The amount allocated towards emergencies should be sufficient to Wave over a cash crunch and deal with contingencies.

Take steps before you start investing

Steps to take before you start investing


Before you start investing take 3 critical steps


1. Create an Emergency Fund

An emergency fund implies creating a kitty that's readily available in case of a health-related emergency such as hospitalization, dental operation, etc. or any other contingency like a job loss. The sum allocated towards emergencies should be sufficient to wave over a cash crunch and deal with contingencies. It's a good idea to allocate about 3-6 months' salary/ earnings for emergencies. If you are single, you can allocate a lesser sum (a month's income); if you are married, you must devote a greater amount (six months' income if married without kids; 12 months' income if married with children). Invest your contingency budget in liquid investments (which can be readily and quickly encashed when an emergency arises). Suitable investment avenues are savings accounts, flexible fixed deposits, liquid mutual funds, etc.. Investing these amounts would make sure they earn some returns till they are required.

2. Seek protection via insurance

Life insurance is crucial to protect your dependents if something unfortunate were to happen to you. This will make sure that your nearest and dearest are financially secure in case of any eventuality. Insurance companies offer two kinds of coverages -- pure risk cover and investment-cum-risk policies. Insurance needs to be used just for protection and should not be combined with investment. Investment-based policies such as Unit Linked Insurance Plans (ULIPs) and endowment programs are expensive and provide a much lower amount of cover to the identical amount of premium as compared to term plans.

To calculate the amount of insurance you need to purchase, use the'income replacement' method. Inside this method, multiply your present post-tax yearly income by the number of years left for retirement to compute the amount of insurance you have to have. For instance, if your post-tax yearly income is Rs. 10 lakh and you also have 25 years left to retirement, the insurance cover required is Rs. 2.5 crores.

If you're purchasing insurance to your wife and/or children, it would make sense to enroll the policy under the Married Women's Property Act, 1874. Once you do so, the policy proceeds cannot be used to pay your debts or form a part of your estate. To put it differently, the policy proceeds are solely meant for your own wife and kids. Assessing the coverage under this Act assists prevent any future litigations among family members, creditors, etc..

3. Get Health Cover

Getting health insurance is crucial to ensure that you are not saddled with huge expenses in the event of expensive health treatment/hospitalization. Buying health insurance when you're young contributes to lower premiums and minimal odds of rejection of your application. If you are a corporate worker covered with a corporate health plan, purchase extra health cover as you may drop the corporate health cover in case of a change in job. Choose a plan that offers coverage for a broad selection of medical ailments and expenses (hospitalization, pre and post-hospitalization care expenses, daycare process expenses, etc.).

Make sure that all family members' needs are insured in the health plan. Choose a household floater health plan instead of individual health programs. In the former, there aren't any sub-limits member-wise. According to this, in individual plans, the amount available to the relative will be limited to the cover available to him specifically. If you presently have a wellness plan, review it to ensure that you have adequate cover for yourself and your loved ones (at least Rs 1 lakh pay per relative ). Add a crucial illness rider for your strategy. In the event of critical illness, once the disease is diagnosed, the insurance company pays out the claim amount no matter whether treatment/hospitalization is necessary or not. Pick a health program that provides lifelong renewability. Make sure the health plan's network of hospitals and doctors includes your preferences. Pick an insurance company that pays out a greater amount of claims; additionally, select a cashless claims coverage (the insurance company makes payment directly to the hospital) as against reimbursement plan (in which you need to make payment into the hospital then seek reimbursement from the insurance company). Assess the preexisting disease clause (the waiting period until the coverage covers a preexisting illness; a lower wait period is preferable).

Health plans generally have sub-limits for every expenditure (e.g. a limit on ambulance expenses, room lease costs, etc.). Look for a policy with greater sub-limits, or rather, no sub-limits on individual expenses. Some health plans require you to cover a particular amount in the event of hospitalization. Assess this clause to comprehend just how much you have to set aside for this. Go the exceptions (illnesses that aren't insured by the policy) to be aware of the costs of illnesses you will have to bear. Buy a distinct health plan for older family members because insurance companies typically impose certain limitations on coverage for seniors.

As soon as you have taken care of those 3 important aspects, you can then consider starting your investment travel.