Maintaining financial hygiene is the key to an effective financial plan, more so during a crisis.
14-Apr-2021 •Research Desk
In the last two parts of this series, we discussed the importance of having a contingency plan and of being a disciplined investor to hold you in good stead during the next crisis. Now in this subsequent part, we will discuss about practising personal hygiene.
No matter how healthy you eat or how hard you exercise, if you don't practise personal hygiene, sooner or later you will fall sick. Same goes for your finances. No matter how big your safety net is, how robust your financial plan is or how disciplined your investment approach is, lack of basic hygiene can nullify it all.
Ever wondered how a chemist quickly finds the drug you want from the thousands stocked? That's the power of being organised. What if the chemist had to open every box to find your medicine? Take a leaf out from that for managing your finances. You are often at the center of your financial plan but what if you are not around? Are your financial dependents even aware of the insurance policies you've bought to secure their future? It would be prudent to have them informed about your finances as well as about the place(s) where you keep all such documents.
Another point to ponder: do you have nominees assigned for your banking and investment accounts? Not having nominations can land one's heirs in a clutch of legal formalities before they can even access what you have left behind. All this is both costly and time consuming, yet easily avoidable by having nominations in place.
According to IRDAI's 'Annual Report 2019-20', 10,990 life-insurance policies amounting to `347.32 crore (1.8 per cent of total claim amount) remained unclaimed. As per RBI, the total unclaimed deposits with commercial banks at the end of 2019 stood at `18,380 crore in more than 6.4 crore accounts. The amount in the savings accounts accounted for more than two-third of this corpus. Since 2005, the unclaimed deposit accounts have grown by six times and the money in them has become 20 times. This highlights the lack of knowledge regarding appointing nominees.
Hence, make sure to appoint nominees in your investments. If you already have nominations in place, make sure to periodically review them. These mundane-looking tasks are just as important as your SIPs.
Needs vs wants
During the lockdown, many of us had to restrict ourselves from incurring discretionary expenses like eating out, taking vacations, etc. This would have given you a fair idea of what is essential spending and what is not. Avoiding the latter can help save more with the same income or even with a reduced income. So, try to figure out which avenues you curtailed spending last year. If you can still do without those expenses, then consider doing an SIP with the saved money.
Steer clear of the debt trap
You may fall into a debt trap even without knowing it. Debt is like a drug that will please you initially as it fulfills your wants but soon, you'll get addicted to it and won't be able to live off it. As Warren Buffett says, "If you buy things you do not need, soon you will have to sell things you need." So, always focus on avoiding unnecessary debt. Look to postpone your wants rather than fulfill them through credit. It will not only keep you off unpaid bills but also help develop a habit of surviving through limited means, in case the need arises.
Even those who are prepared for all eventualities can fail if they end up focusing on the 'what', 'when' and 'where' but not the 'how' of things. Like earthquakes, you don't know when or of what magnitude the next crisis will be. But you know that at some time, it is inevitable. The fact is that you can't avoid risks. The year gone by has been a great teacher of what we should value the most and how to be prepared both financially as well as in personal life. So, prepare today as procrastinating itself is a big risk. Focus on this three-pronged strategy and you are all set to sail through.