Make sure your financial security does not go for a toss anytime soon
Pension funds are powered by various types of pension plans
The health of our financial life today determines our financial integrity tomorrow. Whether you’re someone who’s just out of college and bagged a job or a seasoned veteran of your industry, or maybe even a successful entrepreneur, financial soundness is something that everybody wants to ensure. With the onset of the pandemic situation, millions of people have lost their jobs or other means of livelihood. The unemployment rate spiked to about 8.3 %(CMIE data) in the country on average last month. And of all the businesses affected, most of them are small and medium scale ones.
Thus, given the unfavorable circumstances, following proper personal financial management practices is imperative to make sure your financial security does not go for a toss anytime soon. Read on to know how exactly to accomplish that.
How to evaluate your financial health
- Your Net Worth
This is self-explanatory; your net worth, above all, determines how sound your financial strategies have been and how prepared you are to face possible financial troubles in the future. Whatever it is that we do in life from an economic standpoint, it is ultimately to increase our net worth.
One’s net worth is simple to calculate: Net Worth = Total Assets Owned – Total Liabilities Owed. Think of everything you own, and from that, subtract whatever you owe. Also, compare this value to previous quarters to gauge exactly where your net worth is headed. This would present a clearer idea as to how to proceed cautiously if ‘high-risk high-reward’ type investments like equity mutual funds are on your mind.
- Your Debt-to-Income ratio
The debt-to-income ratio is another important metric to determine your financial health. Just like Net Worth, this is simple to calculate as well.
Debt-to-Income ratio = Total debts to pay over a given point of time / Total Income over the same period of time
Debt-to-income is slightly different from net worth because, in the calculation of the net worth, income is not taken into account. This metric is important because it directly highlights how comfortably you can pay off your routine debts from your disposable income without touching your savings/ investments.
As per financial experts, when this ratio hovers around 20-30%, you are good to go. But alarm bells should start ringing in your head when this figure touches the 40-50% mark, as you are at risk of getting in dire straits, leaving you incapable of paying off your recurring debts from your income itself, especially if your income depends on a lot of variables.
- Your CIBIL Credit Score
TransUnion CIBIL (formerly Credit Information Bureau (India) Limited) provides a unique score in the range of 300-900, which determines the creditworthiness of an individual.
The higher is the number, the better placed the person is with regards to credit access such as Credit Cards and loans. CIBIL score contained in CIBIL reports is an indicator of the financial position of a person at any given time.
- Your control on expenses
Certain crucial points do come in your life where you just cannot manage your expenses because of unforeseen circumstances like a health hazard or an accident or even a sudden loss of partial or full income in the case of people with low-income security. Although these situations are not under our direct control, the lesser they happen, the better.
And when they do happen, your ability to deal with them without breaking your piggy bank (read long term investments) is a key indicator of your financial ability at that point in time in your life.
How to improve your financial health
- Save up as much as you can
This is the most basic step you can take to shore up your finances. You should strive to save up as much money as possible while consistently cutting down on unnecessary expenses to be in control of your financial destiny later on in life. We can’t stress this enough. Even though India’s household savings weigh up about 60% of the total savings in the country, the COVID-19 pandemic has seen gross national savings nose-dive to a 15-year low. Go for automated savings like SIP that your savings do not get hampered in any case.
- Set-up an emergency fund
You see, emergency funds are crucial in dealing with unforeseen incidents and can bail you out when you desperately need some monetary boost. Emergency funds are extremely important, no matter how secure you think your finances are. The amounts can vary, but for the average Indian grinding on a 10-6 job, nothing less than a few lacs would do. The more, the better, but utilize them only when you get in hot water with your finances.
- Set-up a pension fund
A pension fund can greatly help during the financial uncertainties of the post-retirement life. A pension fund is a flexible accumulative fund option that would later provide you monthly amounts against the amount you have contributed during your service/business life. It acts as your personal post-retirement insurance plan.
- Get insured
Talking of insurance plans, it’s wise to get one for the most valuable possessions of yours. Life insurance and health insurance plans are almost mandatory these days to guard against unforeseen circumstances, like this pandemic. You can even insure your business or other tangible properties you highly value.
- Increase your CIBIL Score
Whenever you need access to credit on short notice, your CIBIL score would sail you through. A CIBIL score worth of 800 would help you get quick loans and access to Credit Cards and EMIs when in need. A good way to increase your CIBIL score would be to dispose of your payable debts regularly without fail, which would reflect great creditworthiness on your part.
So is your financial life doing good? Hopefully, you would be able to answer this question with the information mentioned above. Talking to financial experts and seeking professional assistance regarding smart investment options like mutual funds would help strengthen your financial ability to a great extent.
That’s why Comparte Investment team asks do you have “Nivesh Ki Aadat”.
(About Author: Arindom is a professional writer, editor, blogger and a member of the International Association of Professional Writers and Editors, New York. A management postgraduate in finance with extensive industry exposure, he is associated with many reputed global online magazines and publications as a regular contributor. He loves to help his readers writing highly informative and well-researched investment-related content to make informed decisions.
The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of organization)