People who start saving for their future needs through investments often wonder the important things they need to do when they start investing. Interestingly, the answer lies in doing things that should precede investments in the first place. We are talking about making provisions for managing risks that damage your family finances be it risks to life, health, income or your assets such as home and car. If your wealth is a building under construction, the financial products that help you manage the risks are what form the base or foundation of the building.
Why risk coverage needs to precede investing - In daily life, you are bound to face emergencies that require significant amounts of money. In the absence of a buffer, even with outperforming investments, you would end up making premature exits, often at a loss. Worse, if you start investing you or your family wouldn’t be able to make for lost time to make your money grow enough to meet needs like child’s higher education. Let’s assume your investment generates 8% annually and you save Rs 5,000 every month, your money grows to Rs 3.67 lakh in 5 years. If you liquidate the investment then, instead of saving Rs 28.61 lakh in 20 years, you get to save only Rs 16.98 lakh in next 15 years. This means you save Rs 11.63 lakh less. Things can be worse. In the worst case of your absence, even the option of making a fresh beginning will not be available to your family.
How emergency funds secure your wealth - There are two ways in which you cover the risks. Buy insurance for all the risks where insurance is available and for the remaining, have a buffer or an emergency fund. The two would help you absorb much of the financial blows emergencies deliver. For exigencies like uncovered health expenses and temporary job loss, having an emergency fund helps since your investments are spared. Ideally, 3-6 months of expenses should suffice with the money being in liquid investments such as savings account linked fixed deposit which allows easy access to the money.
How life insurance helps protect your wealth - Insurance forms a critical part of the protection that you need to provide to your wealth to ensure that it grows unhindered and you comfortably meet future needs. Here, life insurance plays a critical role. You need ample life insurance to ensure that it takes care of your family’s present and future needs even in your absence. Typically, in early work-life, you are financially most vulnerable. This is because you don’t have the assets that people build up over their work life. This means that in the case of an emergency, your family will not have enough to fall back on. This makes a compelling case for adequate life insurance which can provide a financial protection for your family even in your absence. Once you have the protection from life insurance, you can confidently make investments. This becomes especially helpful for higher risk, higher reward investments like equities which, while though subjected to short-term turbulence, provide high growth of investments in the long term.
To conclude, if an investment was to be a journey and you were to be the driver; like a seat-belt in a car and a helmet in a two-wheeler, you would need to protect your finances with life and other insurance, before you get started, to a safe journey. Online term insurance plans like HDFC Life Click 2 Protect Plus offer the desired cover at nominal premium rates.
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Updated Date: Mar 18, 2016 12:50:34 IST