When considering financial planning, many people immediately think of investing as the first step. Starting to invest early is often recommended, particularly during the early stages of one’s career. While investing is indeed crucial, there are essential financial tasks that should precede diving into investment decisions.
Investing is just one component of the broader financial planning process, indicating the presence of other critical tasks to address at the outset.
Developing Simple Budgeting Habits
Regardless of your income level, whether it’s Rs 30,000 per month or a six-figure salary of Rs 2 lakhs per month, maintaining a budget is absolutely essential. Each month, crafting a budget tailored to your expenses and lifestyle is key, as it encourages saving a portion of your income.
However, setting lofty savings goals can sometimes appear daunting and unattainable. To make this more manageable, consider breaking down your budget into smaller segments. After all, each day and week collectively form an entire month. So, why not leverage this breakdown to simplify your budgeting process?
If you find it challenging to curb your day-to-day or weekly spending tendencies, which often leads to regret at the end of the month, think about setting daily or weekly savings targets for yourself. Having a goal of saving, for example, Rs 5,000 per week can seem much more achievable than facing a larger monthly figure like Rs 20,000. By dividing your monthly target into daily or weekly milestones, you can gradually work towards achieving your overarching monthly budgeting goal.
Establishing an Emergency Fund for Unforeseen Circumstances
It often takes a rainy day to highlight the importance of an umbrella, doesn’t it? Similarly, financial emergencies underscore the significance of having an emergency fund, also known as a contingency fund or rainy day fund.
This fund serves as a safety net during financial crises, such as sudden job loss, severe illness, disability, or a significant reduction in income. In situations where unexpected events disrupt your regular income, an emergency fund can come to your rescue by allowing you to cover your recurring monthly expenses.
Financial advisors typically recommend having an emergency fund equivalent to at least six months’ worth of your routine monthly expenditures. If possible, an even larger fund—perhaps 9 to 12 times your monthly expenses—can provide even greater security. In this case, bigger is indeed better!
Prioritizing Life and Health Insurance
If you haven’t yet secured life and health insurance, despite the stark reminders brought by the COVID-19 pandemic and widespread job layoffs, it’s high time to acknowledge the importance of these two financial safeguards. Acquiring insurance represents a pivotal step towards building a solid financial foundation.
First and foremost, the primary purpose of obtaining a life insurance policy is to ensure a replacement income for your dependents in the event of your untimely demise. It’s advisable to ensure that your life insurance coverage amounts to at least 15 times your average annual income. Term life insurance is often preferred for its substantial coverage at minimal premiums.
Additionally, alongside term insurance, having adequate health insurance is equally critical. A health insurance policy with sufficient coverage helps mitigate the risks associated with escalating healthcare expenses. It’s essential to note that lacking health insurance can result in a single hospitalization bill depleting your lifelong savings.
Furthermore, it’s worth noting that even if your employer offers group health insurance coverage, such policies typically fall short in meeting substantial hospitalization costs and cease when you change employers. This leaves you without health coverage until you secure a new employer-provided health plan.
In conclusion, these initial financial tasks—developing budgeting habits, establishing an emergency fund, and acquiring life and health insurance—are fundamental steps on the journey to sound financial planning. They provide a sturdy foundation upon which you can confidently build your financial future.