Emergencies can arrive in many forms. They come unannounced at any point, leaving us distressed. It is not easy to predict when these twists of fate will befall us. However, there are some common sense steps that every person must take to protect themselves financially. Preparedness is absolutely important, no matter who you are and what you earn. Let’s take a look at some common financial emergencies, and what we can do to meet them head-on.
The list of emergencies
LOSS OF EMPLOYMENT
Employment and income are rarely guaranteed. You may lose your job, or have difficulties in generating regular income through business. The reasons could be many. But a loss of income could mean facing difficulties in meeting various expenses towards daily needs. Here, you should create an income replacement fund. This should be used to cover most fixed and some variable expenses. For example, you would need it to cover essential expenses such as rent, EMIs, children’s school fees, healthcare, supplies, utilities etc. However, you should use it sparingly while meeting variable expenses — especially non-essential expenses such as eating out or travelling. A bank fixed deposit is ideal for such a fund. You should have at least three to six months of your most current income locked in this deposit, and top it up periodically to accommodate any increase in your fixed expenses.
NATURAL DISASTERS & UNEXPECTED REPAIRS
These expenses, too, come unannounced and can cause severe financial difficulties if you are not prepared. For example, damages to your home during an earthquake, or totalling your car in a flood could set you back by several lakh rupees. While it’s advisable to have some cash at hand to survive such situations, it is imperative you cover a largest part of these risks via insurance. A home insurance plan can cover not just the structure of your property but also its contents against damages, theft, natural calamities, etc. Similarly, a comprehensive car insurance with right add-ons can protect you against damages which are not covered under a standard policy. For example, an invoice cover will return the original price paid by you on the vehicle instead of insured declared value. You should buy these covers if you live in areas prone to natural disasters, theft, violence, or similar risks covered by insurance.
HEALTH EMERGENCIES
Using the regular income or savings, the average Indian would find it challenging to meet the expenses of a hospitalisation, surgery, or treatment of a disease such as cancer. You must consider the health risks of your family and allocate some funds towards them. However, the best way to adequately protect yourself is by buying a health insurance for all members of your family. You can buy a basic health cover of Rs 5 to Rs 10 lakh for each member, and periodically increase the coverage with top-up insurance, which costs lesser than standard cover. The topping-up is necessary to account for healthcare inflation.
DEATH OF A SPOUSE
This is a highly unpleasant subject. However, the death of an immediate family member — especially one who is the primary breadwinner — would bring financial challenges. If you’re the family’s breadwinner, make sure you have discussed your long-term financial plans with your spouse, and have considered ways to protect your family from the adverse effects of your death. As I have suggested on these pages in the past, buying term insurance is a must for any person with dependents. Make sure your investments, bank accounts, insurance plans etc. have been properly nominated, and that an immediate family member knows how to access your funds in your death.
HELPING A FRIEND
Financial emergencies may not be ours alone. They could befall a relative or a friend, who may approach you for help. If you have financial constraints, saying ‘no’ is always an option. But if saying ‘no’ isn’t an option, you must look at how much help you can extend. Before you lend to a friend, make sure that your own financial stability isn’t jeopardised in any manner. You can set aside a portion of your savings only to counter such situations. This way, you won’t have to say ‘no’ and you would be able to help a friend up to a limit you are comfortable with.
(The writer is the CEO of BankBazaar.com)
