Plan for Uncertainties

We always keep saying wish I had planned my finances better. If I had done X, then I would be in a better position.

It’s never too late. Start now. What are our basic worries? Tomorrow if something happens how would I be able to take care of myself and my family. What would happen lose my job, fall sick etc. or all of them? Yes all of this can happen to all of us. But then we spend time brooding, than doing something about it. Let’s get to the basics.

What would happen if I did not have a job? How would I survive till I get a job? This is where you need to plan. Have we planned for such emergency? Looking at the current economic scenario, anything could happen, so we need to plan. So what should we plan for 1^st? To be carefree or tension free, first thing we need to do is set aside a contingency fund.

What is a contingency fund? This fund is an emergency fund, to be used in case of emergency or any untoward incident. Now this amount would depend on what you feel would be the time required to get back to normal. If you feel you could get back to normal in a months time then one months expenses should be kept aside as contingency or emergency fund.

Mind you, this is an emergency, so do not touch it unless it is an emergency. This should get you relaxed a bit. Right?

Where should you park this fund, usually you would need it in an emergency i.e. you should be able to have it ready when needed. So most of the financial planners suggest having it in a bank FD, so that it can be broken when needed.

So you think you are done and have become stress free? No, right. Another uncertainty we need to take care of is sickness. This can happen anytime and to anyone. This is a big energy as well as money sapper. Other than expenses, there is also a loss of income, as you will not be able to work during that time. So you should have a medical insurance to take care of this.

Let us look only at essential insurance currently, you could also go for a term policy, this is in case something happens to you, your family would be taken care of. If you have a home loan, then a Home loan protection plan would also help.

Don’t look at insurance as an investment for return, insurance is for contingencies and should be treated as such only.

Inflation indexed bonds

We have been hearing that Reserve bank of India is planning to come out with Inflation indexed bonds. The belief is this will save our investment from being lost because of inflation as the return on investment would be based on the inflation. Internationally this is how it works. You put an amount in an inflation indexed bond at 5% for 10 years. Every year you will get 5% of the interest.

So how is it different from normal fixed deposit? In Inflation indexed bonds the amount invested would change based on the inflation. The adjustment of principle amount would take place on a predetermined date. So if on the predetermined date if the inflation rises by 10%, the principle will rise by 10% and the next interest of 5% would be paid on the new calculated principle. So at the end if inflation goes up, you earn or else you lose.

So we said so many things about inflation and said if it goes up you get more and it goes down you will get less, but which inflation index would be used. Based on the latest information RBI plans to use Wholesale price index, which does not take into account services.

 

So what should we do invest, it all depends on the rate of interest and how inflation is moving. It looks like inflation is coming down, but we need to take a long term view. In the short term it seems to be coming down. Which way would inflation be moving in the long run....Keep guessing.