These six factors define financial stability

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The Covid-19 pandemic has taught us how it is really critical to ensure we are not caught off-guard on financial matters. The need to build an emergency corpus is the most important takeaway from the pandemic experience. Money9 spoke to some people to understand their struggles and how they managed to counter the debilitating impact of the pandemic on their financial lives. Based on their experiences, here are six factors which define a person’s financial situation.

Savings

As a thumb rule, the emergency corpus should cover four to six months of your expenses. After getting the salary you should put a fixed amount into savings instruments like savings account or liquid funds. It will help you sail through in your bad days.

Expenses

Bitan Bose (name changed) a software professional from Kolkata in his early 30s, had lost his job last year. After struggling for six months, he finally got a job. He said planning your monthly spending is most important. You have to chalk out your expenses and then invest.

Try preparing a budget. Unless you have a budget, you won’t be able to control your cash flows. A budget simply shows how much money you have coming in and how those funds are spent.

Categorising your expenses into fixed and variable, urgent and non-urgent, necessities and luxury etc.

To avoid overspending, you can create a list of items before visiting the departmental store. You can also assign a no-spend day in the week.

Invest

Don’t mix savings and investments. Saving is about setting money aside while investing is putting money or purchasing assets like, stock, bond, mutual funds etc. in order to let your money grow. If you want to take high risks, then invest in equities and equity-linked mutual funds. While investing in mutual funds, it is essential to be mindful about choosing the right fund for the investment.

One can also invest in government bonds for safe returns. But you have to fix your goal first, and then fix the investment instruments.

Protection

Covid-19 has made us realise the unpredictable nature of life. So, it is a wise decision to protect yourself and your loved ones financially and you must invest in term insurance and health insurance plans. It is always advisable to speak to a financial advisor before investing in any specific plan.

Tax 

Pallabi Ghosh Roy, an employee of a educational institute in he mid-30s, faced a difficult time for not doing her tax-planning properly. To avoid a similar fate, plan your tax and deduction under different section of income tax act accordingly. In fact, there are as many as 70 exemptions and deduction options through which we can bring down our taxable income. The biggest pool for tax deduction is Section 80C. Under this Section, you can claim deduction up to Rs 1.5 lakh for making various investments and expenditures.

Also, you can claim deduction under Section 80D, for the premium amount you pay for you and your family’s health insurance policy. 80CCD, 80E and other section is there for your help. So it is a wise decision to consult with a tax consultant before starting a fiscal year.

Retirement planning

Retirement is one of the most crucial life stages, and it can be as miserable depending upon how you have planned for it. It holds true for financial planning too. Planning finances for retirement is a two-step process. First, is saving for retirement and second is, generating income from your assets during retirement. Building retirement corpus and income during retirement period is two important things.

You have to plan this two from the very first day of your carrier. Small yet regular contribution in NPS, PPF and EPF makes a hefty amount. Besides you have to make a regular income during the retirement years.

It is very important that you channelise the corpus correctly after retirement. Making the right investments will ensure that you have a steady income as long as you live.

End note

Astute financial planning is necessary for your future happiness. You must talk and take advice of the professionals before taking any steps. Otherwise you will suffer a lot. Your hard-earned money really needs your assistance and care, and then only it will grow.