Financial planning: Are you ready to overcome a financial crisis?

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Adequate life and health insurance, a large emergency fund, a balanced asset allocation, and the avoidance of excessive debt make it much easier to manage a financial emergency.

By Lakhwinder Kaur Dhillon

The Covid-19 pandemic has forced everyone to grasp some salient lessons about building financial immunity alongside physical immunity. Regardless of income, saving is imperative with a high degree of discipline where consistency is key to achieving any goal.

When we have a steady stream of income, we generally follow an income and expense approach. But with the outbreak of this pandemic and the enforced lockdown, we recognized that we could survive on a set budget and could save even more than expected. Planned monthly expenses and wise spending help manage the unexpected.

The right insurance coverage
Relying solely on an employer’s health insurance plan is not prudent. Much of society had no life or health insurance. As life is unpredictable and as successive waves of coronavirus infections around the world over the past two years have proven, buying life insurance is the top priority to create financial security for people. family members. Life coverage must adequately cover all liabilities such as home loan, car loan, children’s education, etc. All non-negotiable financial goals should be covered in the life insurance plan so that if the breadwinner is not there, these essential requirements are not compromised and financial stability is maintained.

Additionally, during the pandemic, people rushed for medical assistance and the exorbitant cost of emergency medical services illustrated the need for health insurance. Health insurance for all family members is essential. Medicclaim to cover hospitalization costs or critical medical coverage for life-threatening illnesses may be considered, depending on family members’ general health or previous experience and age composition.

Creation of emergency funds
Having an emergency fund is a huge financial support in times of uncertainty, as it helps to stay afloat during financial crises. An emergency fund to cover at least three to six months of living expenses or expenses is very important. Many people have suffered huge business losses or taken pay cuts or lost their jobs altogether during the pandemic. This emergency corpus would help support the family until another job or source of income is arranged; it’s a cushion when the unexpected has come true. There is no guarantee that such crises will not reoccur in the future, so it is imperative that everyone establish an emergency fund to combat such unexpected eventualities.

Avoid the pitfalls of debt
Debt always comes with an obligation to pay interest. When the income is regular, we do not care about interest rates or the obligation to pay interest and we involve ourselves in large expenses through credit cards and personal loans. Many end up paying only minimal payments and the amount of interest on unpaid loans keeps piling up, dragging them into a debt trap. The situation becomes ruinous with a financial crisis that strikes due to unforeseen incidents like that of the pandemic. It is always advisable to avoid these high interest rate instruments. Credit card spending should be limited to the extent that we can pay bills on/before credit period expires.

Appropriate asset allocation
The money saved is largely stored in two types of assets: physical assets and financial assets. Most people have significant net worth by investing in physical assets such as real estate, gold, etc. These physical assets are illiquid and it is very difficult to liquidate them quickly. On the other hand, the allocation of savings into financial assets is crucial because they can be easily liquidated in an extreme situation. Asset allocation based on financial goals through proper financial planning is very important for every individual to create future financial security to handle extreme conditions.

The author is Associate Professor, Department of Accounting and Finance, Amity Business School, Amity University

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