Lack of financial awareness and inadequate focus on financial health often lead the millennials to procrastinate their financial decisions. Sahil Arora, Director, Paisabazaar.com, shares his knowledge on some crucial money moves that millennials should make right in the beginning of the financial year itself so as to acheive financial stability and security in future
Maintain adequate emergency fund to tackle unforeseen exigencies
Maintaining adequate emergency fund should be amongst the first financial moves for millennials. Ideally, the size of ones emergency fund should be at least six times of unavoidable monthly expenses like utility bills, daily expenses, existing EMIs and SIPs, rent, insurance premiums, etc.
Having an adequate emergency fund would help tackle financial exigencies, without having to liquidate investments earmarked for crucial financial goals or avail loans at a much higher interest rate. Park your emergency fund in high yield savings accounts to allow instant withdrawals. Those comfortable with mobile and/or internet banking can also invest in fixed deposits of scheduled banks offering higher interest rates.
Prioritize purchase of term and health insurance
As the primary objective of buying a life insurance policy is to provide a replacement income to dependents in case of untimely demise, make sure that your life insurance cover amounts to at least 15 times of average annual income. Prefer purchasing term insurance policies over other life insurance products as the former provides bigger life covers at very low premiums.
A health insurance policy reduces the financial risk emanating from rising healthcare costs. While the employer provides health cover through their group health policies, such covers are usually inadequate to meet hospitalization costs. Also, this employer provided health policy would lapse once you switch organization, leaving you without health cover till you are covered through group health cover provided by the new employer.
Purchasing health and term insurance policies earlier on can help reduce premium outgo.
Prepare a financial plan and begin investing early
A well thought financial plan provides a direction to your investments and assists in formulating optimal asset allocation strategy for achieving financial goals. Millennials should start the process of financial planning by estimating the amount required to achieve each of the financial goals, presumed rate of return, time horizon left to achieve those goals and the inflation rate. Then, use online SIP calculators to arrive at the monthly contributions required to achieve those financial goals.
Once you know the monthly SIP contribution required to meet specific goals, begin investing as early as possible. The earlier you start investing, the more youre your investments would get to grow and benefit from the power of compounding.
Invest in ELSS through SIP mode to save tax right from the beginning of the financial year
Many taxpayers tend to wait for the last financial quarter or for market downturns to invest in ELSS funds for saving tax under Section 80C. However, doing so can force them to buy units at much higher NAVs in case there is no correction during the financial year and markets remain over-valued at the end of the financial year too. Instead, invest in ELSS through the SIP mode spread throughout the financial year. Doing so will help you to average your investments in case of corrections, if any. In case of steeper corrections or bearish market phase, you can always top-up the ELSS SIP with lump sum investments and then, either stop or pause the SIP after achieving the targeted tax saving investment for that financial year.
Build credit score and periodically review your credit report
Having a credit score of 750 or above increase the chances of availing credit cards and loans, often at lower interest rates. Hence, millennials should try their best to build and maintain such credit scores. Those who are new to credit, i.e. without any prior credit history, can build a strong credit score by using credit cards and ensuring their disciplined usage and timely bills repayments.
Those having lower credit scores can improve them by timely repaying their credit card bills and/or loan EMIs, restricting credit utilization ratio within 30%, avoiding multiple loan or credit card applications within a short span, maintaining a healthy credit mix, periodically monitoring guaranteed/co-signed loan accounts and reviewing their credit report at regular intervals.
Fetch one free credit report every year from each of the four credit bureaus or visit online financial marketplaces to fetch free credit reports along with free monthly updates. Report the clerical errors or fraudulent transactions, if any, in your credit report to the concerned credit bureau and lender for rectification. A rectified credit report will sport a higher credit score.