Six Ways To Improve Your Financial Health In 2024

 Six Ways To Improve Your Financial Health In 2024

When your finances are in good shape, you are better equipped to handle unexpected financial challenges, and successfully achieve your aspirations

A financially secure individual would make adequate contributions to meet his financial goals, maintain adequate liquidity to achieve short-term goals or unexpected exigencies and have adequate income replacement instruments for ensuring his family's well-being in case of his absence. Here are some of the key financial decisions that one should take to maintain a healthy financial life

Maintain an adequate emergency fund

An emergency fund would allow you to meet unforeseen financial exigencies or deal with periods of loss of income due to illness, job loss or disabilities.Without an adequate emergency fund in place, any unforeseen emergencies might force you to redeem your investments made for your crucial financial goals, default on your existing repayment obligations, and/or avail of loans at much higher interest rates.Thus, create an emergency fund which is big enough to meet your unavoidable expenses such as your insurance premiums, existing EMIs, monthly contributions to your financial goals, utility bills, children's tuition fees, etc. for at least six months. As financial emergencies can strike at any time, ensure to park your emergency fund in highly liquid instruments including high-yield savings accounts or high-yield fixed deposits offered by scheduled banks.

Prepare a financial plan

Start the process by estimating the amount required to attain each of your financial goals after factoring in an inflation rate, the time horizon left to attain your financial goals and assuming the rate of returns. Then, take the help of online SIP calculators to calculate the monthly contributions required to achieve those financial goals. Apart from providing a clear direction to your investments, financial planning would also help in creating an appropriate asset allocation strategy based on your risk appetite, investment horizon and liquidity requirements.A proper asset allocation strategy would help you strike a balance between risk and rewards by diversifying your investments across various asset classes such as equity, fixed-income instruments, debt, gold, etc.

Purchase adequate insurance cover 

Many people confuse insurance with investments and thereby, end up investing in money-back plans, ULIPs, endowment policies, etc. from insurance companies. These policies provide inadequate life cover while generating sub-optimal returns. Ideally, one's life insurance cover(s) should be at least 10-15 times of one's annual income. The most cost-effective way of purchasing such large life insurance covers is to buy term insurance plans. Also, ensure to buy adequate health insurance policies to protect yourself from rising healthcare costs. Purchase at least Rs one crore with the base health cover of Rs five lakh and super top-up cover of Rs 95 lakh. If you already have group health coverage through your employer, purchase super top-ups to avail bigger health coverage at very low premiums.

Invest through the SIP mode

Systematic Investment Plans (SIP) allow investors to invest a predetermined amount in mutual funds at predetermined intervals, say, monthly, quarterly, etc. As the SIP amount is automatically debited from one's bank account, it ensures regular investment and financial discipline. Moreover, the minimum SIP ticket size of Rs 1,000 (even lower in some mutual funds) allows investors with limited investible surpluses to avail diversification while simultaneously benefiting from the power of compounding. Automated and regular investments through SIPs also help investors to benefit from rupee cost averaging during market corrections by purchasing more units at lower NAVs. This eliminates the requirements of monitoring markets and timing investments.

Start investing early for your retirement corpus

Starting retirement investments in the early stages of one's life increases the chances of creating a bigger retirement corpus with much smaller contributions. On the contrary, starting late would reduce the chances of creating an adequate retirement corpus and/or may also adversely impact the achievement of other financial goals in the later stages of work life. For example, a 30-year-old individual would require a monthly SIP of just Rs 2,700 in equity mutual funds to build a post-retirement corpus of Rs one crore within the next 30 years, assuming an annualized return of 12 per cent. For a 45-year-old, building the same corpus would require a monthly SIP of Rs 20,000, assuming the same rate of return over the next 15 years. Since equity as an asset class outperforms both fixed-income instruments and inflation by a wide margin over the long run, equity is the most suitable asset class for achieving such long-term financial goals.

Build a strong credit score

Lenders and credit card issuers consider credit scores as one of the first filters while evaluating your credit card and loan applications. Those having higher credit scores have higher chances of availing of loans and credit cards. Many lenders also offer lower interest rates to loan applicants having higher credit scores. As there can be no credit score without a credit history, those who have never availed of any loan or credit card can build their credit score by availing credit cards. Credit card transactions are considered as equivalent to availing loans and hence, these transactions are reported to the credit bureaus. The bureaus then use these transactions to calculate credit scores. Those who cannot avail of regular credit cards due to inadequate income, unserviceable locations, etc can avail of secured credit cards to build their credit history.