Even though the COVID-19 global pandemic began more than two years ago, we are still feeling the effects and disruptions in our lives. If we've learned anything from COVID-19, it's that the only thing certain in life is uncertainty.

It is a fact that unexpected events occur. You can sit down and make all sorts of financial plans and budgets but life, on the other hand, has its way of striking. Whether it's a medical emergency, a major home or vehicle repair, a death in the family, or any other unexpected event, your finances are thrown out of the window. These situations can be emotionally as well as financially draining. Even the most meticulous planners can be caught off guard by an unplanned or unprepared event.

There is no way to predict the future, but the best way to deal with them is to be prepared for the unexpected ahead of time. Just as you should adjust your plans to accommodate unexpected weather, you should also have a financial backup to accommodate unexpected expenses. Here are five tips to help you deal with unexpected expenses and be better prepared for a rainy day.

1. Tighten your belt

As a general rule, for wealth creation and financial freedom, we need to save aggressively over a short period of time. People looking to retire early too need to cut expenses and save more in a short time. Cutting down on your expenses becomes avoidable if you feel that your financial situation is not good and if you feel that there are bad times ahead. To stay prepared for such a situation, one needs to cut back on non-essential and discretionary expenses. Examine your spending habits and make a note of any such expenses you could forego. It will make you save more and make your cash last longer during a crisis. Frugality, minimalism and short-term sacrifices, to the extent you feel comfortable, will surely pay off in the long run and save you in your rainy days.

2. Set up an emergency fund

The primary step in preparing for a rainy day is to set aside a sufficient emergency fund. When unexpected expenses exceed your monthly budget, an emergency fund can help you stay afloat. 

There is no universal measure for emergency funds. As a general rule, save at least three months' worth of your regular expenses. This amount of money cannot be saved overnight. The trick is to start saving small amounts regularly and consistently so that you can accumulate your desired amount over time. Even if you can only save a small amount, it will give you a sense of security if you need money right away. To avoid being tempted to spend your emergency fund, keep it in a separate savings account.

3. Get adequate insurance coverage

It is easier said than done to protect your loved ones and prepare for the worst-case scenario, but it is critical in today's world to be prepared for the unexpected. It is vital to ensure that you have sufficient insurance coverage for all possible scenarios. To help mitigate the financial impact of any unexpected event, people of all ages and income levels should purchase insurance policies as required, covering the different risks that they are exposed to. This includes the risks of the 4 Ds' - death, disease, disability and damages. 

Apart from life insurance and health insurance, one must also explore other insurance covers like personal accident, critical illness, travel insurance, global health insurance, etc for personal coverage. In addition, vehicle insurance with comprehensive coverage, home insurance, shopkeepers insurance, fire & marine insurance, professional indemnity, etc can also be explored on a need basis.

4. Have a passive or secondary income

Sometimes, the salary from your primary job is not enough to make ends meet. So, having a side hustle or a passive source of income pays off. As a result, you can save and invest the money you earn from them to create wealth, an emergency fund or to fund your discretionary expenses, without affecting your monthly budget. It is an excellent way of improving your financial security and hedging against your primary income source. Having multiple income sources can be a boon in times of crisis and it is something everyone should aspire for. 

5. Have low liabilities 

It is always better to have low liabilities and debt, regardless of your financial situation. As a general principle, your monthly debt repayments, or EMIs, should ideally be lower than 30% and never more than 50% of your net income. Having too much debt can lead to a cycle of overwhelming stress and the inability to save for future financial security. With credit easily available, most of us would be tempted to fall into the debt trap, spending more on non-asset creating, personal and consumer loans, at the cost of future wealth creation. In times of financial difficulties, your debt burden will be the primary cause of high stress on you and your finances.

Summing Up

You don’t require any crystal ball to be prepared for unexpected events you couldn’t have predicted. You don’t need to know where they will occur, or even what they do, to protect your personal finances and safeguard your financial goals. The above things can help you not just tide over bad times and situations of financial stress but also prepare you to face uncertainties in life with confidence. As the new year starts, let us step up our finances and indeed our financial objectives and behaviour and set the right tone for the rest of the year. 

Saving and investing is a big part of your financial plans. Sometimes, even planning for your cash outflows becomes a vital component of your financial plan. If you are looking for regular and predictable cash flow from your investments then the automatic choice for most of us would be the traditional avenues like bank FDs and postal deposits. However, the falling /low-interest rates on these schemes and inflation have made people worry about their future. The big questions are, will the cashflows it be sufficient and how long will the investment last?

Against this backdrop, Systematic Withdrawal Plans (SWPs) offered by mutual funds are increasingly gaining popularity and can be a great choice for investors looking to generate cash flow from their investments at a regular frequency. In this article, we shall dig deeper to know more about SWPs.

What is SWP?

Most of us are aware of SIP (Systematic Investment Plan) for creating long-term wealth. The SWP (Systematic Withdrawal Plan) is like the reverse of SIP wherein instead of investing money at regular intervals, investors withdraw/redeem a fixed amount from a scheme in an automated way.

The SWP serves as a perfect tool for planning for that phase in your life where you are dependent on cash inflows, for whatever reason. Here, the investor would usually make an initial investment in the chosen fund and then plan for SWP, either immediately or starting at a later date. The investor has the flexibility to customize the amount, the withdrawal frequency and the period of withdrawal - fixed instalments or till the balance is available in the fund. The investment lying in the fund would continue to grow, generating wealth for the investor, helping beat inflation and making sure that the fund lasts longer and the SWP continues for a longer period of time. The SWP is also a smarter and more tax-friendly way of withdrawing money. 

When can SWP be used?

1] Retirement planning /creating own pension 

A very common use of SWP is in retirement planning. Here, a part of the retirement corpus is invested in a hybrid scheme, with a mix of both asset classes - equity and debt, giving the best of both worlds. The equity is for the long term, for that extra boost of growth and the debt is usually for short-term safety. The choice of the fund category and scheme, however, depends on your needs, the risk profile, and the investment horizon, before the start of SWP. 

2] Creating a secondary source of income

A SWP can also be started in financial situations where there is a temporary need to supplement your income, like the recent pandemic. If you have adequate investments, an SWP could be used to meet your temporary financial needs. Also, instead of withdrawing a big amount in one go, one can smartly use SWP to maintain some stability in your spending. Note that in times when you have surplus cash inflows, aggressive savings should be done using SIP instead of withdrawing with SWP. 

3] Meeting specific cashflow needs for someone 

Another smart use of SWP would be in scenarios where you invest and dedicate a corpus for a specific objective/regular expense and an SWP is created to finance the same. The corpus would keep growing slowly while small withdrawal amounts would be credited to the bank account and from this, the intended expenses would be met. Even these expenses can be automated to ease your life. As an investor, you would only need to keep track of the fund balance from time to time and replenish it, if required. There can be many scenarios where such an approach can be used in financial planning. A few examples are cited below.

• Investing on behalf of children and then having SWP for education fees and pocket money 
• Investing on behalf of the wife and then having SWP for monthly household expenses, etc.
• Investing on behalf of dependent parents and then having SWP for meeting their expenses 

The right withdrawal rate:

This is an interesting question. What should be your sustainable or safe rate of withdrawal in order to make sure that your fund lasts for the required period of time and even longer? A complementary question would be, what should be my investment corpus to have the desired stream of money last for the required period of time? This is in fact at the heart of everyone trying to retire early and for those who are reaching retirement soon. 

The withdrawal rate is the percentage of corpus you intend to withdraw every year. So a 4% rate on a corpus of Rs.25 lakhs would mean that you are withdrawing Rs.1,00,000 every year (Rs.8,333 monthly). Obviously, the lower the withdrawal rate and the higher the investment corpus, the better. Also, the expected returns from the fund also matter in replenishing itself and growing to finance withdrawals for a longer period of time. While a rate of up to 3-4% may be considered safe, a lower rate can help account for market volatility, uncertainties and lifestyle improvements. The withdrawal rate should be as per your need - a higher rate would mean that your corpus gets exhausted early and a lower rate would be insufficient.

Benefits of SWP: 

a] Rupee Cost Averaging: Just like SIP bring discipline in investing, SWP brings discipline in withdrawals. You also benefit from rupee cost averaging with SWP, since a fixed amount is redeemed on a regular basis and one is not too much concerned about market volatility. With SWP, redemptions will be spread out evenly and it will protect you when redeeming a large amount at a time when markets are low. 

b] Tax Benefits: The amount withdrawn in an SWP consists of the original investment and the capital gains, on which there is tax liability. The capital gains tax is payable only on the portion withdrawn, unlike traditional investments where the entire interest generated on the investment is taxable on an accrual basis. Further, there is no TDS deduction on SWP withdrawals. With mutual funds, you can enjoy better tax treatment compared to traditional investments. 

To Conclude

SWP is an efficient and optimal way to plan for regular cash inflows. However, one must be careful and keep the financial objectives in mind. Remember, unplanned and unnecessary SWPs can cut short your wealth-creation journey. Get in touch with your mutual fund distributor today, to plan the right investment strategy, suited to your needs. Happy investing!

Setting financial goals is the most important aspect that every person should think of. It is an important step towards becoming financially secure. Whether it is related to career, marriage, retirement or anything else, a clear awareness of resources and thorough planning is necessary. A goal sets you off in a certain direction and crystallises your aims, making it easier to visualise something that could be very far away, giving you focus and motivation.

But, most of us completely ignore this part and do not set financial goals due to a lack of clarity in financial planning. If you don’t have any specific financial goal to work on, you’re more inclined to spend more than you should. Later, when you get unexpected expenses, you might get stuck in the vicious cycle of loans. Eventually, you feel like you never had enough cash to save.

Even the most prudent person can't prepare for every crisis, as the world learned in the pandemic. What thinking ahead does is give you a chance to work through things that could happen and do your best to prepare for them. Financial goals will help you change your mindset, your habits and your life. You’ll start to see how every decision you make matters to your greater financial health. Knowing your goals enables you to work out roughly how much money you might need to save in order to achieve them.

It can be hard to narrow down which financial goals are right for you. Here are some common, must-have financial goals that everyone should make a priority in their lives.

1. Emergency Fund: Emergencies can derail our financial health if we’re not adequately prepared for them. Maintaining an adequate emergency fund will give you a stronger sense of security and ensure that emergencies are easier to manage when they strike as you have a cash reserve to fall back on, if necessary. These funds would help you tackle unexpected events such as job loss, a large medical expense and so on. It is advised that your emergency fund should be at least three to six times your current income.

2. Comprehensive Insurance Umbrella: Do you have a family who is dependent on your income? Do you want to be financially protected against risks to life and health? If so, you need to pay attention to your insurance needs. Having insurance is another important financial goal that will save you and your family from unexpected financial setbacks. It is also important that your cover /protection must be adequate for the purpose it is meant for. The must-have covers to consider are - life, health and personal accident. Health protection should be there for every individual in the family. Beyond this, you can also explore products like critical illness, top-up /super top-up health covers to enhance your health protection and a comprehensive home insurance. All this put together acts a big umbrella against the most common uncertainties we face in life. 

3. Being Debt Free: Debt makes it almost impossible to effectively save for the future as a major part of your income will go on paying off debt along with the interest. But, not all debt is the same. Debt taken for depreciating assets and for consumables /expenses /holidays, etc are especially bad and a strict no-no. If you can’t afford to pay for such expenses as a down-payment, then probably you don’t deserve it. Before deciding to repay loans, identify the type of debt i.e. good debts and bad debts you have. Good debt like home loans can help you achieve goals and tend to have lower interest rates. Bad debt like credit card dues, car loans, personal loans drag down your financial situation with high interest rates. So, focus on paying expensive debt first to better your financial standing. This allows you to save more money and redirect funds to other financial goals. 

4. Retirement Planning: For most of us “retirement” could mean relaxing at home or enjoying life with passions. But, are these things possible without money and peace of mind? No, right. So, planning and saving for retirement is paramount. For most Indians, their kids are like their retirement planning. Is it fair and wise? To have financial independence and self-sustenance in retirement, regular savings is a must. Generally, people get serious about retirement planning only when they are about to reach their 50s. It’s like running a marathon race and getting serious about winning when you enter the last mile. Start investing for retirement as early as possible. It should have started right when you started earning. The sooner you plan for your retirement the less you need to save and power will be the time available for power of compounding. When you start saving early, you have sufficient time to accumulate required funds for retirement. Thus, the task of building a large retirement corpus for your retired life becomes just a bit easier.

5. Budgeting: More than a financial goal, this is like a financial habit or behaviour. No matter how small the income or expense, you should keep track of it. Many people tend to spend without thinking, which results in overspending, financial stress and hardship. Creating and adhering to a budget will allow you to track everything you spend and question yourself where did you fall short in your saving goal and where is your money leaking through your fingers. This will also help you to avoid unnecessary expenses and become financially smart.

The Bottom Line

Reaching a point of financial well-being in life has nothing to do with luck or magic. It’s simply a matter of setting should financial goals and having a concrete plan as to how you will achieve them. By setting (and achieving) the above financial goals you can make the right start and before you move on to the more in-depth exercise of identifying and planning for other life goals. Till then, lets’ at least focus on these five must-have financial goals in life. 

As you grow in life your needs and wants also grow. When you get your annual salary increment, the first thought always tends to be about your increased spending and borrowing capacity. With more money comes the added temptation to spend more and upgrade your lifestyle. This is human nature to want more when we have the means. Rarely does one think that with increased income, you can save more too! Almost everyone tends to ignore regular increases in investments and savings in the same proportion as your income growth.

While you may have allocated a fixed amount for investments such as mutual funds via SIPs, it is also important to increase the amount to match the hike in your income. More money in your hands not only means an increase in the ability to spend. It also means the responsibility to save and invest more.

However, it would be an additional task to increase your investments every year manually. The answer to this is the top-up or step-up facility available for SIPs. A SIP top-up allows you to increase the SIP amount at a pre-determined interval. For most fund houses, the interval is half-yearly or annually. The SIP top-up amount can be specified as a fixed amount at the set frequency over the original SIP amount. 

Wealth Creation with Top-Up:

Increasing your mutual fund SIP even by a small amount will help you to make more money in the long run. Let’s see the comparative results for a period of 15 years and an assumed return of 12%. 

As is visible, the wealth created more than doubles for the given horizon. Even small changes in the top-up amounts can lead to significant impacts in longer investment horizons. 

How Top-up SIPs can be helpful to you?

Some of the significant benefits of stepping up your SIP amount or increasing them periodically are as follows:

1. Convenient way to fight inflation: Inflation, or rising prices, erodes the purchasing power of our hard-earned money. A fixed SIP over the years means that you are saving less and less, as the value of money decreases. Further, the amounts that seem substantial to fulfil a financial goal today may not be a few years down the line as your status /living standards improve. Top-up SIP helps you counter inflation and keep you on track to match the impact of inflation on your overall financial plans. It is advisable to raise the SIP contributions equivalent to the inflation rate or more, just to maintain the real value of savings with time. 

2. Achieving bigger and faster goals: Regular growth of SIPs can help you reach your financial goals faster as you can accumulate the target amount earlier than the planned maturity date. The more you invest, the more you can accumulate with the power of compounding. Further, If your goals have a fixed maturity date, then you will have a higher accumulated wealth giving you more choices. 

3. Safety net for lower returns: At times, it may happen that the markets haven’t delivered the expected returns and/or at the time of goal maturity, the markets are in a bear phase. During such times, if you have increased your SIP more than initially planned, then it is likely that this risk is reduced. With additional wealth created with that extra top-up /new SIPs, you will have a margin of safety for market volatilities.

4. Better use of your increased income

When you get an annual increment, you may not immediately think of increasing your investments. But, if you top-up your SIPs annually by the expected increase in your income, you will automatically make prudent use of part of your risen income. Auto debits ensure you save and invest regularly. The proportion of your savings grows along with the rise in income and cost of living and maintains your overall savings ratio.

How to boost your SIP?

There are two ways to step-up your SIPs every year. 

1. Start a fresh SIP and decide how much more money per month you’d like to invest. You can do that either in the same scheme (the SIPs won’t get clubbed) or in another scheme in the same folio.
2. If you have an existing SIP and you want to increase your contribution, very few fund houses allow you to do that midway. However, most fund houses allow you to decide the top-up amount right at the time when you start your SIP, before you pay your first instalment. So, it is better to opt for a top-up SIP while starting your SIP.

Conclusion

SIPs help you become financially disciplined through regular investments. SIP top-up further ensures that you save and invest your disposable income to keep pace with inflation and growing income. It helps you build a superior corpus faster and accelerate the journey to reach your goals sooner. As a habit or a practice, always try and have top-up registered with your SIP the next time you start one. Every extra rupee saved, will add more towards your financial well-being.