2020 was an extremely challenging year from all aspects: Financially, Professionally as well as Mentally. The year has taught us a lot of important lessons about money management and how to be prepared for uncertain times. So, instead of regretting the money choices you made in the past, now is the time to think about how you can manage your money better in the future to navigate such situations better. At Investica, we talk to a wide group of investors with different investment goals and life stages. However, we believe that a lot of money problems are similar across investor groups. As we enter 2021, here are some important money resolutions that will help you deal with any uncertainty without impacting your financial goals.
Don’t delay the Life and Health Insurance any longer
The covid-19 pandemic was a reality check for all of us. And any uncertain expense related to health issues can impact finances adversely. Risk Management is the only way to come out of this unharmed Financially. Hence, as a priority, buy sufficient Term and Health Insurance cover. While you are at it, here are some tips to help you in the process:
- Always Prefer Term Insurance over any life insurance plan. Term insurance is the cheapest way to have sufficient life cover.
- You need separate health insurance even if you have one from your employer. Because if you take a sabbatical or are in the process of changing jobs you will have no health cover during this time.
- If you have a newborn child, add her to your policy, or buy a new policy in her name as soon as possible. The longer the claim free period, the better will be your chances to get the claim when you need it.
- Read your term and health insurance policies in detail to understand exclusions, waiting periods, and other important details. This will help you and your family members in case of a claim.
If you want to know how much term and health insurance coverage you need basing on your lifestyle and income, you can create your financial plan using Optimo.
Save just for the sake of Saving
This one is a little different than the standard mantra “invest according to your goals”. Allow us to explain the logic behind this. It is always beneficial to invest according to your goals and to create a financial plan to fulfill the goals. But, a lot of investors from 20-30 years of age group do not have clarity about their goals. In such a case, how should they invest? Long term or Short Term? Or they should just wait until they have clarity about their goals?
Investing early in life can be a game-changer for investors. If you do not have clarity on goals, simply go with your risk appetite and divide your money across various assets. Or take a conservative route and invest in debt funds. Once you decide on your goals and investment horizon, make changes in your investments. But don’t wait till your 30s. Added responsibilities during your 30s can impact your saving potential. Hence, start as early as possible and just invest your money for a better and secure future.
Build that Emergency Fund as soon as possible
An emergency fund is the most overlooked aspect of the financial plan. Financial Emergencies can wipe out a significant amount of capital if you are unprepared. During the pandemic, a lot of people had to take a pay cut and some even lost their jobs. While these were unprecedented times, it is always better to be prepared for unforeseen events. Hence, create an emergency fund with at least 6 months’ worth of expenses.
You can invest in liquid and ultra-short term fund which will have complete liquidity at the same time will beat the savings account rate. You can read more about creating Emergency Fund here. You can also use Optimo to understand how much amount you need to create your emergency fund and where to invest it.
Focus on building a portfolio and not on buying investment products
Every market cycle brings a different product that attracts new age investors. A few years back it was ULIP. Every investor had ULIP in their portfolio because it was sold aggressively. Now, it is US stocks. Everyone wants to buy individual US stocks like Tesla, Apple, Facebook, Twitter, etc. However, it sounds very new-age investment but this approach hardly benefits the portfolio. Here’s why. Let’s say in a portfolio of 5/10 Lakhs, you have a US stock investment of 10,000 that doubles to become 20,000. In isolation, you could say that your US stock investment doubled, but on an overall portfolio level, it does not create a big impact.
We are all for taking global exposure in the portfolio, but it needs to be done systematically. Hence, instead of buying the new product, focus on building a portfolio with different asset classes, and stay invested across market cycles. This tried and tested approach may be boring but it is a sure-shot way of creating wealth. Hence, think about a portfolio level impact of any investment other than looking at individual investment return.
Last but not the least, Be patient with your investments
In 2020, we saw Nifty touching the levels of 7,600 in March, and in the same year, Nifty also touched an all time high of 13,700. While in the hindsight, this looks phenomenal, during March no one would have guessed the market rally. The bottom line is that market is unpredictable and can be irrational. The only way you can generate the desired return is by staying invested across market cycles.
And if the sight of negative return terrifies you then use the asset allocation approach to limit your losses. Always remember a quote of an American economist and Nobel prize winner Paul Samuelson:
“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.”
With this, Investica wishes you a very happy and prosperous New Year!