“Stop eating out”. “Cancel gym memberships”. “Shop with a grocery list”.
Often such advice is given to save money. However, there are some items that should never be cut out of your household budget.
What are these expenses?
1. Life Insurance (for risk mitigation)
You might do without a life cover; however, not doing so, exposes your family to substantial financial risk. If the sole earning member of a family passes away at an early age, it impacts household finances and future lifestyle of its surviving members.
While you should stay away from investment plans, term insurance that provides a pure risk cover should be bought. The earlier you sign up, The lesser is its premium. A 28 year old healthy, non-smoking male can secure a life cover of Rs 1 crore for his dependents for the next 30 years, by paying about Rs 6,700 every year.
Life cover is usually taken for a sum assured worth 20-25 times of one’s annual income (for someone younger than 35) and it keeps changing based on the need of the hour. If you have taken a home loan, top up the cover to the extent of the loan amount. Also, ensure the cover outlasts your financial liabilities.
2. Medical insurance
In the past, unexpected medical bills have drastically affected household finances. With medical inflation galloping at 10 percent levels, it is important you seek financial protection from shooting medical costs. A comprehensive family cover for an adequate sum assured will ensure you don’t fall into a debt trap.
3. Comprehensive car insurance
As per law, a car owner is mandated to only take third-party insurance. However, in such cases, if your car meets with an accident, you end up shelling money from your own pocket to do the fixing and repairing.
So, don’t cut corners. Buy a comprehensive car insurance cover, which additionally provides cover for damage to your car.
If you have outstanding balances on your credit card, pay it as soon as possible. With an interest rate of 40-45 percent per annum, it could snowball into bigger debt if not attended to.
4. Debt repayments (to prevent delinquency)
If you have outstanding balances on your credit card, pay it as soon as possible. With an interest rate of 40-45 percent per annum, it could snowball into bigger debt if not attended to. Similarly, if you have a car loan, repay them to avoid penalty. Though, give home mortgages the first priority.
5. Emergency fund (for tackling contingencies)
An emergency fund gives you the buffer to adjust during contingencies - be it a job loss or a huge medical bill. If you have not build an emergency fund yet, immediately bump it up to six months of your household expenses. If you have dipped into your emergency fund, replenish it back to its original levels.
6. Saving (for financial independence)
Last but not the least keep contributing regularly towards retirement and other important financial goals. As a thumb rule, about 20 percent of your take-home salary should go towards it. While doing so, keep the faith in equities, which has the best potential to give inflation-beating long-term returns.
Buy adequate risk cover – be it life, medical or auto – repay debt while also investing regularly towards your financial goals.