In this post, I’ll focus on establishing the essential building blocks for your financial journey. While these steps may seem mundane compared to the excitement of finding investments and tracking returns, they are crucial for laying a solid foundation on which to build a strong financial strategy.
1. Set Up an Emergency Fund
Setting up an emergency fund is one of the most common pieces of advice in financial blogs. However, for NRIs, it’s especially important. Many of us have family and responsibilities back home. A well-funded emergency reserve allows us to be with our loved ones in times of need, without worrying about finances. Not being available to family when they need us is a source of guilt for many NRIs. An emergency fund makes it easier to take time off without stressing over money.
Additionally, an emergency fund can help you navigate job-related situations like redundancies or toxic work environments. In many Western countries, job transitions can take months. For example, in the UK, it can easily take six months from applying to join a new role. Having a sufficient emergency fund in place can make these transitions smoother.
Aim to save 6-12 months of living expenses. This should be kept in easily accessible, tax-efficient non-equity products. In the UK, consider using an ISA (if you have spare allowance), a savings account (which is taxed on interest), or Premium Bonds (which are tax-free). If you expect more expenses in India, you might want to split your emergency fund between India and your current home country. Though with services like Wise, transferring funds to India is fast and simple reducing need for maintaining funds in India. NRIs might face compliance issues with Indian accounts/cards limiting account access in time of need.
2. Review Your Life Insurance Requirements
Many of us have life insurance through our employers. In the UK, it’s common to receive cover for four times your annual salary. However, it’s important to remember that if you switch jobs or are between roles, you may no longer have life insurance coverage. To ensure you’re fully protected, consider getting a personal life insurance policy.
Calculate your life insurance needs by factoring in your liabilities (like a mortgage or dependents) and subtracting your existing assets. Life insurance is typically cheaper when you’re younger, but premiums increase as you age. Consider keeping your coverage until retirement age (65).
Also, it’s wise to put your life insurance policy in a trust for ease of access for your loved ones. Most insurance companies offer this service at no extra cost, and it’s a simple process.
3. Review Critical Illness Insurance
Critical illness insurance provides a lump sum payout if you’re diagnosed with a serious illness, helping cover alternative treatments or other expenses. While this is a valuable policy, it’s also expensive because more people are likely to make claims. In the UK, NHS covers critical illness treatment, so you might want to evaluate whether the cost of critical illness insurance is justified, or if you can self-insure by setting aside funds.
If you’re more concerned about maintaining income while unable to work due to illness, consider income protection insurance instead.
4. Review Income Protection Insurance
Income protection insurance pays a portion of your income (usually up to 80%) if you’re unable to work due to illness or injury. These policies come with various options, so it’s best to consult a broker to ensure you’re getting the best deal. I’ve found that online comparison sites often offer limited options.
When buying income protection insurance, choose “Own Profession” coverage, which ensures you’re protected if you’re unable to perform your current job, rather than just any job. Also, opt for coverage until you either recover or reach retirement age. To reduce premiums, consider deferring the benefits—starting payouts 6-12 months after you’re unable to work.
5. Review Medical Insurance
While the NHS provides healthcare in the UK, waiting times for non-life-threatening treatments can be long, potentially impacting your quality of life. If you value faster treatment, you might consider private medical insurance, which is often provided by employers in the UK.
In India, there are specialized medical insurance products for NRIs. However, traveling to India for treatment can be challenging due to the flight duration and extended post-treatment stays. That said, for non-critical procedures, Indian medical insurance can still be a good, affordable option.
6. Create a Will If You Have Dependents
Having a will is one of the most responsible actions an NRI with dependents can take. In many countries, including India, creating a will is often overlooked, especially by younger individuals. But in your host country, inheritance laws and child custody rules can be very different.
If you have dependents, consider the following questions:
- Who will look after your children if something happens to both parents? Are you comfortable with state-provided foster care, or would you prefer a relative to raise them?
- Do you want your assets to be given to your children as soon as they turn 18, or would you prefer a structured, managed income stream to prevent them from mismanaging a lump sum?
A will doesn’t have to be expensive or complicated. Some charities offer free will-writing services in exchange for a donation, but it’s best to use a professional service to ensure your wishes are properly documented.
7. Create a Lasting Power of Attorney (LPA)
If an accident or unforeseen event leaves you incapable of making decisions, your family may not be able to access your funds or make important decisions on your behalf. A Lasting Power of Attorney (LPA) allows a trusted person to manage your affairs if you’re unable to do so.
In the UK, there are two types of LPAs: one for financial matters and another for health-related matters. These are registered with the Office of Public Guardians and should be prepared while you’re still capable of making decisions.
8. Prepare a Key Information List and Share It with Loved Ones
Having the right protections in place is essential, but sharing this information with your loved ones is equally important. In an emergency, your family will need access to vital details like account information, insurance policies, your will, and LPA.
Create a comprehensive list of key information and share it with trusted family members. Be sure to update this list at least once a year (for example, during the Christmas break).
9. Involve Your Partner in Financial Planning
Financial planning shouldn’t be a solo task. Ideally, both partners should be involved in managing finances and investments. Unfortunately, many households have just one person taking on this responsibility. Involving your partner in financial discussions ensures they can support you in emergencies and have a clear understanding of the household finances.
10. Allocate an Annual Budget for Experiences, Hobbies, and Your Bucket List
Many Indians are natural savers, but it’s also important to allocate part of your budget for personal experiences, hobbies, and bucket list items. Without this balance, you might reach old age with significant savings but regret not having lived fully. Prioritize experiences that you want to enjoy while you’re still able to, as some things are best done when you’re younger.
By following these steps, NRIs can build a strong financial foundation that provides security and peace of mind. However, keep in mind that this is an ongoing process. Regularly review and adjust your plans as your life circumstances and financial goals evolve.