TYPES OF FINANCIAL NEEDS YOU NEED TO BE PREPARED FOR (SAVING NEEDS, PROTECTION NEEDS AND INVESTMENT NEEDS) AND SUITABLE PRODUCTS
Every person has needs and they need to be financially stable to achieve those needs. The term we use is called Financial Wellbeing. This financial wellbeing is very important for happiness, health and peace. Financial wellbeing means having enough money to take care of those needs. Needs can be many including further studies, marriage, buying a house retirement and also emergency.
These needs can be classified into the following
- Saving needs
- Protection needs
- Investment needs
Saving needs – These generally include our daily needs like buying groceries and vegetables, miscellaneous expenses, paying bills such as rent, electricity, mobile, etc. It also includes some very short term goals like buying a bicycle or a two wheeler, getting a personal fitness trainer, buying a gym membership or new shoes or workout outfit etc
Protection needs – As the name suggest, these needs are required to protect oneself and their family in case of adverse circumstances. Protection needs are an arrangement by which a company undertakes to provide a guarantee of compensation for specified loss, damage, illness, or death in return for payment of a specified premium and this is called insurance. Insurance needs can be of different nature like life insurance, motor insurance, medical insurance etc.
Investment needs – In today’s world, even if we are risk averse, we are forced to take risk. The money kept in the wallet/locker earns no interest and due to the effects of inflation the value of this money reduces. Even if we invest in savings accounts, the real returns we get are negative. All this discussions is just so that a person can maintain the same standard of living. But we have dreams right? To achieve them we are forced to invest and take risks. All of our medium and long term goals can be achieved through the investments that we do. If we keep buying the things that we do not need, soon a time will come when we have to sell the things that we need.
Once we have understood our different needs, we need to categorize our products as per our needs. Each financial product has its features. Features are in terms of risk, return and liquidity.
Products in which one should invest in for savings needs will generally have low risk with low return but must have very high liquidity. Products include
- Savings bank
- Recurring deposit
- Post office savings
- Money Market
- Liquid Mutual Funds/ Ultra short term funds
Products in which one should invest in for investment needs will generally have medium to high risk with corresponding medium to high risk with a little less liquidity. Products include
- Bonds/ Debentures
- Mutual Funds
- Pension Plans
- Provident Fund
Products in which one should invest in for protection needs can be a mix of savings needs and investment needs. Most of the insurance premium payments are either lumpsum / yearly/ half-yearly / quarterly and one can them in the category of saving or investment based on the liquidity of the financial instrument.