Hold On! You Might Want To Read This Before You Invest Your Valuable Money.

Investing your money is an exciting and rewarding journey, but it is still feared because of the risk of financial loss it carries.

What if I lose my money?

What if I am not able to withdraw it when I need to?

What if some eventuality happens?

So, before beginning your investing quest, this fear of the unknown should be defined and mitigated.

In this article, we will analyze and prepare ourselves financially for most of the unexpected events so that there is no need to withdraw our investments before they yield results.

Note: The Financial Instruments I will use to describe these concepts principally belong to my country, India. However, similar instruments exist in most other US markets.

1. Emergency fund

Uncertainty is the most haunting of realities, so we begin our discussion with a discussion of general emergency.

As the name suggests, an emergency fund is a fund for May Day. It ensures you have money in hand for your basic needs in the face of any unforeseen financial emergency, such as if you don’t work, have ill health, or make a job switch.

Basically, this fund ensures a year-long buffer in any situation without an active income.

Photo by Josh Appel on Unsplash

However, we don’t try to beat inflation in this fund as its objective is NOT wealth creation. Any returns are a welcome bonus.

Computation

Figure out your household’s monthly basic needs(including rent, electricity bill, and groceries) — just the NEEDS, NOT THE WANTS.

Let this figure be x. A typical emergency fund should last 6 to 12 (recommended) months. So, your total emergency fund amount should be 6x to 12x (preferred).

The big question: Where to put it?

We need to have access to this money at all times. Hence, I recommend a split of 10% cash, 20% savings bank account, and 70% liquid mutual funds(I will describe them later).

Note:

1. The cash component can be omitted(i.e., 30% in a savings bank account) if one has a functional debit card and access to ATMs.
2. As I described later, it takes a maximum of 24 hours for money from a liquid mutual fund to be released. The cash and savings bank component is to tide over that period. Also, having a credit card or pay later service provides an additional layer of security in this regard.

What Are Liquid Mutual Funds?

As the name suggests, liquid mutual funds are very safe( liquid) funds, even though the rate of return is humble with respect to equity. By liquid, I mean that the entire money can be withdrawn from these funds within 24 hours(as opposed to 2 to 3 days in other mutual funds) and with no extra cost or exit load(as opposed to Fixed Deposits and other mutual funds).

To conclude, set some money aside for your emergency fund every month. Once you complete it(12x), you can start investing the same or more amount in equity (the stock market) after purchasing your relevant insurances as under.

2. Life and Term Insurance

This instrument ensures the survival and thrivingness of your dependents (spouse and children) in the unfortunate event of your(earning member’s) untimely and unforeseen demise or incapacitation.

Having life insurance means that in the event of such misfortune, your dependents are entitled to a previously agreed-upon sum to tide over the otherwise arising financial compromise.

A few important considerations while buying life insurance are:

1. The best age to get insured is 25 to 35 years.
2. The best duration for which to get insured is your earning term, i.e., 25 to 65 years.
3. Let it be a product for insurance and NOT AN INVESTMENT. The plans that ‘promise’ to return premiums (aka. endowment plans) have insanely high premiums. Why go for them when you can invest the same money in an index fund (at the least) over the same period and generate much higher returns?
4. Please make sure to disclose every detail honestly to the company.

If you’d like to know more, watch this fantastic video from Labour Law Advisor. It is a complete guide to life and term insurance.

A detailed YouTube video on the topic from Labour Law Advisor.

3. Health Insurance

Private healthcare in this country and around the world is very costly. Also, the yearly medical inflation in the country is about 14%, way more than general inflation. This means healthcare will become even more expensive in the coming years. So, a family is one unexpected medical bill away from losing their savings and becoming poor.

Enter health insurance. Health insurance ensures you don’t have to bear the cost of unexpected hospitalization, which can run in lakhs.

Things to consider while buying health insurance are:

1. The ideal health cover (the insured amount) depends on the city of treatment and preexisting conditions. It is typically 5 lakh for children and 10 lakh for adults.

2. There should be no sub-limits for diseases, no room rent cap, and no copay condition. The coverage should be pan-India, especially where you will likely get treatment. A no-claim bonus is also essential.

3. There should be both a cashless option and a reimbursement option available. The cashless facility lets you make 0 payments from your side, thereby protecting your emergency corpus.

You can watch this fantastic video from Labour Law Advisor to learn more about it.

A detailed YouTube video on the topic from Labour Law Advisor.

4. Vehicle Insurance

Another dance of uncertainty is road traffic accidents and vehicle damage or theft, which can negatively impact one’s pocket.

Enter vehicle insurance. Vehicle insurance covers the financial bearing of any mishap related to your vehicle.

Important considerations regarding vehicle insurance are:

1. Third-party insurance (Covering damage to the other party involved in an accident) is compulsory in India.
2. In addition to third-party insurance, purchasing insurance to cover damages or theft of one’s own vehicle is a good idea.
3. Also, a personal accident cover of the driver (and the passengers if so chosen)covers the medical expenses of any injury or loss of life in any road traffic accident.
4. Zero depreciation cover, consumables add-on, engine protection cover, and a no-claim bonus are essential add-ons. Roadside assistance is also necessary.
5. Cashless garage network and claim settlement ratio (CSR) are important considerations when choosing a provider.

To know more, watch this fantastic video from bekifayti

A detailed YouTube video on the topic from bekifayti.

5. Travel Insurance

Another experience of uncertainty occurs when traveling abroad in a new country. Any situation, from loss of luggage to loss of passport to medical emergency or even loss of life, can happen.

Your traditional health insurance stops working when you set foot on foreign soil.

Enter travel insurance. It takes care of all these circumstances.

It also handles flight delay scenarios, which can otherwise be very costly in any foreign country.

Photo by Kaysha on Unsplash

It should be remembered that travel insurance doesn’t cover any pre-existing condition, disclosed or undisclosed.

If you want to stay in a foreign country for extended periods, global health insurance might be a better choice.

If you would like to know more, please take a look at this informative video from Moneycontrol.

A detailed youtube video on the topic from moneycontrol.

Although it is impossible to predict the future, these are most of the measures that make you better financially prepared for it. Once you have taken care of all this, you can begin investing your money carefreely.

Of which I will write another article.

Thanks a lot for reading here.

I hope you enjoyed this article. If you did, I would be grateful if you clapped 50 times for it. Also, please mention your thoughts in the comments.

See you around.