- What should a financially strong individual have?
- The individual must have a sound investment portfolio coupled with an adequate insurance cover - Read this post that tells how to make that happen
To many, financially strong means earning high. And they are right to a greater extent, but not entirely. A high five or six-digit salary amount does look impressive on paper. But if not managed properly, all that feels negligible. On the other hand, people earning less but having created a strong investment portfolio along with a sufficient insurance cover will find life much easier to live. Irrespective of whether you earn high or low, a cohesive financial plan has to be in place so that you can dictate both your present and future. In this post, we will tell you that very plan. Let’s read on!
Table of Contents
- 1 Tenets of a Cohesive Financial Plan
- 1.1 Intelligent Use of Credit Cards
- 1.2 Investment Portfolio Should Align to Your Financial Goals and Match Your Risk-appetite
- 1.3 But How Will You Invest in an Equity Mutual Fund?
- 1.4 What Investment Options Individuals with a Low-risk Appetite Have?
- 1.5 Adequate Insurance Cover is a Must
Tenets of a Cohesive Financial Plan
Simply put, a cohesive plan takes care of your finances holistically. It not only helps you dominate in the future but also lets you take control of the present situation. Striking a balance between the current and future holds the key to how strong an individual you would emerge financially. Let’s check out the disciplines you need to bring in to ensure you become financially strong sooner or later.
Intelligent Use of Credit Cards
Credit cards work wonders when you don’t have the cash to meet your requirements. But utilizing the plastic instrument too much and on unnecessary expenses will only hit you hard with a sky-rocketing bill at the end of the month. But while checking the statement, you could find the biller giving you a minimum due payment offer to avoid late payment charges. The minimum due accounts for around 5% of the total outstanding balance. So, if you pay that on time, you can avoid late payment charges. But what you cannot avoid by repeating this habit month after month is the addition of revolving credit that only gets compounded at a monthly rate of 2.5%-3.5% and 30%-45% annually. Just imagine the high debt-like situation you will be in if you follow this credit card spending habit. The point is very clear here – use the credit card for what you need and do it according to your income. Raise the spending limit only when your income rises.
Investment Portfolio Should Align to Your Financial Goals and Match Your Risk-appetite
Why should I invest? Which investment should I choose? How long should I stay invested? You might come across these questions when you look to invest. The answer to all these lies with the financial goals you are likely to achieve and the risk-appetite you carry. So, the individuals who are financially strong must have chosen the investment this way. If you want to tread their path, be clear on the questions mentioned above. If you have a high-risk appetite, you will enjoy investing in stocks that can multiply your capital exponentially over time. But if you don’t have knowledge about stock investments, will you be able to make those smart changes on your own in case the negative sentiments prevail in the capital market for long? Maybe not! So what should you do? In that case, you should invest in mutual funds that keep the money in handpicked stocks. Here, on your behalf, the concerned fund manager will do all those buying and selling of stocks based on the market movement. All you need to do is check the credentials of the fund manager who will be taking stock of the mutual fund scheme you want to invest in. As someone wanting to be financially strong, you should emphasize on this FUND MANAGER point. It is his/her wisdom that can help you make the most of good times and sail smoothly in case the market goes awry.
But How Will You Invest in an Equity Mutual Fund?
There are basically two ways by which you can do so – SIP and lumpsum. A Systematic Investment Plan (SIP) helps you invest a fixed sum of money at fixed intervals – daily, monthly, quarterly, half-yearly or annually. For a better investment discipline, the monthly interval is the best option. Whereas, a lumpsum investment is a one-time investment in mutual funds, although you are allowed to make additional investments. Both are good, but an SIP holds an edge because of its ability to multiply your capital over the long-term with the ‘Power of Compounding’ effect. It also reduces the average cost of investment by buying more units when the price of the fund falls and less when the price rises.
What Investment Options Individuals with a Low-risk Appetite Have?
It’s not only those who invest in stocks directly or via mutual funds are going strong in their financial lives. Those who have invested in debt mutual funds are also enjoying a good run. Yes, they know their risk-appetite is not on the higher side. And that’s why they have invested massively in debt funds that put the money in debt instruments such as bonds, debentures and money-market instruments. These instruments are safer compared to equities even as they yield less than the latter. But they are still way better than fixed deposits and savings bank accounts in terms of returns. The average return of debt funds can be around 8%-9%, better than 5%-6.50% of fixed deposits and 3%-4% of savings accounts. Like equity funds, you can invest in debt funds via an SIP or lumpsum.
Adequate Insurance Cover is a Must
One cannot be called financially strong if they do not have adequate insurance cover to protect themselves against unforeseen circumstances going forward. Broadly, there are two types of insurance – one is life insurance and another is general insurance. Within general insurance, there are health insurance, vehicle insurance, property insurance, etc. In the absence of insurance cover, your savings will reduce drastically. Let’s talk about some important insurance products.
Life Insurance – Ever wondered what will happen to your family members after your death? Emotionally, it will be a big loss to your family members. But having a life insurance cover with adequate sum assured will ensure they don’t face financial problems after your death. Yes, there’s a premium you need to pay for a long period. But it’s worth putting money in such insurance plans that give a protection cover to your family members in the eventuality of your death. Compare insurance plans online and check which insurer gives you the maximum sum assured at relatively less premium than others.
Health Insurance – Hospitalization expenses don’t remain the same year after year, thanks to the rising prices of medical equipment used for the treatment of patients. Keeping this in mind, every individual who aspires to be financially strong should have a health insurance cover that accommodates the treatment expenses.
You have two claim options – cashless and reimbursement. Cashless claims, as the name suggests, can help receive medical treatment for the ailments caused to you or any of the covered family members without having to pay anything. But that will be possible only if the treatment happens in a network hospital. You can find the list of network hospitals either on the menu provided by the insurer or on its official website. Whereas, if the treatment happens in hospitals other than from the list of network hospitals, you will need to bear the full expenses and get them reimbursed later on. However, you need to inform the insurer within 24 hours of the hospitalization to get the claim settled later on.
Yes, there will be some ailments for which the cover won’t be available. Plus, there will be a few on which the insurer will put a waiting period clause. Generally, in the case of pre-existing medical conditions, insurers put such a clause, which means you can’t get cover until your health insurance policy has run for the time as fixed by the insurer. So, if the waiting period for a certain disease is 3 years, you will get cover for that only after the policy runs for 3 years. Like life insurance, here also you need to pay a premium. Plus, you should compare health insurance policies and find the one which gives you cover against maximum diseases/conditions at less premium. And one more thing – the sum assured.