Financial stability is very important for a stable life. Up and down are part of life problems can come any time without warning. But with proper money management you can prepare yourself to face financial troubles. Below are few things you can do
1. Keep three times your monthly income in saving account for emergency
Emergencies can come any time without any warning. To troubleshoot the unwanted problems you may require good amount of money. The requirement of money is sometimes so urgent that you cant even arrange it by borrowing. Wise men always saves for the rainy days. One should save at least three times of his monthly income and keep it in the saving account so that you can use it anytime to troubleshoot your unwanted financial troubles. If you earn twenty thousand a month then keep minimum sixty thousand in your account always. You can also enable auto sweep facility to get extra interest on that saved amount.
The three months rule is good for a single person, but if you are sole breadwinner of family or work in an unstable industry then you should keep 6-12 months of expenses in the saving account for emergency fund.
2. Have a health insurance
Health is wealth and when you lose your health you lose your wealth also. Medical expenses are too costly now and critical illness can sometimes take away all your savings and wealth. Diseases don’t see the age these days and any healthy person can suffer critical illness even at young age. It is necessary to have a health insurance to manage the medical expenses. It is good to take health insurance at an early age as health policies cover certain health problems only after four years. At young age the premium you have to pay will also be less.
If your job involves lot of travelling then take an accidental insurance as well. Which pays a lump sum amount in case of disability from accidents. If your family members are dependent on you then its good to have life insurance as well. Term plans are good for this than endowment insurance plans.
3. Invest in fixed income asset
Invest twice of your annual income into risk free fixed income assets which can give you assured returns on maturity. This could be fixed deposit, bonds, debentures etc While making the investment in the fixed income assets make sure that your investment should be able to beat the inflation growth and calculate the actual returns you will get after tax. I prefer debt funds for this kind of investments.
4. Invest in mutual funds
So far investment options which I had discussed above gives only capital protection with some appreciation after discounting the inflation. For long term wealth creation you have to invest in some risky assets, which are actually not risky in the longer term. They are volatile in the short term but not risky if you have patience of around five years. Mutual funds can give 10-15% annualized returns. Its very good comparing to other investment options. Returns depends on the type of fund you choose also. Large caps mutual funds are less volatile and returns are also less. Midcap small caps are more volatile but has more potential to give you more. Check out how a small investment in mutual funds can make you crorepati
5. Invest in stocks
Mutual fund invest in equities their portfolio is highly diversified and consist of 30-100 stocks. Mutual fund gives 12-15% annualized returns. If you have sufficient knowledge you can invest yourself in stocks and make more than 20% annualized returns. For this you should have sufficient knowledge about equity investing otherwise you may erode your capital too. You need to learn technical analysis and fundamental analysis for this. Basic observation skills also helps in quality stock picking.
The above steps should be followed in sequence. You should not jump straight to equity investing. Its always good to ensure the survival first before getting straight into equities.