Financial planning: Achieve your goals and protect yourself against life’s uncertainties

The past 18 months have shown us that life comes with its twists and turns. The unprecedented Covid-19 pandemic took the world by storm and highlighted the need to financially plan and manage one’s personal finances towards building a secure future and coping with any unexpected financial turmoil that might come up in life.

Determine and track your net worth

The first step of financial planning is to determine your net worth which is the value of your current assets minus current liabilities. Tracking your net worth helps to determine your financial health and whether you are on track to achieve your financial goals or falling behind.

Identify your household income and expenses

Household income is the sum total of the salaries of the earning members of the household, as well as regular income from other sources such as income from the family business, rent from property, or part-time work. To understand the spending pattern of the family, keep a track of household expenses for a few months. Segregate them into essential and non-essential expenses. In times of crisis or financial difficulties, you can cut down on some non-essential expenses instead of dipping into savings.

Map out your long-term and short-term life goals

A family has different life goals. Long-term life goals could include children’s higher education (possibly in a foreign country), buying a home, children’s marriage, retirement, amongst others. Short-term life goals could include saving for a foreign vacation, purchasing a new car, enrolling children in extra-curricular activities etc.

Identifying these life goals and their timeframes is essential as they form the basis of your financial plan. Earnings, savings and investments need to be aligned to these goals. From time to time, revisit your life goals as well as your financial plan to ensure that they are in sync with real life.

Build an emergency fund

The pandemic has opened our eyes to unforeseen crises that can hit us at any time, with little to no warning. Medical emergencies, accidents, job loss, salary cut, or in the worst case, an unexpected demise in the family.

Keep an emergency fund for the household which would be at least 6 months’ worth of living expenses, if not more. Keep this fund sacrosanct and keep contributing to it. The fund should be spread across financial instruments that can be easily liquidated in case of an emergency.

Invest in life insurance and health insurance

The pandemic has also taught us that life insurance and health insurance are essential investments that must be made on priority. Invest in a life insurance plan that will adequately cover your dependents and leave them financially secure in case of your death or any other unfortunate circumstance. You can also top up the plan with riders like total and permanent disability riders, critical illness riders, etc. which would enhance protection. Keep reviewing your life insurance plan every few years and at important milestones such as a job promotion or the birth of a child, to ensure that you and your family continue to remain adequately covered.

Burgeoning medical costs make investing in a health insurance plan crucial. Opt for a health plan considering your family’s medical history and make sure that every family member is covered in the plan.

Involve the family

When working on the financial plan for the family, it is a good idea to get everyone, including the kids, involved. Children learn from observation and involving them in the family’s finances helps to inculcate financial discipline and interest from an early age.

Consult a financial advisor

Understanding and managing your finances is often difficult and time-consuming. Consult a trustworthy and knowledgeable financial advisor who will educate, help and guide you on the different investment options available, the risk-return trade-off of various financial instruments, the tax benefits and implications of each option, and other details.

To sum it up, wise and prudent financial planning helps you to stay in control and achieve the dreams of yourself and your family without fear.

(The writer is CMO and Head – Products, Ageas Federal Life Insurance. Views expressed are personal.)