Nobody is immune to the wrath of an emergency. It can come unannounced in anyone’s life at any point. The best thing anyone can do is to follow the Scout Motto: be prepared. Financial emergencies aren’t hard to prepare for. Buying insurance can cover you against most well-known calamities. For others, all you need is a bit of foresight and financial discipline. Here’s a look at some well-known financial emergencies—and how you can prepare for them.
Income is rarely guaranteed. If you are a salaried employee, you may well be aware of the challenges of holding on to your job. If you’re a businessman, you understand the difficulties in generating regular cash flow. The absence of regular income could upset your finances and make it tough to meet basic expenses such as rent, utilities, EMIs etc. Your family, too, would be impacted by your loss of income. To survive such a situation, you should have an income replacement fund at all times. Such a fund should cover your regular income requirements for at least three to six months (or longer, if possible). This fund should cover all your essential money needs towards rent, EMIs, children’s education, groceries, insurance premium, utilities, etc. A bank fixed deposit is the ideal way to create and maintain this fund. Periodically, you should also take stock of this fund to make sure it matches with your current income and lifestyle. If not, it needs to be topped up. You should not touch this fund for any other purpose but to meet the loss of income.
Disasters, Damages & Repairs
In the blink of an eye, vital assets such as your home or car can be lost. We’re entering the cyclone season, and areas on the east coast should prepare for damage, invariably caused by cyclonic winds and heavy rain. Similarly, a natural disaster may cause heavy damage to your home, property, and vehicles. Luckily for you, several of these risks can be covered through insurance. A comprehensive home insurance plan will cover the property structure as well as the contents inside against financial damage from natural calamity, robbery, theft, man-made disasters, etc. You can also individually insure assets you consider valuable and damages to whom may cause you major losses. Vehicles, too, can be covered under comprehensive insurance plans. While a third-party insurance is mandatory by law, you can consider an all-inclusive coverage, especially if you live in areas where natural disasters such as floods occur frequently.
Many people do not want to think of a situation where a loved one becomes gravely ill. Which is why they do not want to prepare for such a situation. And this leaves them poorly equipped when the emergency actually arrives. Hospitalisation for illness, surgery, or the treatment of a critical illness such as cancer can set you back by several lakh rupees. Worse, prolonged healthcare issues will drain you slowly over an elongated period of time. It is important that you and all the members of your family are insured against such situations. If not, start off with a basic health insurance cover of Rs. 5 lakh to Rs 10 lakh. Depending on your health risks and age, have a top-up policy of Rs. 10 lakh to Rs 20 lakh more. This coverage will make sure that your family’s wealth is not drained while dealing with a health emergency.
Preparing for the ill health of a loved one is tough. Thinking of their mortality is tougher. However, the primary breadwinner has the responsibility of safeguarding his family against his own death. You must discuss and plan for a situation where you may pass away before your time, leaving your dependents financially vulnerable. This process requires you to determine your family’s long-term money needs—such as the payment of a home loan, funding of a child’s education, and the surviving spouse’s money needs—and then buying the appropriate insurance policy to cover what your savings and investments may not. It is best that you cover your risks with a term insurance plan, which offer large coverage at low premium costs compared to traditional insurance plans.
What if a friend or a relative is going through an emergency, and you want to help them? Saying no to your loved ones in their time of need is a hard call. Which is why you must always ensure your own financial stability before helping anyone. You may have your own commitments to meet, such as EMIs, rent, healthcare etc. To counter this delicate situation, you may consider preparing a friend fund devoted solely to this one requirement.
The author is CEO of BankBazaar.com