"If you want to reap financial blessings, you have to sow financially." — Joel Osteen
We create a financial plan to achieve goals in a systematic manner. But it can run into unexpected problems that prevent us from reaching our milestones. Covid created several such unexpected problems for us last year due to which we faced a lot of stress in terms of money. We weren’t sure whether we would we able to save our jobs or not, when our businesses would get back on track, when the health emergency might strike us etc etc. Though Government provided us with some relief on loan EMIs, but landlord was still asking for rent, car and other household machines were still asking for repair, Insurances were getting due, Schools and Colleges were asking for fees, petrol and diesel prices kept on increasing and so on…..
Situations like these may come again in future and it’s always wise to be prepared with sound financial health, to face such situations stress free. Thus, doing a stress test in personal finances would help us understand our readiness to face such circumstances. By subjecting our plan to various stress points, we’ll get to know our readiness to get past difficult situations. Here are some variables that you might want to look into to check your readiness.
- No Source of Income : If you lose your job tomorrow or if your business fails, how many months of expenses can be managed without dipping into the savings ? By expenses, I am only referring to the mandatory expenses needed to meet basic needs and pay mandatory expenses such as school fees, loan EMIs etc. To check this, calculate liquid money i.e. cash in hand, bank balance, investments in liquid funds and see how many months you can cover on the basis of this. Do NOT count credit card or a loan as liquid money - these should be avoided in tough times, to the extent possible.
- Insurance coverage : Living in this century is not easy with all the new kinds of viruses, pollution and stressful lifestyle. Are you covered for all the issues that might crop up ? If you or your loved one suffers from a health problem, how much stress will that put on your personal finances ? To check this, you’ll need to understand your family history of diseases, see how stressful your lifestyle is, to understand the health issues that might emerge. Thereafter, you need to see if you have enough insurance coverage to handle such situations.
- Asset Allocation : What if your emergency fund and insurance is not enough to take care of the crisis mentioned above ? If your investments are more into lock-in products like ULIPs or Endowment Insurances or Post Office schemes or in Real Estate, then you may find yourself in a difficult situation during crisis times. Thus, it is always advisable to invest in products with less or no lock-ins.
- Diversification : What if you invested your money in a fund and fund loses badly OR you loan your money to a friend and friend goes bankrupt ? To check this, you need to make sure that you are not investing a large amount of money in one product. You should diversify so that if one part of the investment goes bad, it won’t impact you in a large way. It is always advisable to not invest more than 10% of the money in a single investment.
- Executing the Will : What if you die ? How will you family claim the Insurance money ? How will they claim your money from all other assets and under whose guidance ? Make sure that you have a will executed and review it at regular intervals to make sure it is up-to-date. Also, make sure that executor of the will is available and willing to help the family in executing the will.
Personal finance is a very big subject and a stress test is required at regular intervals to make sure you and your family are taken care of in an unfortunate situation. Stress test is an exercise where you do not think about tax savings, growth, equity, debt, interest rates etc. Rather you think that whether the planning that you have done will take care of you and your family in the difficult times or not and for how long.
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