New Delhi: A sound financial situation is the surest route to peace of mind. So, it’s only fair to conduct a periodic check of your finances and see how healthy are they. Here is a five-point checklist to ensure your financial health is sound:
Savings: Do you have them?
For starters, you should have at least three months of salary in savings to give you suitable cushion to deal with exigencies in case of unexpected shocks such as loss of job. You should also have enough savings to deal with unexpected expenses so that you don’t have to dip into your retirement savings or go into debt if you have already saved enough.
“For any unexpected expense, people tend to take out personal loans, rely on their credit facilities, and some of them are not certain how to handle such an expense. So as a general rule, check whether you have at least three months’ gross salary in savings. It will soften a financial setback from unfortunate events such as losing your job or needing money to do major repair work on your car or house,” says Archit Gupta Founder and CEO Clear.
Use credit, short-term debt with utmost discretion
The allure of going ‘a few extra bucks’ gets even stronger when you don’t have immediately pay for things but at a later date. Buy now, pay later schemes or short-term EMIs are usually expensive even if you don’t realise it. If your CIBIL score is decent, banks will try to shove loans down your throat. This is especially true for freshers or newbie workers—having a credit card is different from having the capacity to pay it off in full, once utilised to the maximum limit; it is the surest way to fall into a debt trap.
“If the credit cards and personal loans are not used responsibly, you may recklessly use these short-term loans, and most of your salary will go into paying them off. At last, you may not have any money left over for living costs and savings,” adds Gupta.
Missed and inconsistent payments will lead to expensive penalties and severely impact your CIBIL score. Your debt-to-income ratio says a lot about how you manage your finances and your capacity to build any respectable savings for future.
“A high portion of the debt to income reflects poor financial health. Ensure that your percentage of monthly debt payments from monthly income is within 20% to 35%,” recommends Gupta.
Keeping your unsecured debt as low as possible is highly recommended.
Insurance: A stitch in time
Have you ever heard the proverb: a stitch in time saves nine? It summarises what insurance is about. An annual health insurance premium worth a few thousand may end up saving you lakhs of hard-earned rupees in case of medical emergencies. There are many well-documented accounts of Covid patients, especially those in metro cities, paying lakhs for a few days of hospitalisation, during the second wave in April 2022.
Insurance shields your savings from emergencies and keeps your assets secure when unexpected events occur. Sadly only five per cent of Indians are insured, out of which two-thirds are under-insured, saus Gupta. However, one should ensure that they are not over-insured. An appropriate insurance cover will depend on various factors, like age, financial liabilities, income, life goals, etc, he adds.
Retirement planning
You need some income to pay for your monthly expenses when you retire. You will stop working at some point and cannot be reliant on a monthly payment from your job. You’ll need to have retirement investments that generate income for you. Your goal should be to have at least 75% of your pre-retirement gross monthly payment when you retire. By saving early, you can make sure that you use compound interest to your advantage. In this way, you can ensure to have enough retirement savings, adds Gupta.
Keeping a regular check on these financial vitality indicators will make you more financially disciplined and benefit you in many ways.