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In the second blog of the series, MoneyZs’, we spoke about how you can maximise your savings in the most efficient manner.

The next step is to figure out what to do with these savings. Logically, you want to think about putting your savings to work to create long term wealth through the right investments.

However, even before you get to the investing part, your savings have another role to play: they need to secure your present-day life in a manner that is healthy, removes financial anxiety and brings you closer to feeling financially secure.

Keep in mind that money can be the cause of a lot of emotional reactions in our lives. These can be reactions which bring peace or those which bring anxiety. The choice is yours. If you want to focus on the former, building an adequate pile of savings and put it to work.

Three things you must do before investing

1. Create an emergency fund

If anything, the last few months of living through the economic crisis caused by COVID19 has taught us the importance of having a stash of money put aside to be used in times of sudden crisis.

The COVID19 pandemic is literally this crisis we are all living through right now.
If you have lost your job or are struggling with a hefty pay cut, you know what I am talking about.

An emergency fund is what will help you tide over any income shortfalls in a crisis. This is not a defined uncertainty but something that you are unable in envision beforehand.

What should the value of your emergency fund be?
Ideally anywhere between 6-12 months of your living expenses.

The world has gotten more and more uncertain over the years. What you took for granted just a decade ago, steadily growing income, good health, gratuity, suitable interest on deposits, are all up in the air today. Your savings bank account gives you 2.75%-3% interest in a year, your deposits give you 5% and expenses keep rising at a superb pace each year.

Hence, the closer your emergency fund amount is to a 12-month cushion, the better it is.
Calculate all your non-negotiable living expenses for the month and add them up. Calculate what this amount will be for the nest one year and start allocating a portion of your savings to building this emergency fund.

Doing this activity will also make you realise if you need to start saving more and spending less, at least till you have this emergency fund in place.

Should you keep this money in your regular savings bank account?
No.

Separate this allocation away from your most-used savings account. If you aren’t comfortable with any other form of parking this money, then open another savings bank account and shift this amount every month to that account or create a recurring deposit with monthly contributions for a year to create this fund.

You can also use, mutual fund schemes like Ultra Short-Term Bond Funds, Liquid Funds or Overnight Funds for this purpose. To invest in these mutual funds, open an online account with a robo advisory platform or alternatively get a mutual fund advisor to help you.

2. Get insured

Once the emergency fund is out of the way, focus on getting the right kind of protection in life. If you have a family with individuals, be it children or elderly parents, who are dependent on your income, you need to get yourself some life insurance. A life insurance policyAn insurance policy gives you the right to reimbursement or payment from an insurance company for losses agreed up on in a defined contract. A life insurance policy for example, needs the insurance company to evaluate a claim on the... is the protection you need to ensure that your dependents don’t undergo financial chaos in the event of your untimely death.

Life insurance is most efficient when taken through a Term Life Policy, kindly avoid endowment and money-back plans completely.

Once life insurance is figured out, get a good health insuranceA comprehensive policy that covers for medical and surgical expenses that you incur. This includes hospitalisation expenses, pre hospitalisation expenses and other expenses incurred for all the illnesses covered in the policy. plan, a vehicle or motor insurance plan in place for sure. Hospitalisation expenses are only rising and health insuranceA comprehensive policy that covers for medical and surgical expenses that you incur. This includes hospitalisation expenses, pre hospitalisation expenses and other expenses incurred for all the illnesses covered in the policy. comes at a low cost.

Instead of getting stuck with a huge hospital bill, be smart and get an appropriate health plan.

Once, the important insurance covers are taken care of, you can think about adding other protection plans like home and travel insurance.

Insurance plans act as a protection by compensating monetary loss during an emergency. An ideal insurance plan is one that comes at a low cost with high protection.

We all need this protection for efficient financial security, don’t move forward until you have this in place.

3. Repay your debts

When spending overshoots income, debts come into the equation. While Indians are known for being savers, the household savings data in recent years shows a declining trend in saving while at the same time the net borrowing of an individual is edging up.

It’s no surprise though given the ease with which you can get credit today coupled with the push to consumption all around us that the individual’s balance sheet is now starting to tilt towards more borrowings.

However, small debts soon become large and large debts become impossible to manage when income uncertainty hits you. Another aspect of getting into debt is the inability to get out of it as sometimes the easy access to loans and overdrafts can promote greed.

One assumes that income will continue and small debts like credit card extensions, lay buys or instalments on consumer goods purchases will keep getting paid off. Two things can happen you go overboard with the amount you are borrowing or the number of times you are borrowing because the small instalment amount makes you believe you can afford more than you really can.

Increasing debt will get with it more anxiety, insecurity and self-doubt. You will constantly find yourself trying to repay and yet at the same time taking on more debt to keep up the unaffordable lifestyle you have created for yourself.

In such an environment it gets impossible to invest gainfully for long term wealth creation, from time to time you’ll find you have to dip into your investmentAn investment is made to give you a return. You make an investment if you use your money to buy either physical assets like property or financial assets like bonds and equity with an aim to receive income or gains... contribution or the pool to fulfil debt obligations.

That’s why you must first get rid of the debt, at least the ones which are more because of over spending rather than pure need, then go about building investing.

The only exception can be your housing loan for the home that you live in. That you should be careful to take on a commitment that you can afford rather than a huge monthly repayment on for an unaffordable property.

Summary

Put your savings to work even before you begin the investmentAn investment is made to give you a return. You make an investment if you use your money to buy either physical assets like property or financial assets like bonds and equity with an aim to receive income or gains... journey. Build an emergency fund, get protection through efficient insurance plans and repay your debts. Doing this will give you an anxiety-free ride on the investmentAn investment is made to give you a return. You make an investment if you use your money to buy either physical assets like property or financial assets like bonds and equity with an aim to receive income or gains... journey.

As always planning is one part of it, execution or just doing it is the most important part!