Sometimes Life can be unfair to us. Our loved ones might fall sick or we might lose our job or we might meet with an accident after which we have to sell our car in the scrap market. All of these situations have emotional as well as financial impact in our life. In this article, we will talk only about financial impact, which is ignored by many of us. To some extent we can avoid emergencies, but we should also be prepared to reduce the impact when such catastrophe happens. We save money for our dreams, for our kid’s future and if we do not act to protect those savings, then we are doomed.
In the very famous book “The Richest Man in Babylon”, author has mentioned one principle as protecting your wealth. He has written that it is very important to protect what you have earned otherwise you keep on earning, but will never be able to build wealth. We always feel that we are ready to meet any emergencies or we assume that we are among those lucky ones who never face any problem in life. In either case it is always good to review below steps that I have learned over a period of time. Below steps if followed will reduce the financial impact to great extent and we can focus on other areas.
Emergency fund – If you have studied Financial planning anytime, then you might have noticed that every financial planner suggested creating an emergency fund. Emergency fund is nothing but savings equal to your 3 to 9 month’s expenses depending on your job or business. If you think that you might take a longer time to get another job, then go for 9 months. It is very important that you have accounted every single expense. After that, invest this saving in liquid investment, which is easily accessible to you in any situation. However, this does not mean that you use this fund to buy a new car (unless old one broke down) or go for a luxury vacation. The name itself explain the use of it. You do not touch it unless you face any financial emergency. This will give you peace of mind and will not affect your other savings.
Mediclaim – Nowadays mediclaim is almost compulsory. People have started realizing its importance, but still the problem is that they go for less cover. I cannot say how much cover you should take, but take an idea from the current hospitalization expenses and we all know that it is increasing every year. Mediclaim will allow you to focus on the health of your family member instead of worrying about expenses. Many mediclaim also offers cashless which makes your life easy as you do not have to touch your savings. If possible, then go for group mediclaim from office.
Life insurance – Nothing can replace the life of a loved ones emotionally. But for financially, you can minimize the impact by taking the life insurance cover for the earning members. Normally it is advisable to take the cover for at least 10 years of expenses. It varies from person to person. Also, consider any loan outstanding while deciding the cover. For, e.g. If your expenses comes to 40 lacs and housing loan is of 50 lacs then take the cover of minimum 90 lacs. The most important thing is to take the Term insurance. Never combine investment with life insurance. They are two different matters.
Investment in liquid assets – I have already mentioned it in the emergency fund, but it is crucial and hence repeating the same. Invest some amount in liquid assets to meet any emergencies. A liquid asset is one which can be converted in to cash easily on a short notice without losing value. All those assets which do have these three fundamental characteristics are termed as liquid assets. Examples include current account, savings account, marketable securities, etc. Avoid investing emergency fund in illiquid assets like property, car, antiques, private company interests and some types of debt instruments.
Taking care of yourself – We can avoid many problems only if we take care of ourselves. If we take proper diet and follow some exercise, then we can save ourselves from visits to hospitals. You can include a walk in your daily routine or you can listen to guided relaxation music. If you give 15 to 30 minutes every day for your body then you will feel fresh, energetic and minimize the expenses.
Get organized – Once everything else in place, it’s time to get organized for all your documents. Imagine a situation where you have arranged for everything mentioned above, but no one except you is aware of it. If anything happens to you, then your family member would not be able to take benefit of it. Buy a folder and create divisions for different documents like one for mediclaim, one for investment and one for life insurance. Also, create an excel file with all the details and mail it to your spouse or any other closed ones. This will help you and your loved ones to find documents easier when it is most needed.