Ways to avoid financial disaster

Often people are confused between a financial setback and a financial disaster. However, they are totally different from each other.

Financial setbacks happen unexpectedly. Say for instance, you might lose your job or your car might need few unexpected costly repairs or you might need to face huge medical bills. These are some of the possibilities that are deemed to be a financial setback and if steps are not taken with respect to these setbacks, then in no time it might turn into financial disasters.

Keeping that in mind, there are ways with which you can avoid such financial disasters that life throws at you. These ways are listed as below:

Have an emergency fund

This is one of the must have things and should be on your priority list to build and maintain appropriate corpus. This is not a one-time activity. You need to review it periodically to account for various changes whatsoever, occurring in your life.

As a thumb rule, you should at least have three to six months of your expenses as emergency fund. This must also include your equated monthly installments (EMI), systematic investment plans (SIP) and annual insurance premiums.

Having said that, every individual is different so one should not depend on the thumb rule. Thumb rule only supports the bare minimum requirement and not the actual requirement.

Be insured

Having covered under appropriate and required insurances is important. This will help you to fund huge sum of money in case of any unfortunate event or big medical expenses. This would not just take care of you and your family but also of the wealth that you are creating and your financial goals.

As a thumb rule, you should at least have life insurance of ten times your annual income, health insurance of two times your annual income and disability cover of twenty times your annual income.

Again, these are just thumb rules, that means a bare minimum requirement. Thus, it is crucial on part of individual to access their own unique requirements. You may even seek help of an expert financial planner to do it for you.

Reduce your debt

Debt is a part of everyone’s life. Most of the people, if not big debt, at least use credit cards. Therefore, if not handled properly on time, might lead to financial disaster. It wont just hurt your finances but also your peace of mind. Hence, it is important to reduce your debt to the extent it doesn’t harm your financial life.

This can be done by first paying off your high interest-bearing debt such as credit card, personal loan, car loan, etc. These are the debt that slowly eats up your wealth. You might think you are paying low in terms of EMIs but the interest cost the end of the loan tenure makes the product much costlier.

Therefore, it is better to pay-off these debt the soonest and in case you wish to buy something, then plan for the same in advance by investing in mutual funds to achieve those goals.