BEFORE YOU SPLURGE, ASSESS YOUR NEEDS

BUYING NEW GADGETS MAY KEEP YOU IN SYNC WITH OTHERS. BUT IT SHOULDN’T GET PRIORITY IN YOUR FINANCIAL PLANNING.

Last month, the new generation of the iPhone was announced. The top-line model iPhone X, expected to be launched in India in November, reportedly costs `1.02 lakh. Who doesn’t love shiny new toys? The latest iPhone in your hands will give you many technological advantages. It will also earn you brag value and the respect of your peers. However, it is an electronic item, and it is a depreciating asset, which means it will start losing monetary value the moment you buy it. Similarly, there are plenty of other smartphones and electronic items that you are, no doubt, looking to buy during the festive season. Before you make this expenditure, ask yourself these five questions to ascertain that you have attended to the high-priority items first.

IS MY LIFE INSURED ADEQUATELY?

An adequate life insurance needs to be a part of every financial portfolio, especially for those who have financial dependents. You need to assess the long-term monetary needs of your family. Money requirements such as income needs of the surviving spouse, education costs of children, healthcare, utilities, rent, EMIs, daily needs etc. should be adequately covered by insurance. If you have dependents, you may be putting their future at risk, if you haven’t bought a term plan. If you are a 30-year-old, salaried male with no tobacco habit, you can avail a life cover of `1 crore for annual premiums starting from `6,511.

IS MY FAMILY INSURED AGAINST HEALTH EMERGENCIES?

LAhealth emergency has the potential to deplete a family’s entire savings. The treatment of a critical illness such as cancer can cost several lakh of rupees. To protect the family against such emergencies, we need health insurance. A 30-year-old male can buy an individual cover of `5 lakh for annual premiums starting from `5,994. You can also cover all members of your family under a floater coverage where the policy benefits are shared. Having health insurance is mandatory. So make sure that all members of your family are covered.

HAVE I STARTED A RETIREMENT FUND?

et’s say you are 30 years old today, and your monthly income requirement is `40,000. Considering an average inflation rate of seven per cent, your monthly income needs in 2047 would be `2.84 lakh. In 2057, when you'll be 70, you will need `5.59 lakh per month. Assuming you have a life expectancy of 80 years, and an expected retirement age of 60, you will need to save at least a couple of crores as your pension fund. So have you started saving up for this astronomical money requirement? If not, start today. If you invest `6,000 every month for 30 years in a mutual fund with a CAGR of 12 per cent, you will create a corpus of `2.1 crore. But if you delay this monthly plan by only 10 years, you will create a corpus of only `59 lakh, which will be inadequate for your retirement.

DO I HAVE ENOUGH MONEY FOR EMERGENCIES?

Have you set aside a rainy day fund yet? As I explained on these pages last week, a financial emergency could arrive in many forms: a job loss, a medical emergency, damages to property, etc. It is important to make a common sense assessment of your own life risks and be financially prepared. When the emergency finally hits, you will at least be financially secure. You should put away at least three to six months of your current income to help you cover such requirements as rent, EMIs, insurance premiums, utilities, etc. You should use a bank deposit or a liquid mutual fund for building this fund.

DO I HAVE OUTSTANDING DEBT?

Lastly, before you splurge on an electronic item, check if you have outstanding debts: a pending credit card balance, a loan you didn’t repay, or some other borrowing you are currently servicing. Repayment of your debt can help improve your credit score, allowing you to borrow further at attractive interest rates. On the other hand, failing to repay your debt will reflect adversely on your credit history. If you repay your EMIs regularly, consider making a pre-payment to lower your loan balance since the interest rates have bottomed out. If you have a pending credit card balance, repay it on priority since it is a very expensive form of debt.

Once you have settled these five toppriority needs, you have managed your money well and have earned the privilege to indulge your fancies.

INSURANCE FOR LIFE, HEALTH COVER, SAVING MONEY FOR RETIREMENT AND REPAYING OLD DEBTS MUST PRIORITY OVER BUYING THE LATEST ELECTRONIC PRODUCTS