Not even in our wildest dreams could we have imagined the crisis that 2020 unfolded. The COVID-19 pandemic took millions of lives, impacted livelihoods and pushed people into financial distress. It taught us that nothing is more important than our health and that we need to be financially ready to handle whatever life throws at us.
As the world recovers from the disaster that has taken over our lives for almost two years, we can only hope that we do not have to witness another one in our lifetime. However, we need to learn from it and ensure we are financially secure at all times by leveraging smart saving and risk management strategies.
Here’s how you can effectively save for a rainy day.
Build a corpus for emergencies
Having liquid assets at your disposal creates a financial cushion to deal with any crisis or unexpected expenses without having to disrupt your lifestyle, liquidate investments or draw down additional debt.
The rule of thumb suggests you should have a reserve fund equivalent to at least three to six months of your monthly expenses; however, you could consider expanding the safety net over six to 12 months if you anticipate things to be challenging for you.
To estimate your needs for an emergency fund, account for all fixed expenses such as rent/ maintenance, mortgage and other EMIs and children’s education, as well as variable living expenses such as groceries, utilities, travel, medicines or any other expenditure specific to your household.
Emergency fund = (monthly fixed expenses + monthly variable expenses) x 6 + other large projected expenses
You can make a 10:20:70 allocation towards your emergency fund, wherein 10 percent is held in cash, 20 percent in bank for quick remittances and the balance 70 percent is invested in low-risk options such as short-term liquid/ money market funds and bank deposits that allow you to generate some returns and can be liquidated easily, if and when required.
Get adequate health and life insurance
More often than not the crises we face are personal in nature, revolving around our wellbeing or that of our loved ones. Considering the rising cost of living and escalating medical costs, both health and life insurance are necessary tools for being future-ready.
One should consider a comprehensive health insurance plan or a family floater with the maximum possible sum insured. Leverage top-up plans and add-on riders that allow you to significantly increase your health insurance coverage for a nominal increase in premium cost.
Similarly, life insurance, especially a term plan, is an inexpensive tool to mitigate risk of uncertainty and secure the financial well-being of your family. Proceeds from the insurance claim ensure a sustained livelihood for the family and unburden them from any outstanding debt you may have taken up. As a ballpark figure your term cover should be at least 10 to 12 times your annual income.
Term insurance cover = annual income x 10
Consider a higher coverage after assessing your outstanding liabilities, financial goals of the family and inflation.
Manage debt effectively
Unbridled use of debt without a repayment plan could jeopardize your savings and future goals. Be mindful of utilising loans only when absolutely necessary and serviceable within your means.
Monthly EMI liability (secured + unsecured debt) < 30 percent of take-home salary
Limiting your debt keeps discretionary expenditure in check, helps maintain a healthy credit score and credit availability. In terms of preparedness, it ensures your savings and investment plans remain on track and you are not overly burdened if things go awry. Utilise part of any windfall gains, bonus/ commission or investment profits to prepay loans, especially high-interest loans.
Maximise your savings
Your ability to save directly impacts your financial future. Your goals of building a contingency fund, repaying debt or successfully investing for your long-term milestones depends on it. Your monthly savings goal should be at least 20 percent of your take-home salary. It could be higher depending on your life goals and other requirements.
Monthly savings > 20 percent of take-home salary
Prioritise your savings plan by earmarking a certain percentage of your monthly income for various financial goals. Structure an auto-invest plan that will debit funds from your savings account when your salary gets credited so as to bring discipline and consistency.
Look for opportunities to monetize your skills or hobbies as a passive income stream to increase savings. Your wish to retire early or live a more luxurious life is also possible with higher savings and prudent investing.
Wrapping up
Remember that tomorrow’s uncertainties will bring both – opportunities and challenges. By planning your finances and savings judiciously, you will be able to both weather the storm and bask in the sun.
