Swanand Pagnis

How do you know your finances are in order? Are you on the right track? What should you do next?

Here is an essential checklist for good financial health. Do these things first, and then you can seek an advisor, planner, or wealth manager based on your needs. This list is not an end-goal; instead, it’s a pre-requisite.

tl;dr 👇🏼

• Contingency Funds 💵
• Term and Health Insurance 🏥
• Equity to Debt Ratio ⚖️
• Controlled expenses and regular investments 📈

1. Contingency Funds

Save one full year of expenses in capital-preserved, safe financial instruments. These are ALL YOUR outgoing expenses: monthly rentals, EMIs, school fees, planned necessary purchases for the upcoming year. Name one, name all. Even if the markets crash and the economy tumbles, you need access to these funds.

It’s quite likely that you are not in a position to put the whole year’s worth in one go. In such a case, aim lower and build it up. Three months first, followed by six, then maybe ten, and finally, the whole year. Find your path.

A contingency fund is far more critical than low performing investments. Liquidate your worst performing and worst future-outlook assets if you need to. Many people have a baggage of LIC policies, ULIPs, under-performing mutual funds. Often taken from well-meaning family friends who don’t really know better. Research and swap them out. Guilt-free! Some well-known avenues for research:

• https://capitalmind.in/
• https://indmoney.com/
• https://app.bankoncube.com/lead/upload/
• https://www.smallcase.com/creators (Curated list of advisors)

Why is your emergency fund necessary?
A contingency fund instantly improves your risk appetite. You can afford some additional risk because your baseline is now firm.

A contingency fund will make you look at your current debts and liabilities. Do you have high-interest loans? Are you earning from your mutual funds but losing out on the interest? Now would be a good time evaluate and get rid of those as much as you can. Stop bad debt.

It also helps you get into a positive mindset. You can do things like taking a break, leaving a toxic job, trying something new, spending time with family, maybe even vacations. When you are not worried about putting food on the table, you can think better about other essential items. 🧘🏼‍♂️

If you’re constantly worried about not having money, you will make poor choices out of a need for safety. Avoid that. Consider this anecdote from a friend:

I left my job without another one in hand because I knew I had four months of runaway saved up. That same runway helped me reject a not-so-good offer because of the same mentality: I wanted to wait for a better offer to come my way.

It’s liberating.

2. Term and Health Insurance

Get appropriate amounts of insurance. How much is appropriate?

Term insurance: 20x of your family’s total annual expenses. If you Google around, you will find plenty of credible calculators from reputed institutions. But 15x or 20x is a good number. Start there.

Term insurance is needed many reasons, the two essentials reasons are this:

• Your existing liabilities shouldn’t burden your dependents
• Loss of an earning member shouldn’t put them in a position where they need to scramble for putting food on the table. Remember the reasons we set up the contingency fund? Similar reasoning.

Optimize for a hassle-free disbursement and high settlement ratio, not merely for a low premium. When the need arises to claim your insurance, your family and loved ones will be grieving. They won’t be in a position to think through. Don’t set them up for further doom. 🤞🏼

Health insurance: This is a far more nuanced discussion, but take as high a cover as you can. 20L, 30L, higher! Let your budget and comfort guide you. There are plans like “super top-up” that raise your floor by a considerable margin. Utilize them.

The idea is not to leave your dependents and loved ones stranded.

3. Equity to Debt Ratio

Not counting your emergency fund, make sure you have a healthy distribution of equity and debt instruments — 60:40 and 70:30 are extremely popular ratios, and for a good reason. The central idea behind the balance is, of course, risk negation.

Your equity exposure drives your growth, and your debt portfolio gives you stability.

Use planning services to gauge your ratio and work on improving it first. If you have too much equity, stop your equity SIPs and switch to debt instead and vice versa. Give yourself a year to fix the ratio.

Debt instruments are not to be judged based on their year-over-year growth. No. That is not their primary job. Having a good, firm debt portfolio enables you to take risks in your equity game. This way, even if your equity risks try to bring you down, your stability from debt will shield you.

I will repeat, your equity exposure drives your growth, and your debt portfolio gives you stability.

4. Controlled expenses and regular investments

None of the above will matter if you can’t control your expenditure or don’t invest regularly. It’s a commitment, no less. I have written about spending less before.

Spending as little as you can and investing as much as you can is almost a lifestyle. The good thing is you get to decide what “little” and “much” mean to you.

What next?

That’s all, folks! You have everything you need, and you are now ready for a more advanced course of action. This course of action looks something like:

• Portfolio management services (PMS)
• Certified financial planners (CFP)
• Self-guided investments

PMS is an excellent choice if you can afford it. For advisory and planning, the world is moving towards a “fee-only” model. It’s hard to make the incentives align in a commissions model. Services like Smallcase are making it easy for us to take our own investment decisions. YMMV!

Let your budget and risk appetite guide you. Consult experts for all critical and specific decisions like where to invest and which policies to take.

Happy investing! 💰