2020 was a difficult year due to the Coronavirus (COVID-19) pandemic, social unrest, and natural calamities. The last year has taught you a lot and given you an opportunity to reinstate the importance of financial independence.
If you wish to become financially self-reliant in 2021, you can follow these steps to safeguard your money:
- Get adequate insurance coverage
Life is uncertain, and an unforeseen circumstance can arise without warning. Insurance plans like medical and term policies protect you against such situations. If you are the sole breadwinner of your family and an unfortunate event results in your sudden absence, can you imagine the plight of your loved ones without insurance coverage? A term plan ensures that your family does not face monetary distress while dealing with the emotional loss of your absence. The insurance policy pays the benefits to your nominees if an untoward incident occurs during the policy duration.
Similarly, if you or a family member is infected by COVID-19, the treatment can be expensive, and without health insurance, you may find it difficult to pay for it. Even when there is no pandemic, an unexpected ailment requiring hospitalization can wreak financial havoc without adequate health coverage. Additionally, if a tragic incident results in your absence, your family members will find it difficult to meet their requirements. This is when a term plan can be a savior for them,
In addition to providing financial stability, health and term insurance plans are tax-saving investments providing deductions under the Income Tax Act, 1961.
- Build an emergency fund
The pandemic caused physical, mental, emotional, and economic crises across the world. Millions of people globally lost their jobs, and a higher number have seen salary reductions.
When 2020 came, you could not have predicted an unknown virus would cause a pandemic. Unfortunately, unfavorable things happen; so, it becomes necessary to be financially prepared to face such a circumstance. COVID-19 has brought the importance of an emergency fund to the forefront.
Having a fund is not optional because even in the absence of coronavirus, emergencies can occur. An accident, massive home repairs, dental treatments, or car repair can come unannounced, and a contingency fund ensures that you can pay for these expenses without much financial distress.
Typically, it is recommended that you have at least three months of regular expenses in this fund if you and your spouse are both working. For single-income homes, it is advisable to retain six months of expenses in the fund. You can explore various liquid investment options to hold the emergency fund.
- Reduce your debt
In modern society, being debt-free is almost impossible. You may have a home loan, car loan, or an education loan. However, you must be cautious of building up too much debt, especially on your credit card.
A significant credit card debt can lead to a debt trap, resulting in financial difficulties while preventing you from saving your money in beneficial investment options. The interest on credit card debt is much higher compared to other loans, which can be a significant amount, especially if you pay only the minimum due on the outstanding bill. It is recommended that in 2021 make efforts to lower your liability and avert monetary crises.
Resolve to save more, cut down on unnecessary expenses, and decrease your debts. The important question when you think about saving more is where to invest money. You can consider investing in Unit-Linked Insurance Plans (ULIPs). Here, you have the facility to invest in equity, debt, or balanced funds according to your risk appetite. This instrument inculcates investment discipline, as it has a five-year lock-in period. Moreover, you can switch your investments from one fund to another as per the market conditions.
While comparing the different products, consider your risk-taking ability, investment horizon, financial goals, and the principal to make an informed decision. If you find this confusing or overwhelming, you can take help from an experienced investment professional who can guide you to choose the most beneficial options.