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Stage 2 - Getting Married, Having Children, Life Goals Increase

Insurance

The first thing you should do is checking your life insurance requirement. Buy life insurance in the form of a simple term plan and not any other type of product. The premium for a term plan is the lowest; the cover you will get for this premium is the highest. This is the best way to protect your family in case of your untimely demise, especially if you also have any liabilities like a home loan / car loan. 

A financial planner can help to do an exact assessment of your insurance requirements and suggest the most suitable policy from the universe of hundreds of policies.  Also, for health insurance - take a family floater that covers your dependents. Ensure that you have sufficient cover for each member of the family, considering that medical costs can be quite high these days. 

Different Kinds of Loans Available and How to Ensure You Don’t Over-Borrow

Unsecured Loans - An unsecured loan refers to any kind of loan that is not attached by a lien on any of your specific assets. This means that in case you default on the loan due to bankruptcy or any other reason, the unsecured debt lender does not have the right to claim any specific asset. Example - credit card debt & personal loan 

Secured Loans - A secured loan is one where you, the borrower, pledge some asset of yours as collateral to the loan. In case of bankruptcy / any other reason for defaulting on the loan, the lender has the right to take possession of the asset and sell it to recover some of his loss. Example - car loan & home loan.

Thus there are many options of loans and different lenders (from banks to housing finance companies to your relatives), which can help you take a loan when you need one. Now you face the question of how to ensure that you don’t over-borrow and put a strain on your finances. 

A simple way to check whether you are over-leveraged or not is to find out your  Debt to Income Ratio. 

Formula = Sum of monthly outflows / EMIs / total fixed monthly income

Ideally, this ratio should not be more than 30%, else you might be exerting strain on your income to service your debt.

How to Build your Wealth with a Loan?

Taking a loan can be a great way to build your wealth provided you know how to use it smartly within the laws of land. For example home loan & car loan can help you achieve the financial goal of buying a home or a car (by making payments over a period of time) without having to wait and save enough to make an outright purchase by paying in lump sum mode. 

In the case of home loans, there are tax benefits both on principal repayment and interest payment.

Since you are not going to pay in lump sum but via EMIs so it provides a way to build an appreciating asset like a residential flat.

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