Financial Planning is an Exercise to Keep Your Finances Healthy

Recently, we friends were catching up on a video conference call discussing the lifestyle changes that have occurred since past one year. My friend Ritika said, "The year 2020 has been the worst year for me. I did not tell you guys but I went through major financial difficulty amid the pandemic."

We asked her, "What happened, Ritika? Why didn't you tell us earlier? Don't forget we are always there for you."

Ritika responded with a smile "Thanks guys, it was such a disturbing time for me, I just called Mitali, as earlier she helped me with my SIP investments and now I wanted to redeem them."

"So in January 2020, I quit my former job and began seeking for new opportunities. I was offered a job by the end of Feb 2020 with a start date April 1, 2020. Now, in month of March 2020 everything took a downturn, we were hit with a global pandemic caused by COVID-19. My employment with the organisation that hired me was put on hold and I had already left the previous job and there my financial struggle started due to lack of income."

I jumped in and said, "Guys, when she called earlier, she explained the whole scenario to me, she had to pay her rent, household expenses, utility bills, and the education loan EMIs. Obviously, it was difficult for her to manage all the finances."

Ritika said, "Yes, and the landlord kept asking for rent even after explaining him the financial situation. So I thought its better I redeem the investments and I will have surplus over my savings which would have been sufficient for only 3 months."

To which I piped in, "It was a poor decision because equity markets were at all-time lows in March-April 2020, and she would receive less than she had invested. Ritika only had a limited amount of money in her savings account, and her new job start date was delayed by five months. As she was living in Mumbai away from her hometown for work, she had to bear all the expenses on her own."

Ritika replied, "I made a decision to go back home to Lucknow. I cleared all the dues including rent. This did save me from most of the expenses, but my loan EMI was still a concern."

I added, "By staying with her family, the rent and other expenses were eliminated now, the savings amount she had for 3 months towards overall expenses could be utilized to pay only her loan EMIs and after calculating she was able to easily pay for 6 months of loan EMIs."

Ritika continued, "Now that I have started my new job, I called Mitali to inform her and ask if there is any way I could prevent such financial crisis in challenging times. She told me that to be financially healthy you need to exercise financial planning."

One of my friend Rohan curiously asked, "Wait a minute, exercise financial planning? Financial health? I am confused."

To which I responded, "Rohan, just the way you exercise in the gym for physical health, similarly, to maintain your financial health, you need to exercise financial planning measures".

Ritika said, "Mitali please elaborate it the way you did before to explain me about financial planning."

You see, financial health is a basic measure of the soundness of an individual's finances. Your financial health encompasses the various aspects of your personal finances, such as income, expenses, savings, investments, debts, credit rating, and financial plan. Some key elements to good financial health are being aware of your overall financial condition, and making a financial plan.

All your financial decisions and activities have an effect on your financial health. An important factor that contributes to financial 'fitness' is being ready for any curve balls that may come about, such as job loss or ill health that affect income for a time or a pandemic scenario like now.

Let us take a close look at how you can maintain your financial health with an effective financial plan:

Step 1: Creating a Budget

When was the last time you reviewed your financial situation? Budgeting is the best way to help you determine how well your finances are doing or what you need to work on. Budgeting is a basic, but important tool to know where your hard-earned money was spent. You become aware about the reality of your financial situation. With the help of budgeting, you could manage your cash flows and cut off nonessential spending from your budget.

Budgeting will also help you set your financial goals; once you have an idea of your cash flows. You will be able to plan your future goals with a certain time horizon. You are more likely to succeed in accomplishing a goal, if your goals are S.M.A.R.T (Specific, Measurable, Adjustable, Realistic, and Time-based).

Step 2: Build an Emergency Fund

Since many of you have adapted to the 'work from home' set-up due to the imposed lockdown restrictions, it will be easier to resist the temptation of spending money on impulse buys, eating out, and regular commuting costs. This will create a surplus amount for your savings and to maintain an emergency fund.

An emergency fund (rainy-day fund) is a significant part of your financial plan. As we saw in the above mentioned case, if Ritika had maintained an emergency fund, it would have saved her from the financial hardship. The primary objective of an emergency fund is to help you in times of uncertain events. It sets aside a certain amount and you can aim to garner a contingency fund of expenses for at least 12-24 months, including loan EMIs.

Step 3: Start Investing early

It is critical that when you start earning, no matter how much you earn, more or less, I strongly recommend investing your money into various investment avenues that increase in value over time. Investing is an essential part of your financial planning process. This will enable you to achieve your envisioned financial goals and it is the most effective way for wealth creation in the long run.

The sooner you start investing the better/bigger corpus you will be able to build for your future and your retirement. In fact, you may start investing from your first paycheque itself, and if you haven't started, you can begin now. Remember, you need to be consistent with your investments for the long haul, regardless of the amount, huge or small. The fundamental point is to construct a robust investment portfolio that can and will survive the markets' various phases and volatility.

Step 4: Control Debt

Looking at the current environment, some of you may have had to borrow loans to fulfill your financial requirements. Having a debt is not a disadvantage, but if you are unable to control your debt, it could turn into debt burden. You may end up living paycheck to paycheck and this can grossly affect your financial health.

You need to avoid the frequent use of credit cards or going overboard with borrowings accruing debt in anticipation that a rise in income in the future will help us repay the loans. This thought-process is detrimental to your financial health and it will, eventually, land you into a debt trap. As a rule of thumb, your debt-to-income ratio should ideally be below 50% for your financial well-being.

Step 5: Safeguard your family's financial future

Life is full of uncertainties as we have experienced recently and not having adequate financial protection for your family can create many difficulties in the future. To safeguard your family from financial hassles, you need to analyse and purchase suitable life and health insurance cover for your family.

If you are the sole breadwinner of your family, a life insurance cover will help them in fulfilling the financial obligations and compulsions in your absence. Taking into consideration the current milieu of uncertainty, it is essential to secure your family's financial health.

The points elucidated above will assist you in developing an efficient financial plan that will help you maintain your financial health. However, you can benefit from this only if you are financially literate enough to comprehend the finer nuances of financial planning and implement them accordingly. Financial literacy will assist you in developing a financial plan that will aid in enhancing your financial health.

Today, there is no dearth of information; you can easily conduct a search on a variety of websites, newspapers, blogs, online forums, etc. before making a financial decision. However, information overload may mislead you. If you lack of financial knowledge, you may make an unhealthy financial decision that negatively impacts your financial health.

Therefore, it is crucial to empower yourself with the weapon of financial knowledge to make informed financial decisions. It is important to exercise financial planning to maintain your financial health.

PS: PersonalFN understands that not everyone holds the adequacy of financial knowledge. Here we encourage you to gain and enhance your financial knowledge and become a 'Financial Guardian', who understands the financial planning elements to guide your family through these challenging times.

And in case you are wondering how to become that financial guardian for your family, PersonalFN's latest special initiative, the "Certified Family Guardian" offers you an exclusive opportunity to learn the finer nuances of money management.

​Organised into eight modules with 24 extensive videos, the "Certified Family Guardian" will help you with all the relevant tools and learning modules needed to get better at money management. It also offers a host of other benefits to help you make informed investment decisions. Read here for complete details.

So, if you wish to improve your financial knowledge and exercise financial planning to maintain your financial health, enrol to "Certified Family Guardian" course today!

Warm Regards,
Mitali Dhoke
Jr. Research Analyst

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