The beginning of the financial year 2021 saw a devastating Covid-19 wave that spread across India. Because the virus is constantly mutating, various medical experts and health authorities across the country have predicted that a third wave is imminent.
There has been a steady improvement in the covid situation for the last few months but as per the recent news report, the AIIMS head has forewarned that if the social distancing norms are flouted and people do not follow the precautionary measures then the severity of the third wave could be much worse.
As the third wave seems likely to happen, people must learn from past experiences and understand the importance of following health authorities’ guidelines and take precautions. While the plans are being devised by health officials and government authorities to deal with the upcoming third wave, individuals need to be prepared for what lies ahead on both the personal and financial fronts ahead of time.
Importance of personal finance planning
Personal financial planning is the key to avoid any financial crisis. If you have never planned your finances to date, it can be a bit confusing to understand how and where to begin. To understand this, one needs to prioritise their financial goals. All financial priorities such as retirement savings, buying a vehicle, owning a house, etc. can be postponed but there’s one that can not be deferred in your personal financial planning and that is called the creation of an emergency fund. An emergency fund is an essential component of a good financial plan.
Some of the key measures that need to be kept in mind while preparing for the third wave of Covid-19 and to ensure financial stability are listed below
Create an Emergency fund
What is an emergency fund? It is a contingency fund that acts as a safety net that helps you manage financially in difficult situations and averts derailment of your financial goals when dealing with emergencies emanating out of situations such as accidents, illness, business crisis, etc. Any situation which pops out without any prior intimation falls under this category of financial planning.
The first question that comes to mind while creating an emergency fund is how to ascertain the right amount of the emergency fund. A thumb rule of personal finance says that the amount of an emergency fund should be at least 6 month’s worth of unavoidable monthly expenses of an individual or a household. If one is faced with an emergency, this fund acts as a cushion that helps to sustain and manage expenses for a duration of six months.
Important aspects of an emergency fund are to ensure the safety and ease of liquidity so that you have quick access to the money when the situation arises. To safeguard an emergency fund, most experts recommend splitting it up into multiple parts.
At least 3 months’ worth of expenses which amounts to half of the total emergency fund can be parked in the savings account with the bank. One of the benefits of doing so is you can take out the money anytime you want. The only downside is that you get low returns for these savings. The remaining half of the emergency fund can be put in liquid funds. Liquid mutual funds are a type of debt instrument that provides potentially higher returns and the biggest advantage is that you can withdraw funds within a day or two.
Make sure you invest in a good health insurance plan
Health insurance wasn’t a very popular investment until now. This could have been perhaps because most people felt that having a single life insurance policy was security enough for all exigencies in life. It could also have been because healthcare wasn’t prohibitively expensive. However, the twin pincer-like movement of rising medical inflation and a worsening global health scenario are pressing concerns, leading to an increased weightage for health insurance policies in your financial planning toolkit.
In current times, healthcare costs in the private sector have skyrocketed hence an emergency fund is not sufficient. It is advisable to have health insurance cover to mitigate the expenses in case of medical emergencies. When the provider/ income earner of a household is taken ill, health insurance can act as a rescuer as it covers various expenses incurred during medical emergencies.
Enhancing credit eligibility
Medical emergencies are often unpredictable and it is always good to be prepared for them but there are certain instances wherein a person is not ready for such unexpected circumstances. In such situations, one looks for credit facilities such as instant loans that can be used to take care of those unplanned expenses. But to use these credit facilities, one needs to have credit eligibility which is directly proportional to their credit score.
Ways to strengthen your credit eligibility are as below
- Keeping a check on your credit score by constantly reviewing it.
- Ensuring that all the debts are paid back in time
- Low utilisation of credit cards. Ideally, it should not be more than thirty percent of the credit limit.
At the end of the day, one does not have to be a finance expert to understand the importance of a personal finance plan. A good plan not only helps to ensure financial stability but is useful when it comes to achieving your financial goals. Ever since the pandemic began, people have realized the value of being prepared and having enough funds to deal with exigencies. The old saying ‘health is wealth’ has never been as true as today. Hence it is strongly advised for all to prepare their finances and prioritise their financial and physical health for mitigating unforeseen circumstances.