If you face a financial crisis like a job loss, a debilitating illness, divorce, or a natural calamity, are you equipped well enough to weather the storm? Read on to find out strategies to deal with such crisis situations.
It is very important to have an emergency fund. If you happen to lose your job suddenly; face a medical exigency; a pay cut; or any such unforeseen circumstances, you would need your emergency fund to fall back on. Ideally, you should have at least six months' expenses in the form of an emergency fund. In case you are working in the private sector, where job security is low, you must try to have at least a year and a half's expenses in the fund.
Here are ways you could prepare for a financial emergency:
Build an emergency fund: The first step to preparing for a financial emergency or unexpected life event is to build a solid emergency fund. Explains Amit Suri, director and CEO of AUM Wealth, a financial services company: "Calculate your monthly expenses on household Expenses + EMIs (equated monthly installments) + school fees + insurance premiums + house rent + any other non-discretionary expenses like support to parents, etc. Your emergency corpus has to be at least between 6-12 months of these expenses, depending on sources of income. Higher the number of sources, fewer months required & vice versa."
He adds that, ideally, this money should be kept aside in a bank FDR (fixed deposit receipt) & not in a sweeping kind of facility. If the money is not available, start an RD (recurring deposit) in a bank or a SIP (systematic investment plan) in a short-term debt fund.
Health Insurance: As soon as you get a job or some funds, you must equip yourself and your family with a solid health insurance plan. While there could be sudden medical needs, hospitalization costs are also high these days. If you or your near and dear ones get detected with a health issue that needs constant treatment, you could deplete all your savings and get into a debt trap. A small sum in the form of a premium could give you a cover of the amount that took you years to build. While buying a health plan, you must check the sum assured, the claim settlement ratio, and exclusions.
Says Renu Maheshwari, chief executive officer and principal advisor, Finzscholarz Wealth Manager, and a Sebi-registered investment advisor: "It's important to buy insurance to take care of financial obligations arising out of the risky situation. A sufficient amount of health insurance will ensure that any medical expense doesn't disturb the regular investment and also makes sure that you are not pushed into debt."
Life Insurance: You could simply buy a basic term plan to save your family from financial trouble in case of an unforeseen crisis situation. A term plan provides you with a higher cover at a lesser premium. You could also invest in a personal accident cover to protect your family from income loss due to permanent disability. "An accident policy rider can ensure some payout during convalescing. Householders' policy can give protection against damage to property due to flood, fire, or even theft," adds Renu.
Get prepared for natural calamities: There could be a natural disaster, like an earthquake, flood, tornado, hurricane, or forest fire, in the area you live in. If it comes upon you suddenly, you should be well prepared to deal with it. If natural disasters are common in your city, you could talk to your insurer about the coverage you need. Also, you must be well-equipped with adequate cash as an emergency kit for a few days, the number of your credit cards and other accounts, and the phone numbers you require. You should also have at least a week's supply of food, water, and other necessities in your home, car, and office.