As the new year begins, one must look at prudent strategies for financial stability. Building an emergency fund, buying adequate health and life insurance, maintaining high credit score and prepaying loans will help you walk the path of financial freedom.
Build an emergency fund
Build an emergency fund equivalent to six to 12 months of household expenses. This corpus should be used only in case of an emergency like hospitalisation or job loss. Park the emergency fund in high credit quality debt mutual funds, which is tax efficient as compared with a bank deposit if held for more than three years.
Also read: Asset allocation in 2023: Start your investment journey with this ever-green strategy
Buy adequate insurance cover
With increasing healthcare costs, a comprehensive health insurance cover for the family is a must. Make sure you select the best health plan as per your needs. As a thumb rule, health insurance cover should be around 40% of your annual income. For life insurance, opt for a term plan which will help to take care of the needs of the family in case of any eventuality of the insured. Ideally, the sum insured of a term plan should be 10 times of one’s annual income.
Try to prepay loan
As interest rates have risen, it is better to prepay a loan, especially those with a long tenure, to reduce the interest burden. New borrowers should increase their tenure as they may not have the money to repay as they would have stretched their finances to pay the margin money. However, borrowers should not sacrifice their existing investments for achieving crucial financial goals.
Also read: Key trends and developments that redefined the Indian insurance industry in 2022
Keep high credit score
A credit score of over 750 helps get better deals on loans and credit cards. Pay all EMIs on time and ensure that the bank account has sufficient funds to avoid late charges and interest. If you miss a payment by a day, the lender will report it to a credit bureau. Check your credit report once every year and if you spot an error, report it to the credit bureau immediately.