TomorrowMakers

2020 taught us many life lessons and financial lessons. It is time to learn from them.

7 financial assumptions that no longer work in 2021

The last year has taught us some tough lessons and 2021 presents an opportunity to turn those hard-earned lessons from the COVID-19 pandemic into an enduring exercise in getting our financial act on track.

Here are seven financial assumptions that we just can’t take for granted anymore.

1. You can manage without insurance coverage

We have all witnessed first hand families running from pillar to post trying to arrange funds for expensive hospitalisation and treatment. Without adequate health insurance, even a small trip to the hospital can turn into a major financial setback.

If you don’t have health insurance, you should get one on priority for yourself and every family member. Preferably opt for a cashless claim facility and take benefits of add on-covers such as Corona Kavach, critical illness cover, room rent waiver, etc.

2. Credit cards are a great resource to manage expenses

Credit cards allow us to defer expenses; however, if used callously, it is a sure-shot way of getting stuck in a debt trap.

Credit cards have extremely high interest charges going up to 36-40%. If you do not have a repayment plan in place, the liability could snowball, affecting your credit scores and future savings plan. Be mindful of using a card only when absolutely necessary and within means that allow you to repay the bills in full and on time.

Related: 8 Bad financial habits to abandon in 2021

3. Cash in hand/ bank provides a safety net

While it is prudent to have some liquid cash for immediate expenses, if a substantial chunk of your earnings are idling in a bank account, you are effectively losing money. The interest rate offered on a savings bank account is much lower than the prevalent inflation rate.

Not more than 5% of your total savings should be held in cash. For emergencies too, allocate funds in bank deposit or liquid funds that can be accessed easily when required. The rest should be invested promptly so as to maximise your possibility to compound gains.

4. Investments will recover once things normalise

While economic cycles and market forces will create short term volatility, it is important to review your investment choices periodically. Despite the best of due diligence, there are chances that some investments may not perform as expected.

Rather than holding on to these investments indefinitely hoping for them to recover, exit the laggards and look for opportunities to reinvest in funds/ stocks that are performing in line with the benchmark index. Losses, if any can be used to offset tax on capital gains from other investments.

5. This is the time to explore new asset classes

Given the uncertainty around us, now would not be a good to experiment with new assets. For example, even though crypto-assets are in the limelight, they are fundamentally illegal in India, with the government even mulling penalties for those participating.

Investors are better off buying into aged funds or quality stocks that have weathered multiple market cycles and proven to be robust choices for the long term.

Related: 5 Changes in spending habits you should make in 2021

6. If an investment has worked for a friend, it will work for me

With social media ruling the roost, there is tonnes of investment advice being floated through WhatsApp forwards or Telegram alerts. Everyone is trying to cash in on the volatility, but it only takes one bad call to regret it all.

All of us have different financial goals and propensity to stomach risk. What works for someone else may not work for you. It is important to treat your hard-earned money with respect and make an investments decision after considering all factors.

Related: 8 Ways women can save on income tax in 2021

7. Grab on an investment opportunity when it presents itself

The opportunity to make supernormal gains on investments are far and few between. Unless you are a full-time trader, it is highly unlikely you would be able to maximise such an opportunity.

Rather, the best approach is to stay disciplined with your investment plan and take advantage of SIPs. A systematic approach allows you to benefit from Rupee Cost Averaging, enhancing your overall returns in addition to gaining from compounding. How financial literacy can empower women to develop a financial identity