The start of a new year is generally a good time to make some solid resolutions to manage your finances. While you need not take any giant leaps, you must start 2020 with some simple financial steps to manage your money well. These go a long way to inculcate financial discipline in your life & secure your family.
- Start/continue your SIPs: Though the leading indices- NIFTY/SENSEX gave handsome returns in 2019, the broader markets have largely been a laggard. So it makes sense to keep accumulating small amounts of money. According to a recent AMFI-CRISIL study, the chance of your investments earning negative returns is nil if the holding period is five years. On the other hand, it is as high as 25% if the horizon is just one year. It is always recommended that investors opt for equity mutual funds through systematic investment plans (SIP) with a horizon of five to seven years. There is no reason, especially for salaried employees with monthly cash inflows, to stop SIPs. If the money stays put in your savings account, it will not fetch returns capable of beating inflation.
- Choose your bank wisely & diversify: Do not be swayed merely by the additional half or one percentage point interest rate. The financial strength of the bank should be the primary factor. I would personally stick to bigger PSU/Pvt sector banks & avoid smaller co-operative banks. You could also look at spreading out your deposits across two or three banks. This will provide protection against a PMC Bank-like crisis, where the deposit insurance cover cannot be invoked at the moment as the bank is not facing liquidation yet.
- Switch to repo-rate linked home loan rates: If you plan to take a fresh loan in 2020, the interest rate will be automatically tied to an external benchmark – as mandated by the RBI. While most banks have picked the repo rate as their external benchmark, Citibank has chosen Treasury Bill yields. If you had borrowed prior to 1st October 2019 (the date on which the repo-rate loan was made compulsory for new borrowers) and are servicing Base Rate or Marginal Cost Lending Rate (MCLR), you may switch to Repo Linked lending rate (RLLR), if the one-time administration charge is less than the additional amount paid under the old rates. This will make sense for higher valued loans of say, above Rs.10 lakhs & loans with higher residual tenure above say 5 years.
- Create a large emergency corpus: A weak economic period such as the one we’re going through at the moment could throw some more shocks. And it pays to be prepared. In 2020, you must chalk out a plan to deal with such challenges. As a thumb rule, you must set aside at least six months’ household expenses in a secure, liquid instrument. The amount can be parked in fixed deposits or ultra-short-term debt funds. It must be capable of paying your monthly bills, EMIs, insurance premiums, mutual fund SIPs and children’s school fees for 9-12 months.
- Buy adequate health insurance: Given the rising cost of healthcare expenses, an Rs. 3-5 lakh health cover may not suffice. Many believe they will need higher covers only when they age and that they can enhance their sum insured later. However enhancing an existing coverage at a later stage in life is difficult & in fact, a lot of insurance companies do not allow you to enhance coverage after a certain age or allow only to a limited extent. However, do not buy a single, large cover. Instead, opt for a base sum insured of Rs.5 lakh and add a top-up cover of Rs 10 lakh to your portfolio. You can look at critical illness covers too.
- Take adequate protection for your dependents: Take adequate life insurance cover for your family/dependents through a basic term insurance plan. You should take a cover of at least 10-20X your current income. A lot of us make a mistake of taking a cover of only Rs.5-10 lakhs through ULIPS & Endowment plans which is not adequate.
- Be vigilant against frauds: In 2020, resolve to be more vigilant. Never share your bank, card, CVV, OTP and PIN with anyone. Shun unsecure links, emails and calls seeking such details, even if they seem authentic. As more people take to their mobile phones for money transactions, the chances of digital frauds increase.
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Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 12 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata. He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’