A step-by-step guide to your first financial plan - PART III

Term insurance

Generally, as a beginner, there will not be any requirement for life insurance. But if your parents are financially dependent on you, then you need to cover yourself. This is needed to ensure that in case of any mishap, your family members do not need to compromise on their lifestyle. That is why it is advisable to cover yourself with life insurance if you have dependents -- be it parents, spouse and/or children.

A word of caution here, don't fall prey to ULIP schemes. Opt instead for a pure term insurance policy. These policies give you high coverage with low premium. The premium for a sum assured of Rs 10 lakh will cost a 25-year-old only Rs 2,500 pa approximately.

Emergency reserves

Once you have completed these obligations, you need to build an emergency reserve or contingency fund. One aspect of financial planning involves planning for situations where there could be a temporary break in one's professional income. This could happen, amongst other reasons, due to ill health or could even be self-opted.

Such planning requires the creation of a contingency fund. The size of a contingency fund is linked to one's estimate of what could be the maximum duration of such a break. For instance some people plan for the possibility of a three-month break, others for six months.

This emergency fund also serves as psychological security. In case you need to quit your present job and need to search for a new one, you can do that comfortably and confidently as you have an emergency fund for the intermediate period; you need not panic. Also, if you have created a contingency fund, in the event of an emergency you need not pre-close your other investments and thus you avoid paying penalty or booking losses.