It is all over the place that Mumbaikars should be alert towards protecting themselves from such unfortunate incidents, the one which happened on July 13 (the serial blasts). While stepping out of Dadar station next morning, the thought crossed my mind whether those who have injured or died in the incident, what will happen to their families, financially? Besides being in the emotional distress, they will be in financial stress too to deal with this untoward incident.
Most of us being ordinary citizens can’t do much than being more vigilant about surroundings and inform police in case of any suspicious activities around us. But more important is that we should safeguard our family’s interest in such a scenario.
It is a fact that emergencies like this can strike any of us at any given point of time. It can be a terrorist activity, any major disease or may be job loss. In all these cases, income for the households may stop temporarily or even permanently. Every household should prepare themselves well to handle situations like these and make sure that the family doesn’t have to go through any financial strain in such times along with the mental trauma which anyway they will have to go through.
As a first precautionary step, every family should have at least 3 to 4 months of expense amount kept aside which should be used for the purpose of contingency planning. This expense should include the insurance premiums, EMI for all the running loans along with the regular household expenses.
For example lets take example of a household with monthly cash flows as follows –
Net Household income – Rs. 40,000
Regular household expenses – Rs.15,000
Lifestyle expenses – Rs. 2500
EMI for Home Loan – Rs. 10,000
Life insurance premium – Rs. 3,500
Mutual funds SIP - Rs. 5,000
The amount needed for the family at the time of emergency would be Rs. (15000+10000+3500) = Rs. 28,500 per month hence there is a need to maintain a contingency fund. Please note that lifestyle expenses and mutual fund SIPs should be kept out of the purview of contingency fund. Keeping this in mind, an amount of at least Rs. 90,000 - 1.25 lakhs should be kept aside as contingency fund. This fund should be kept in savings bank account with a sweep-in and sweep-out option to earn better interest rather than letting them be in your regular savings account. This fund should be used only in case of emergencies. Also, you can keep this fund aside in a liquid fund, but before doing that, you should remember that this is slightly riskier as compared to a bank’s fixed deposit. Contingency fund should be kept only in investment assets that have minimum risk and can be liquidated easily.
The next step after creating a contingency fund is to buy enough insurance for your self. Please remember that hospitalization expenses due to terrorist activities are treated as accidents under health insurance policies and are covered accordingly by the insurance companies. There is no right or wrong answer to how much health insurance should one take, but go for the maximum health insurance you can afford. In metropolitan cities we recommend that one should take individual health cover of at least Rs. 3 lakhs for each and every family member. Like if there is a family of 4, then each and every family member should have Rs. 3 lakhs cover each which means a cover of Rs. 12 lakhs for the entire family. Over and above that, one should buy hospital cash plans to make sure that the loss of income due to not being able to attend work is also taken care off. Hospital cash plans should be taken for the earning members of the family.
Life insurance is a requirement only for the earning member of the family. How much life insurance one needs is a very sophisticated calculation and one should get advice on the same through their financial advisor. But by rule of thumb, a working individual should have a life insurance cover of at least 12 times of the annual income.
While buying any insurance policy, please make sure that you have mentioned each and every detail, which is being asked in the proposal form to the best of your knowledge. This will make sure that you or your family doesn’t have to go through any difficulties at the time of claim for both health and life insurance policies.
Creating a good contingency fund and buying enough insurance for yourself and your family are the most important steps in financial planning. These steps are like the foundation of the building. The future of the building completely depends up on the foundation. Once you have created enough contingency funds for your family and covered all the risks, which you and your family are exposed to, you can start investing for all your future goals.
Live a happy & safe life, Financially!
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