Converting Your Goals to a Plan

Now that, we know our cashflows, our goals and options to reach our financial goals with, let’s look at two more things which should be put in place before we start investing.

Below is hierarchy of Investment needs which should be taken care of in the said particular order:

1. Contingency Fund

2. Life insurance, critical illness cover, disability cover and medical insurance

3. Short Term Goals

4. Medium and Long Term Goals

So your contingency fund should be ready first and it is something described by the expense ratio which should be kept ready first.

Expense ratio: 

(Amt in savings account+FDs+cash)/monthly expenses = 6 for salaried people

                                                                                         = 12 for business people and professionals

Expense ratio tells us what amt of contingency fund we should be always ready with us in case of situations like job loss, sudden medical expenses, etc.

 Eg. If you are a salaried individual and your monthly expenses are 50K then you should have 3 lacs in savings account + FDs or liquid funds and cash.

If you are a professional or a business man and your monthly expenses are 50K, should have around 6 lacs in savings account + FDs or liquid funds and cash.

The expenses ratio is 12 for professionals or business men as their income is variable and monthly expenses are constant. Keeping funds in liquid format would help set money aside from good months for months when there is less income.

In case your contingency fund is not ready, put this as your first short term goal, fulfill this first and then move to other goals.

After expense ratio, your medical insurance with critical illness cover and accidental disability cover and your life insurance should be in place, and then you should move to your short term goals and then your long term goals. It no where means your long term goals are less important, what it means is, you should be ready for sudden events like job loss, health issues and life loss first, then short term goals which you have no alternative for or which cannot be push beyond 3 yrs and then make investments for your long term goals.

To understand these concepts in detail, Please watch following video.