From Emergency Funds To Writing A Will: 10 Financial Activities You Must Do This Financial Year

This year take small steps to be on top of your finances and lay the foundation for attaining financial freedom

As a new financial year has dawned upon us, all of us should take a pledge to attain financial fitness this year. Together with physical and emotional fitness, financial fitness is also very important in the post-Covid era. As registered investment advisors we regularly meet and interact with people, answer their queries and create financial plans together with investment strategies. We feel an individual should take these 10 simple steps this financial year to improve his/her financial status.

1. Be on top of your lifestyle expenses

While people are generally aware of their earnings and savings, most people don’t know how much they spend and where. This is important to ascertain their expenditure pattern, how much is spent on necessities and how much on luxuries? In future if there is any need to curb spending due to loss of income, then it becomes very difficult.

This year, write down all your expenses above a certain amount in various buckets such as groceries, utilities, shopping, entertainment, travel etc. and analyse at the end of the year. If you do this exercise once, then it is not compulsory to repeat it next year as you would become aware of your consumption pattern.

2. Take a term insurance cover

Life is uncertain. The pandemic has been a grim reminder. Most of us have lost a friend/family member/near or dear one. In order to ensure that your family is not financially deprived, one should take adequate term insurance (life cover) so as to meet the family's financial responsibilities. The maximum life cover one can normally get is 60 minus current age multiplied by current income.

3. Lock in FD/Bonds at high interest rate

We are almost at the peak of the current interest rate cycle. Stock markets have been flat in the previous financial year. This year as well, prospects do not look brighter with global economic slowdown, geopolitical crisis, banking failures. Banks and corporates are offering good interest rates on fixed deposits (7.25 per cent to 8 per cent). Many listed bonds with the highest credit rating of AAA are offering yield to maturity of 7.5 per cent to 8 per cent.

4. Exhaust your PF/VPF limit of Rs 2.5 lakh

The EPFO has fixed interest rate of 8.15 per cent for FY22-23. This is a post-tax return. PF/VPF is an EEE product (exempt when you invest, interest earned is exempt and so is the maturity amount). It is a great product to build your retirement corpus. You should invest up to Rs 2.5 lakhs in PF, if your eligibility is of a lower amount, then you could opt for voluntary PF to reach the figure.

5. Open a PPF A/c

Similarly PPF is also an EEE product, it is offering a return of 7.1 per cent (tax free). A FD/bond which gives 9 per cent -10 per cent interest will give you a 7.1 per cent post tax return. In 25 years, you could become a crorepati if you invest Rs 1.5 lakh per annum. If you have male child, then it is a good product to fund his higher education expenses.

6. Open a SSY A/c

If you have a girl child, there is no better product to fund her higher education/marriage expenses than Sukanya Samriddhi Scheme. Currently, it is offering guaranteed post tax returns of 7.6 per cent. In 15 years you could build a corpus of Rs 63.65 lakhs at current rate of interest if you invest Rs 1.5 lakh per annum.

7. Start investing in Index funds and G-Sec funds

Many people who invest in mutual funds do not have index funds in their portfolio. Globally more than 90 per cent of mutual funds schemes fail to beat the index. Further their management fee is also very low compared to other schemes.

Similarly for debt, investing in a 10 year government securities/gilt scheme will help you earn better returns than any other debt mutual fund. These two are must haves in your portfolio. In our endeavour to beat the market, many of us do not even get the market return.

8. Get your own health cover (Don't depend on company)

Most of the salaried people are covered under a group health insurance policy of the companies in which they work. And, hence, many do not feel the need for taking their own/personal medical insurance policy. However, this exposes them to risks. Any hospitalisation during loss of a job can make a big hole in an individual’s savings. Generally when people shift jobs they are exposed for a few days as it easily takes 15 days to a month to get enrolled in the group cover of the new company.

9. Build emergency funds up to 6 months of expenses

In an era of uncertainty, layoffs, one should have decent money parked in savings / FDs to meet emergency situations. One should have at least six months of their monthly expenses as emergency funds to meet any adverse situation.

10. Write a will or communicate all assets/liabilities to family members

It is very important to write a will to avoid confusion in the event of unfortunate death. It provides clarity to successors and prevents legal hassles. If not a will, you should communicate details of all your savings accounts, investments, loans, insurance policies etc. to your dependents. More than Rs 1 lakh crore is lying unclaimed with banks, mutual funds and insurance companies.

Amitabh Tiwari and K. Shankar are SEBI Registered Investment Advisors.

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