FINANCIAL PLANNING FOR AN EMERGENCY

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Job loss, loss of health, death are a few of the instances which were quite common during this pandemic. If this pandemic has taught us one things, it is that no one is immune to any type of emergency. So how does one deal with emergencies? Several individuals rely on their credit cards to get out of this sticky situation. Others depend on loans and eventually fall into the vicious cycle of debt trap. But, is it the ideal way? We’d like to believe it’s not. Read on to understand how you can plan better for emergencies.

What is an emergency fund?

An emergency fund is a corpus that helps investors during exigencies in cases on an unexpected expense. It acts like a financial net and supports an individual against any unanticipated situations and  financial needs. As an investor, you can use it to pay for your immediate needs such as unavoidable household expenses, education fees, health care cost etc. According to the thumb rule of investing, an emergency fund should comprise of at least three to six months of one’s living expenses. You might allocating funds more than six months, if you are an entrepreneur who does not enjoy a fixed income, or the prospect of job loss is high, or if you have serious health issues.

Here’s how you can avoid a financial crisis:

Build an emergency fund

If you are wondering where to invest money, there are different types of investment you can consider. For instance, since your emergency funds must be highly liquid so that you can easily liquidate your money during an emergency, avoid investing in investment options that have a lock-in period. Liquid funds are a safe bet to park your emergency funds.

Purchase health insurance

Abrupt poor health could mean that money might unnecessarily get diverted to cover up medical costs. So, make sure to have a life insurance in place, and regularly pay its premium. Even if you have a health insurance premium offered by your employer, consider topping it. A comprehensive health insurance plan protects loads of money by covering expenses such as pre-hospitalisation and post-hospitalisation, apart from hospitalisation charges.

Buy a life insurance

Life insurance is vital to ensure that your families are secured, specially during times when you are not around to take care of them. How about mixing your life insurance needs with tax-saving investments? With Unit-Linked Insurance Plans (ULIP) you can get both life insurance and tax-saving attributes in one financial product. A part of the corpus is invested in life insurance policies, while the remaining is allocated to investments in preferred investment options.

Most of the times, an investor’s financial planning goes to waste when an investor is not cautious in choosing the right investment product for their portfolio. The world of investing does not follow the concept of “One shoe, fit all”. So, make sure that you invest in mutual funds solely after assessing your financial objectives, risk profile, and investment horizon. Now that you have understood the importance of investing and creating an emergency fund, get right to it. Experts preach that one should revisit their emergency corpus every now and then and top it up with the shifting financial needs. Happy investing!