Safety before Growth

So far we have covered the crucial steps to create the ever elusive ‘investible surplus’ and briefly covered ‘investments’ versus ‘speculation’. If you wish to dig deeper into the latter, I recommend Benjamin Graham’s timeless treatise, aptly titled ‘The Intelligent Investor’.

Secure Self First

Before we start walking down the path of investments and growth, we should first secure our most important resource, ourselves. As a former army officer, I am big on safety. I would not enter a battle without being properly kitted and without being adequately protected. Similarly before investments and wealth creation, one should protect oneself with adequate insurance – life and health.

I must put a disclaimer before moving ahead. I do not sell insurance for a living and this blog is not sponsored by anyone related to the insurance industry. With that out of the way, there are a few rules while buying insurance one should be aware of.

Guidelines while buying Insurance

1. Insurance products are for protection and not investment. Insurance is not a means for wealth creation or for developing annuities. Their cost structure is too skewed for the purpose.

2. Buy Term Plans for life cover. And of value that covers 3 to 5 times your annual income at the time. Keep enhancing it every 5 years to reflect the growth in your income and changing lifestyle. Since a term plan is meant as a cover for your family, make sure they are adequately provided for.

3. Get a Health cover early in your life to avail maximum benefits and coverage at a lower premium. Start with a fairly adequate cover under a family-floater plan and continue to increase the cover every 5 years. This will ensure access to better medical facilities as one progresses in age.

Absolute musts

1. Fill insurance proposal/application form(s) carefully and truthfully. It is advisable to pay slightly higher premium on account of a disclosure like smoking, alcohol consumption etc. than have the nominee undergo an ordeal due to claim denials or have the insurer not receive the assured medical cover.

2. Don’t seek cash-back from agents/advisors. It shifts their motivation from insurer’s long term benefits to short term gains and also from insurer’s best interests to their self-interest of making a sale.

It is therefore in your best interest to be absolutely clear about the purpose an insurance instrument is meant to serve and finalize on one accordingly. Beware of unscrupulous ‘advisors’ and do your due diligence before making a purchase.

One should start thinking about investments and wealth creation only after one is adequately protected on both fronts – life and health. If you find yourself with little investible surplus after following the formula of ‘saving before spending’, it is advisable to spend it first on creating a safety cover of insurance. Only after you are adequately protected, should you move to the next aspect of living a financially fulfilled life.

Patience is a virtue. It is never truer than while dealing with finances. You must train your mind to delay gratification. Anything that promises overnight success usually results in catastrophic failure.