Financial plans and investment needs are as different as each individual. Investment needs change over a person’s life cycle. How individual structure their financial plan should be related to their age, financial status, future plans, risk aversion characteristics and needs.
Before embarking on an investment program, we need to make sure others need are satisfied. No serious investment plan should be started until a potential investor has adequate income to cover living expenses and has a safety net should the unexpected occur.
Insurance
Life insurance should be a component of any financial plan. Life insurance protects loved ones against financial hardship should death occur before financial goals are met. The death benefit paid by the insurance company can help pay medical bills and funeral expenses and provide cash that family members can use to maintain their lifestyle , retire debt , or invest for future needs ( for example , children’s education , spouse retirement). Therefore, one of the first steps in developing a financial plan is to purchase adequate life insurance coverage.
Insurance can also serve more immediate purposes, including being a means to meet long-term goals, such as retirement planning. On reaching retirement age , you can receive the cash or surrender value of your life insurance policy and use the proceeds to supplement your retirement style or for estate planning purposes.
Insurance coverage also provides protection against other uncertainties. Health insurance helps to pay medical bills. Disability insurance provides continue income should a person become unable to work. Automobile and home (or rental) insurance provides protection against accidents and damage to cars and residences.
Although nobody ever expects to use his or her insurance coverage, a first step in a sound financial plan is to have adequate coverage “just in case”. Lack of insurance coverage can ruin the best- planned investment program.
Cash Reserve
Emergencies, job layoffs and unforeseen expenses might happen, and good investment opportunities might emerge. It is important to have a cash reserve to help meet these occasions. In addition to providing a safety cushion, a cash reserve equal to about six months’ living expenses. Calling it a “cash” reserve does not mean that funds should be in cash; rather, the funds should be in investments you can easily convert to cash with little chance of a loss in value (high liquidity). Money market or short-term bond mutual funds and bank accounts are appropriate vehicles for the cash reserve.
Similar to the financial plan, an investor’s insurance and cash reserve needs will change over his or her life. The need for disability insurance declines when a person retires. In contrast, other insurance, such as supplemental medical insurance coverage or long term care insurance may become more important.
