The Securities and Exchange Board of India (Sebi) has introduced a new tool on its investor education web portal to equip and empower people to make robust financial plans for themselves. Developed by M. Pattabiraman, a professor at the Indian Institute of Technology (IIT) and founder of Freefincal, the financial health check tool aims to assist individuals in assessing and improving their financial well-being.
This tool poses a series of questions to users, offering tailored recommendations based on users' responses. It prepares a final report after you have answered 12 questions posed by the tool. Let's break down what are key checks to navigate your financial future:
After asking if you have any dependents, it asks whether the users have life insurance coverage at least 15 to 20 times their annual income. If the response is negative, the tool suggests purchasing a term life insurance policy with dependents as nominees. It is vital to ensure financial security during an unexpected tragedy.
Then, it inquires about health insurance coverage. Users without health insurance are encouraged to consider purchasing a personal health insurance policy ranging from Rs 5 lakh to 50 per cent of their annual income, whichever is higher. For those with employer-provided health insurance, the tool advises adding a personal health insurance policy to enhance their coverage. Users are asked about their familiarity with their health insurance policies features, terms, and conditions and advised to comprehend them to facilitate smooth claims processing.
The tool assesses how well users can handle unexpected expenses. If users cannot do so, it recommends building an emergency fund (e.g. a savings bank account other than your salary account or main account), which should be at least six times their monthly expenses. This fund can be a safety net for unforeseen financial emergencies.
In cases where users do not pay their credit card bills in full before the due date, the tool warns them, "You will be charged an annual interest of about 40 per cent or outstanding". It suggests seeking assistance from a credit/debt counsellor or a registered investment advisor to address
potential spending issues. For those with personal or unsecured loans, the tool advises closing these loans as soon as possible due to their high-interest rates.
The tool asks if the total EMI payments for loans exceed 40 per cent of the user's monthly take-home pay. If this threshold is crossed, the tool recommends reducing the debt burden and exploring options for refinancing with a Registered Investment Advisor (RIA).
Retirement Financial Planning
The tool encourages budgeting to manage needs and wants effectively. It stresses calculating the corpus needed to retire comfortably, as delaying it can increase costs by 10-12 per cent yearly. Those who have not invested enough for retirement are urged to start immediately. Sharing investments with dependents is advised so that they do not suffer if you are incapacitated or unable to manage your money. Adding nomination details is crucial, but creating a Will is recommended for precise asset distribution, with nominees (when possible) aligning with the will's beneficiaries.