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How to prepare for a financial emergency

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Investments are generally used to complete one’s financial requirements. But not many people actually realize that it is important to keep aside funds in a savings account or in an emergency fund where the money can be easily withdrawn without many hassles if any emergency or unfortunate event strikes.

If you had not foreseen this necessary requirement and stacked away most of your income into assets, then in case of emergencies you might have to liquidate assets, that will not only waste a lot of time and delay your requirement for funds but also reduce the overall returns on your funds since there will be a certain cost of prepayment penalty charges that will be involved.

If you do not plan to liquidate your assets because of various reasons and believe that buying a debt like a loan will be much easier, then you are wrong. It is true that these days it is easier to avail loans at lucrative interest rates, but if your current urgent requirement is fulfilled with the loan amount, your future financial plan can be disturbed if the loan in question is a big amount or if you are entitled to pay hidden charges that were earlier not mentioned to you.

In case you are trapped in such a situation it is best that you do not borrow another loan to repay the former loan. Instead, build a fund that will enable you to repay the loan amount, including the interest in the next six months to one-year time frame. The fund should consist of your income, apart from your regular expenses and the EMI of your loan.

In the eventuality of a job loss or a business loss, you are left with your fund payments, premium payments, your monthly regular expenses, etc., which cannot come to a halt if you stop earning due to any unfortunate circumstances. The expenses will continue to pile up nevertheless. If you want to secure yourself from any such situations it is best that you open an emergency fund.

Apart from naming your savings’ bank account as an emergency fund where your funds earn a mere interest rate, you can save your funds in short-term debt funds or liquid funds where they enjoy a good interest percentage and also provide you the flexibility of withdrawing your funds in 48-72 hours. Sweep-in accounts or flexi deposits are another good option wherein your funds can earn a decent percentage and enable you to withdraw as and when required.

Get yourself insured
Apart from your investments in assets and emergency funds, it is also important that you get a decent life cover protection that can provide you with the funds in case of any accidents. Also, investing into a general health insurance along with a critical illness cover can provide you a complete all-round medical protection in case of medical emergencies and provide for hospitalization expenses.

A personal accident cover can also be taken, which can provide you adequate financial aid in case of any disability, whether permanent or temporary, and ensures that you are not deprived of any immediate income loss.

Apart from the typical life and health insurance covers, the insurance market these days provide protection to you in case of a job loss, which comes as a rider with mortgage insurance products. Basically, they function by servicing the loan if in case you are not in a position to pay. There are various other features of these types of insurance covers: some covers are provided only if the job loss is due to a merger or an acquisition of a company and the cover is provided only for a period of three months. Therefore, it is always better to read the terms and conditions of the insurance policy before settling for any cover.

Disclaimer: All information in this article has been provided by BankBazaar.com and NDTV Profit is not responsible for the accuracy and completeness of the same.

Story first published on: December 26, 2012 17:11 (IST)

Tags: financial planning, financial emergency

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