2020 truly taught us to not take outliers lightly. Statistically, since outliers are rare events or anomalies, our supposedly rational behaviour tends to ignore them. However, there is a distinction between improbable and impossible, which plainly being cognizant of goes a long way in navigating the colossal damages that these events can result in.
To avoid this fragility in 2021, or ever again, these three simple and prudent measures can cushion much of the potential impairment.
1. Get Cover
Insurance is meant to safeguard you against unfavourable events. Term insurance is not an investment. It ensures your family gets enough money to not face the shortfall from the loss of your income after your death. Health insurance is not a tool for reduction of your taxable income. It saves you the hospital bills.
Once you get the objective of these instruments right, it makes sense to not procrastinate, and get going on signing up on policies. You’d rather pay four digits for insurance premium a year, than end up with a six-digit hospital bill that severely derails your future finances.
2. Maintain an Emergency Fund
Emergencies don’t announce their arrival. Job loss, medical emergencies, salary cuts, unavoidable repairs, accidental damages are all uninvited guests. Having a contingency fund for these works well on two fronts – (i) lesser worry when you’re already facing the situation at hand, and (ii) no impairment to your future financial plans.
As long as this fund is liquid in nature (easily withdrawable), and is enough in quantum (typically two months of non-discretionary expenditure), it’s okay for it to exist in any form – bank accounts, liquid mutual funds, or even plain hard cash in your drawer.
3. Don’t Tightrope with Debt
Whether it is credit card debt or loans used for acquiring assets, servicing liabilities can be a pain down below even in normal times, let along unforeseen situations. If you’re walking that thin line of making money barely enough to spend and repay, you need to reprioritize and bring debt down immediately.
More so, if it is credit card debt. While home and vehicle loans result in an asset in your name, borrowing a lifestyle at 24% per year is plain unreasonable. In situations of either income-loss or spend-increase, this is going to hurt, and bad.