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3 steps to avoid financial fragility in 2021

Larissa Fernand  |  17 Dec 2020Text size  Decrease  Increase  |  
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Investing advice site Kiplinger summarised 2020 as the year that delivered multiple gut punches.

Social unrest in various parts of the world, natural calamities, a pandemic and its devasting repercussions, a global economic downturn and a volatile stock market, left us feeling flat.

While there is much we have learned in 2020, and can carry into the next year, there is no newfound enlightenment. The year has just reinforced timeless, classic financial wisdom with a vengeance.

To avoid being financially fragile in 2021, here’s how to fortify your portfolio.

1st line of defence: Get covered.

You never buy medical insurance because you hope to submit a claim someday. You never buy term life insurance because you hope your loved ones can submit a claim someday. You buy it to protect yourself and your family against awful misfortune.

Imagine the plight of a family where the breadwinner succumbed to the virus during the ongoing pandemic. Besides the emotional devastation, the tragedy would be compounded if there was no life insurance as a safety net. If you are the primary source of support for even one other individual, get your insurance sorted out before evaluating investment alternatives.

The same applies to adequate health insurance cover. In my neighbourhood, an entire family tested positive for COVID at the same time. While they initially panicked, their one source of relief was that each of them was medically insured, should they have to be admitted to hospital.

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Even in “non-pandemic times”, just one illness of a family member can cause a major dent in your savings. Don’t depend solely on your job providing a medical cover. Should you lose your job, your cover vanishes. Get a personal medical insurance for the entire family.

2nd line of defence: Have an emergency fund

The pandemic presented us with multi-faceted challenges: physical health crisis, mental health crisis, emotional health crisis, humanitarian crisis and economic crisis. Many lost their jobs, while few were immune from income disruptions.

At the start of 2020, your financial plan did not account for a virus. But stuff happens. You can argue that the odds of such a devastating event occurring again is pretty low. But that does not justify being lax in this area. If anything, the pandemic has highlighted the importance of having a liquid reserve as a part of your financial plan. Indeed, the emergency fund has got a PR makeover.

Building an emergency fund is not optional. You will always need a safety net because emergencies occur even in the best of times. Accidents. Urgent dental treatment. Travel in case of death. Sudden massive home repairs.

I used to recommend three months of expenses, if it is a dual-income household, and six months for a single-income household. After being witness to both spouses getting salary cuts and many losing their job, I now err on the side of caution and recommend nine to 12 months of expenses in an emergency fund.

3rd line of defence: Curb debt

Few individuals can go through life having never incurred debt. In fact, it is a near impossibility for many. How else would you buy a house or fund your higher education? Don’t be debt averse, be debt aware.

I am specifically shining the spotlight on credit card debt. The type of debt you incur when you view credit as easy access to maintain a particular lifestyle. This type of debt has severe consequences. It weighs you down. It costs you your peace. It’s a drain on your income. It hinders your savings ability.

Indulging in a lifestyle with money you do not have is a dangerous way to live. Debt may get you noticed and grant you momentary satisfaction but will never help you win. I was talking to a pilot who took a substantial pay cut when Jet Airways declared bankruptcy and he had to join another airline. During the pandemic, he copped a further pay cut. Unfortunately, he was still servicing debt that was at a comfortable level at his Jet Airways’ salary, and a source of much stress now.

When you service credit card debt of about 24 per cent annualised, be extremely mindful of the fact that this debt costs you a lot more than you can ever earn elsewhere. Even if you are servicing a much cheaper loan—say 12 per cent a year, once you clear it there is an immediate return there.

In 2021, get ahead of your debt. Pay it down. Decrease your stress levels. Choose to be aggressive with your savings and conservative with your debt.

Wishing you financial success in 2021!

is the editor of the Morningstar India website.

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