Are you spending too much? Time for a reality check on financial immunity

Reduce leverage, enhance insurance coverage and size of contingency fund to improve score

In a year marred by the pandemic and consequent job losses and reduction in income, the two leading online retailers managed to clock sales worth a massive $3.5 billion within four days of their respective festive events.

Financial advisors say people may have splurged beyond their capacity. If you wish to do a quick check on how your family’s financial situation, turn to the Financial Immunity Calculator launched by SBI Life Insurance. This is a free tool available on its website.

What the score tells you: A recent survey carried out by SBI Life, in association with Nielsen, showed that over 50 per cent of Indians are not prepared to face financial emergencies. Many are not even aware of their vulnerability. Ravi Krishnamurthy, president (zone 1), SBI Life Insurance, says: “The Financial Immunity Score is an indicator of financial readiness — how well prepared one is to tackle emergencies.”

To understand where you stand, enter information such as income, liabilities, or insurance coverage. The calculator will throw up a score in percentage terms. Higher the score, greater the financial immunity. Says Krishnamurthy: “The Financial Immunity Score is an eye-opener and allows individuals to revisit their portfolios.” Experts say such calculators can be effective. M Barve, founder of MB Wealth Solutions, says: “People may not understand financial ratios. But online tools like retirement calculators or the Financial Immunity Score do give a broad sense of where they stand.”

Parameters on which score is calculated

• Number of family members or dependants that you have
• Household income spent on payment of monthly liabilities like rent and EMIs
• Your monthly income 
• Your and family members’ health insurance coverage 
• Your and family members’ life insurance coverage (term, critical illness, etc)
• Financial impact of Covid-19 on your household
• Number of months family can sustain on existing liquid savings
• Existing categories of long-term investments 
• Whether your nominees/dependants are aware of your existing investments

Note: List not exhaustive Source: SBI Life

Low score: A low Financial Immunity Score warrants immediate corrective action. If you have, so far, been a Do-It-Yourself (DIY) investor, the poor score indicates you have not done a good job of managing your finances and would be better off seeking professional advice. If you already have an advisor, discuss the score and ask the areas you need to work on.

Key parameters: The Score will not tell you the parameters you are weak on, which is why you may need to take expert guidance. Focus on your level of leverage. Those with lower salaries are clearly more vulnerable. “People who have lower salaries should not have more than 45 per cent of their take-home pay as EMI, while those with higher salaries can have up to 60 per cent as EMI,” says Suresh Sadagopan, founder of Ladder 7 Advisories.  

It is imperative to focus on term insurance. It’s best to run the numbers or seek professional advice on this aspect. However, if that’s not possible, the thumb rule is to have a minimum of 10x your gross annual salary (for those over 40), and 17-20x your gross annual salary (for those below 40) as coverage. As for health insurance, a cover of Rs 10 lakh is the minimum a nuclear family should have in these times, while Rs 20 lakh and above (with a super top-up) should put you in a comfortable zone.

Finally, have a contingency fund equal to at least six months’ household expenses, (including children’s tuition, insurance premium, etc). Those working in the more vulnerable sectors should have funds of 6 months-1 year of expenses.