5 things to do to avoid being financially fragile

Dec 12, 2022

I could not think of a better way to emphasize the point I want to make. So here's a short story.

WWI. German troops invaded France in 1914. Over the next four years, the enemy occupied roughly 8,000 square miles of French territory and 5% of the country’s total population perished in the fighting.

André Maginot, the French war minister pressed the government to spend vast sums on defences. The Maginot Line was named after him. It was an enormous defensive barrier – a 280-mile-long network of concrete bunkers, constructed along its eastern border to deter invasion. At its broadest, the Maginot Line was more than 16 miles deep and was made up of a series of separate defensive layers.

France’s defence strategists knew that the menacing barrier would save them from a frontal German assault. Should Germany try to enter France by attacking Belgium, they assumed that other European powers, namely Great Britain, would intervene and an Allied army would defeat the Germans in Belgium.

WWII. The Maginot Line was famously outflanked by Hitler’s army that invaded The Netherlands, then moved through Belgium and entered France. Not only did the Maginot Line turn out to be one of military history’s most impressive yet regrettable engineering feats, the assumption of a defeat in Belgium was a colossal mistake.

What is your line of defense? Are you covering yourself and your family from all angles, or relying on assumptions? To avoid being financially fragile, here’s how to fortify your portfolio.

1st line of Defense: Get covered.
DON’T ASSUME a smooth ride. Life has its own vagaries, its ups and downs.

You never buy medical insurance because you hope to submit a claim someday. You never buy term life insurance because you hope your loved ones can submit a claim someday. You buy it to protect yourself and your family against awful misfortune.

Imagine the plight of a family where the breadwinner passes away. Besides the emotional devastation, the tragedy would be compounded if there was no life insurance as a safety net. If you are the primary source of support for even one other individual, get your insurance sorted out before evaluating investment alternatives.

The same applies to adequate health insurance cover. There is a line that keeps doing the rounds: “A middle class family is just one medical bill away from bankruptcy”. If that is too extreme, then let me tone it down a bit; just one illness of a family member can cause a major dent in your savings.

Don’t depend solely on your job providing a medical cover. Should you lose your job, your cover vanishes. Get a personal medical insurance for the entire family.

7 things to note when buying medical insurance

2nd line of Defense: Have an Emergency Fund
DON’T ASSUME that your paycheque can cover whatever life throws at you.

The pandemic presented us with multi-faceted challenges: physical health crisis, mental health crisis, emotional health crisis, humanitarian crisis and economic crisis. Many lost their jobs, while few were immune from income disruptions. It was in 2020 and 2021 that the Emergency Fund got a PR makeover.

Building an emergency fund is NOT optional. You will always need a safety net because emergencies occur even in the best of times. Accidents. Urgent dental treatment. Travel in case of death. Sudden massive home repairs.

I used to recommend three months of expenses, if it is a dual-income household, and six months for a single-income household. After being witness to both spouses getting salary cuts and many losing their job, I now err on the side of caution and recommend 12 months of expenses in an Emergency Fund.

4 things an Emergency Fund is NOT

3rd line of Defense: Curb Debt.
DON’T ASSUME that debt is harmless just because you manage to make the minimum payments when due.

Few individuals can go through life having never incurred debt. In fact, it is a near impossibility for many. How else would you buy a house or fund your higher education? Don’t be debt averse, be debt aware.

I am specifically shining the spotlight on credit card debt. The type of debt you incur when you view credit as easy access to maintain a particular lifestyle. This type of debt has severe consequences. It weighs you down. It costs you your peace. It’s a drain on your income. It hinders your savings ability.

Sporting a lifestyle with money you do not have is a dangerous way to live. Debt may get you noticed and grant you momentary satisfaction but will never help you win.

When you service credit card debt of around 24% annualized, be extremely mindful of the fact that this debt costs you a lot more than you can ever earn elsewhere. Even if you are servicing a much cheaper loan – say 12% per annum, once you clear it there is an immediate return there.

Get ahead of your debt. Pay it down. Decrease your stress levels. Choose to be aggressive with your savings and conservative with your debt.

The psychology of debt repayment

4th line of Defense: Kickstart your retirement savings.
DON’T ASSUME that you will somehow manage to have sufficient funds later on.

Financial Independence and Retirement are not necessarily linked at the hip. They exist independently. To retire, you must be financially independent. Though I do know of individuals who are dependent on their children for support. Not a very desirable situation, but that is the unfortunate reality for many. On the other hand, you can be financially independent and choose not to retire. Plenty fall into this category.

I am not going to give any generalised suggestions with regards to a retirement corpus. It is way too personal and a myriad of factors need to be accounted for. Sources of income after retirement. Pension. Single or married. Living in a joint family or nuclear. Risk capability. Lifestyle. Debt. Age.

 But I will say this: START NOW.

Why retirement planning must start when you are young

5th line of Defense: Invest in yourself.
DON’T ASSUME that you will always be relevant in the work place.

No matter your life stage, staying current on the latest major technology developments and news, both on and off the job, is a crucial way to ensure that you stay relevant.

Explore all avenues: A degree, certifications, pick up skills that you need to develop or learn, attend workshops or webinars, look for a mentor, listen to podcasts, checkout LinkedIn Learning, read about the subject you want to increase knowledge in, and so on.

You get the gist; just never stop learning. Get focused. Be intentional about what you want to stand for professionally and what you have to offer.

 Wish you financial success in 2023!

Larissa Fernand is an Investment Specialist and Senior Editor for Morningstar India. You can follow her on Twitter
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