Does Your 2020 Resolution Include Building Financial Security?
The start of the new decade is a great time to build long-term and short-term financial goals and develop habits to increase your savings and reduce unnecessary expenses.
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It’s the end of the first month of the year! You know now if you’ve followed through with your new year resolutions or not!
New year resolutions for most of us are easy to make and keep at the beginning of the year, but as the year goes by, it becomes challenging to stay committed to them.
Everyone has different goals that they want to achieve in the year. It is important to build your resolutions around attaining the financial goals that will help safeguard your future. The start of the new decade is a great time to build long-term and short-term financial goals and develop habits to increase your savings and reduce unnecessary expenses.
The concept of financial security in India
Financial security involves planning and working towards it on top of all the plans you are making to enjoy life. It has helped a lot of people avoid huge debts and build assets in their life.
Many consider financial security as savings for a rainy day, but it is so much more. It includes savings and investments. But it also includes the habits that we develop when we start to make ourselves secure financially. For example, the first rule of building financial security is ‘Income minus savings equal to investments.’
Many a time, due to lack of awareness and guidance, youngsters always end up spending all their income with no savings, even till the age of 30. You will hear most freshers complaining at the end of the month about having no money to spend and hence waiting eagerly for the next salary date.
So, it is highly important to develop a few good financial habits and follow at least one of these rules:
- 50-30-20 rule: It's the 50-20-30 rule, i.e., 50 per cent of your income should go towards living expenses, i.e., household expenses, including groceries; 30 per cent towards spending, including outing, food and travel and at least 20 per cent (you can try up to 30% too) towards savings for your short-, medium- and long-term goals.
- Pay yourself first rule: It simply means that out of your monthly income, a certain percentage has to be saved before the rest is spent.
What to invest in and how much to invest?
Understanding how much to invest is easy: 100 minus your age. For example: if you are 30, 70 per cent of your savings should be investments. There are a lot of investment instruments that help you be financially secure. They include:
- Insurance (Health and Life)
- Home Loan
- Mutual Funds
These instruments are also eligible for tax- rebates. Investing in them will save you more money. Also, at least 10 per cent of your monthly income should be put aside for an emergency like a medical emergency or unexpected expenses.
So, if you are following the 50-30-20 rule, 70 per cent of 20 percent savings should go for investments,
10 per cent for the emergency fund and the remaining 20 percent for any other short-term goals you are planning to invest in like a phone, guitar, two-wheeler, etc.
Contributing to insurance
The question is are we protecting our investments?
Often, we don’t realise the importance of securing our loved owned assets like our home, mobile or bike, which were bought with hard-earned money and how it is also crucial to set aside some of your income towards investing in insuring such investments.
From a long-term point of view, insuring assets like homes is very essential as even though the losses are rare, they are huge and can rip you off your entire life’s savings in rebuilding a home. Especially in today’s time when natural calamities are on a rise globally, the optimism bias around homes being secure should go away and a healthy, wholesome, comprehensive home insurance should be thought of.
And in case the home is not yours, you are renting it, make sure you have at least protected it with a home contents cover. And such covers are available.
For other important, expensive assets like car and bikes, we already may be having an insurance. But there one should make sure we are having the right cover, which is not only comprehensive, covering the own damage as well as third-party damage, but is also appended with the right addons that can protect your asset in need. For instance, if you are in a city that is prone to floods, having an Engine & Gearbox protect may become important.
Covering yearly expenses
Even holidays are a big part of our expenses these days and on a short-term basis, protection of these expenses could be seen in the form of travel insurances for the international or domestic trips that you have planned to protect yourself from any unforeseen eventualities like adventure trip accident, trip cancellation, baggage loss, etc.
Assets that are short-term, not as expensive, like mobile phones can also have protection. For instance, one already invests around ₹2000 for a screen guard, then why not look for an insurance for the same instead.
The most invaluable asset
And of course, our most invaluable asset, our health, needs the most protection. These days, the most common flu or the smallest mosquito bite could lead one to be hospitalised. In this case having a health insurance that covers costs of hospitalisation from dengue to cancer is utmost important. This should be seen as a protection of all your savings as when the time comes, it will exactly protect those from emptying out on huge hospital bills.
Today, insurance is available at a cost that is affordable and is relevant to the current age customer and situations. So, putting aside some money for a comprehensive insurance or bite-sized insurance product policies will go a long way in helping you build a safety net for your own assets, including your health.
Resolutions are a pledge to ourselves to build a better tomorrow for ourselves. If we can resolve to lose weight and achieve it in the year, why not resolve to build our own financial security and achieve it, too?
Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.