Dictionary meaning of contingency is ‘a future event or circumstance which is possible but cannot be predicted with certainty.’ A financial contingency is the same where future events, problems or emergencies will be possible but can not be predicted when it
Let us see what could be the various contingencies
A. X family is clearly dependent on both incomes. If anything were to happen to either earning member, the family will be dire straits. Life insurance that too, sufficient TERM insurance plan will mitigate this risk. Some important point to be remembered
Never mix Investment and Insurance. This is thumb rule of Financial Planning.
But if Investor wrongly stuck up with traditional insurance plan then he/she remains underinsured if they can’t afford to pay huge premiums for the required Sum assured and secondly on the premium, so-called invested
B. Healthcare costs are another financial risk for the family. Having adequate standalone Medical Insurance policy for self and dependendets apart from employer health coverage can mitigate this risk. Some important point to be remembered
Medical emergencies come unannounced. To get the best medical facilities without a financial burden you will need health insurance.
Many times the company’s group health insurance sum assured is not sufficient as well as If you lose your job, your group health cover is ceased. You will not be a part of that.
So apart from
An emergency fund needs to be the first goal towards which a household should save as a protection against the possibility of loss or reduction of income.
The fund should be adequate to meet the expenses for six months for a salaried person and 1 year for the self-employed person in the event if the regular income stops.
This fund should be liquid enough to access easily when needed. If it is used then efforts must be made to replenish it as soon as possible.
The adequacy of the emergency fund should also be periodically reviewed. It should be done annually or whenever there is a large addition such as an EMI, to the monthly expenses.
D.Separation (divorce) is another risk the families face. To mitigate this risk healthy distribution of assets between spouses are important.
For example, in some investments, one partner will be the first holder, while the other may be a joint holder, the holding pattern can be reserved in some other investments.
In case of double income families, the holding pattern can be closely aligned to the sources of income of the investment.
Another approach would be to keep the salary account of each partner distinct. This account to be used only for investment and one more for household expenses and both the partners to fund these accounts. This helps in better expense monitoring, investment record keeping and tax record keeping too.
This way you can mitigate the Financial contingency risks of life which are unpredictable but manageable if happened, unfortunately.
Investment process should started only after you are done with CONTINGENCY PLANNING.