We often get emails from readers wanting to know if they are on the right financial path. Here is a simple check to find out. The answer to all questions below is a simple yes or no.
The aim here is to maximise the number of yeses. Even if you can’t answer yes to a question today, as long as you are en route to saying yes soon, you are on the right track.
- Do you have life insurance for at least 15-25 times your annual income?
- Note: If you purchased term life insurance a few years ago and your annual income has increased, there is no need to buy additional coverage unless your dependents’ needs or the number of dependents have changed. Just invest as much as possible (see below) and strive to increase your net worth above the term insurance cover.
- Guide: How to choose a term life insurance provider in 30 minutes!
- Do you have private health insurance for at least ten lakhs? The higher, the better; you can also opt for a super top cover.
- Do you have an emergency cover equal to at least your annual expenses? The more, the better!
- Have you planned to reduce all other debt within the next few years except for a home loan?
- Have you listed your financial goals and categorised them as long-term (> ten years) and short-term (< ten years)?
- Have you determined how much you need to invest for each of them, considering realistic inflation estimates on their current cost?
- Are all your investments tagged to goals?
- Can you invest at least 20% of your take-home pay towards these goals?
- Here again, the higher, the better, but even with EMIs, you should be close to 20% or more.
- Are you disciplined in investing? Even if you cannot invest for a few months, do you do your best to try to catch up later?
- Are you tracking the amount you invest each month? Are you trying to increase the amount you invest each year by at least 10%?
- Do you think twice before upgrading your lifestyle? Ideally, such upgrades should not affect the amount you invest and the increase in investments each year.
- Are you investing as per a set asset allocation plan?
- If your portfolio has less equity than is required for a goal, have you planned to increase this?
- Are you rebalancing your portfolio from time to time?
- Do you have the plan to reduce equity exposure in future?
- Have you stopped worrying about saving tax and integrated all tax saving with goal-based investing?
- Is your “fear of missing out” under control?
Do give this questionnaire a go. Do not despair if your answer to many questions is currently a no. You can easily turn it around with disciplined effort. This free e-book may assist: Free ebook: Re-assemble Step by step money management basics.