Edition: June 13th, 2021
Curated by the Knowledge Team of ICS Career GPS
- Excerpts from article by SHANTANU GUPTA, published on moneycontrol.com
Like the global financial crisis of 2007-2008, the economic challenges caused by the coronavirus pandemic have impacted financial planning in an unprecedented manner.
Youngsters have witnessed their parents losing their secure jobs or taking pay cuts, which have shaken up household budgets and financial goals.
They have consequently woken up to the fact that traditional methods of financial planning may not provide an adequate buffer against a nationwide or a global economic depression.
Therefore, new earners should keep the following aspects in mind during financial planning:
1. Avoid the debt trap
- These days, loans to purchase vehicles and electronics are available at the click of a button, which tempts individuals into purchasing goods and services without the immediate liability of having to pay for them.
- New earners need to follow a ‘delayed gratification’ approach by resisting the urge to splurge instinctively. Until they have enough savings, they should defer purchases to avoid indebtedness.
2. Create an emergency fund
- New earners should insulate themselves from the prospect of job loss due to another global economic depression by creating an emergency fund that they could dip into if the need arises.
- Such a fund would help them tide over turbulent times and meet basic expenses such as rent and utility payments.
- While the amount to be set aside as part of the emergency fund varies from individual to individual, a thumb rule is to have an emergency fund that is enough to meet expenses for at least six months, parked in a fixed deposit or a liquid fund.
3. Get adequate health and life insurance
- A key aspect of sound financial planning is not only creating wealth, but also protecting the corpus so created.
- The pandemic has highlighted the fact that unexpected medical emergencies may cause a huge drain on financial resources if adequate health insurance is not taken.
- New earners should also be conscious of the fact that the health insurance provided by their employer gives them benefits only till the time that they are gainfully employed.
- New earners need to take a separate health insurance policy in addition to those provided by their employer.
- They should also obtain a term policy which provides funds to dependent parents or spouse and children in case of their demise, which should cover their expenses for at least 20 years, adjusted for inflation.
4. Leverage the power of compounding and imbibe goal-based investing
- New earners need to realise that not investing early in life will be one of the biggest mistakes that one can commit.
- Leveraging the power of compounding is best accompanied by goal-based investing, wherein the investments are aligned with future expenses, adjusted for inflation.
- To begin goal-based investing, you should classify your goals and decide on a combination of debt and equity investments accordingly.
5. Create an estate plan
- The final step of an efficient financial plan is to create an estate plan for the smooth transfer of assets to one’s legal heirs.
- New earners should prepare a will and align the nominees of their accounts/ folios with banks and financial institutions.
- They should also address any digital assets that they may possess, such as e-wallets, social media accounts and cryptocurrency wallets.
(Disclaimer: The opinions expressed in the article mentioned above are those of the author(s). They do not purport to reflect the opinions or views of ICS Career GPS or its staff.)