for parents who need to plan for their children’s future, while also ensuring that they plan for their own retirement.
ULIPS provide life cover along with the potential to generate wealth by making systematic investments in market-linked products, while endowment plans are suitable for those who wish to receive guaranteed returns on policy maturity without worrying about market volatility. In comparison, term life insurance plans are cheaper and are equally important to cover against mortality risks.
Alok Rungta, Deputy CEO and Chief Financial Officer, Future Generali India Life Insurance