Skip to main content

Porfolio Structuring Step 3: Build Safeguards

One of the most important things you can do is to build safeguards. That includes things like building a cash nest for contingency, taking insurance cover for life and non-life risk factors. Let us take them one at a time.

1. Contingency Reserve: You need to have a amount set aside in cash to meet any emergency requirements. A good amount to keep aside is 3-6 times your monthly expenses. So, for example, for a monthly expense of 20,000, you can set aside 60,000 to 120,000 as a contingency reserve. DO NOT touch this reserve unless there is an emergency. This is not meant for your day-to-day expenses.

2. Life Insurance: Your requirement for life insurance will depend on your life stage, your current networth (calculated in step 1) and your dependents. Simple back calculation tells you that to get a earning of 100 you approximately need to invest 1200. So, multiply your annual expenses with a factor of 12 to get the amount you need to have insured. But, its always better to have some buffer in hand so for prudency jack up the multiplier to 15-20. So, for an annual expense of 240,000 (monthly 20,000), you will need the following:
@ 12 times = 28,80,000
@ 15 times = 36,00,000
@ 20 times = 48,00,000

The best thing to do is to buy pure term plans from any good, top-of-the-line insurer (e.g. LIC). Do not go for premium refund term plans as they are more expensive than the pure term plans. Use insurance purely as a risk covering tool.

Also, for prudency, break up the total insurance amount into 2-3 policies from different companies, so that you are not exposed to a particular company risk. I.e, if the insurance company goes bankrupt you still have two other companies to look forward to.

3. Medical Insurance: This is another critical factor that a lot of people miss out on while planning for their finances. Here, take the maximum possible cover that you can afford while you are young. If possible, take a family floater plan to reduce the cost. Also, pay for the medical insurance for any financial dependents you may have (parents, in-laws, siblings, children etc)

Comments

Popular posts from this blog

Indian Markets - Crystal ball gazing

Here is what I came yup with by crystal-ball gazing (the crystal ball is now pretty cloudy and filled with dust, but what-the-heck...it sure is some fun to look at it once in a while... Sensex/Nifty will make a dash for the all-time high sometime soon (maybe as early as October end) Either breach it or turn back just short of it. A bout of profit booking follows. Indices go down 10%-15% (back to around 18K-18.5K) Main indices remain sideways for the next couple of quarters. Mid caps move up from now as the last few weeks the valuation gap has widened. Sometime after 2-3 quarters, the next up move starts for the main indices. By that time, PE is down to about 22 (which is still high but certainly not hitting the roof). One point to consider is that the 2008 debacle is still fresh in the minds of most people, and as long as it remains, the sentiment of fear will be there. That will prevent the markets from having a runaway rally or a breakneck fall. I sure hope I am right!!!

Great Quotes

I came across some very nice quotes on the web.  Some were really good and worth repeating. Figure out what the top five most important stuff is, focus relentlessly on that and keep iterating. Less is more. -- Daniel Ek, CEO, Spotify  My personal limit is upto 3 concurrent goals. It gets much much more complicated if it grows more than that. Have 3-4-5 (whatever suits you fine) goals that are top of the list and focus on them wholeheartedly. Don’t let people tell you your ideas won’t work. If you have a hunch that something will work, go build it. Ignore the haters. -- Dennis Crowley, CEO, FourSquare  There will always be naysayers. It's more important to believe in yourself and do what you think is right. End of the day you are only answerable to yourself, and no one else. Follow your gut. it may be wrong, but you won’t regret it if you fail. You’ll regret it if you ignore your gut and fail. -- Sarah Lacy, CEO, PandoDaily  Follow your instincts, but upto a limit. The