Emergency fund and insurance, ultimate tools to Present Assurance

Emergency fund and insurance, ultimate tools to Present Assurance

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n Money Square post we have seen the basic information of emergency fund and Insurance, let’s understand these concepts in detail.

            In the previous post we have read that Emergency fund reserve is like stored water in dam and reservoir which will help us to face extreme drought conditions, In the same way, the Emergency fund will help us to face the short term financial crisis. Many times these financial crises will impact our Insurance and Investments. The first thing we think in such situations to surrender our insurance policy or to liquidate our investments. But is this right option to liquidate our investments? Which we are investing for wealth creation. Is it right option to solve our short term problems by disturbing our long term goals? No, we should create an arrangement for such situations, so our investments can do their work properly. Let’s take one example for understanding the importance of Emergency fund.

             few years ago I had read one news in newspaper-it was the story of a youngster. He had great academic records, he was always ranker in his school. After he completed his degree from a top university and got a job in the USA with seven-digit income. Further, he had married and settled in the USA. Everything was going nicely. A good job, two children, a good job. They were enjoying their life. But suddenly the bubble in the global economy had busted. That was the Sub-Prime crisis in the USA. Number of big companies collapsed overnight. Many companies cut jobs for surviving in this crisis. He also lost a job in this crisis. From that day his suffering was started. He was searching for a job all day and came home at night with a lot of rejections.  After a few days family could not meet their day to day expenses. His land lower ask them to leave the apartment as they failed payment of rent. He and his wife were very frustrated with this condition and finally  3 days before the date to leave the apartment whole family committed suicide.

            Question is that why had four innocent people lost their life? Could they avoid to take this horrible decision? Here we can understand the importance of the Emergency fund. What if he had maintained an emergency fund equal to his expences of 6 months?  He could get more time to find a solution to this problem. And this is only one news, what about a number of people who suffered that event.

            Today also there is a slowdown in India, in the Automobile and other industries millions of people losing their jobs. In such situations, the Emergency Emergency fund could play a significant impact. It could save our insurance and investments.

Insurance:-

            We can consider insurance as the security of our present for the long term. Many people prefer investment before insurance. Suppose one man saving  Rs 15,000 monthly. He could get an annual compounded return from 12% to 20% according to risk. By the above formula, he could create large wealth in 25 to 30 years for him and his family. What will happen if he faces some mishappening?  Will this assumed investment give to the family? And is that amount that will be sufficient for the family to maintain their standard of living? In such a case, insurance will play an important role.

            We should consider all the above factors at the time of financial planning.we could build big skyscrapers if the foundation is strong, Life and health insurance are the foundation of our financial planning. life insurance will give ous security by which we can live tension-free life and able to take higher risks on investments, which could increase our returns amazingly.

            Many people take insurance for reducing their taxable income. Many people take insurance for saving. But is that the right purpose of buying an insurance policy?no, we should consider different factors while buying insurance. If you have X income annually so we should purchase insurance such that the amount of insurance could generate X income after us. Our family could invest  Insurance amount in fixed income instrument to get returns of 4 to 10% for that purpose. That means if we consider a 5% interest rate then we need to take insurance which gives 20X after our death. So our family could live tension free life.

            We could get different riders along with the base policy. We could buy a term rider to get an additional benefit. We could get an Accidental death rider in which our family will get an additional amount in case of accidental death. we could get a critical illness rider to get a fixed amount on critical illness case.we to have many options in life insurance. In health insurance, we can cover the drain of our pocket in case of a medical emergency.

            So in this way, Emergency fund, and Insurance build the foundation of our financial planning. and everyone should make provisions for that before further proceeding into financial planning.