We face risk in every second of our life. Some risks are known and can be seen and some are unknown and unseen. We give importance to manage some risks but we sometimes delay some risk thinking that we may never face it in life.
When our life is going very smoothly we hardly think of risk management as in good times we are least bothered of thinking of managing known or unknown risks. Risk management and Goal-based investments are two pillars on which your Financial Planning is built on.
Nobody expected the Corona crisis will hit us so badly Financially, Emotionally as well Mentally. Such kind of risks is unknown and unseen. We may not predict such risks in our lives and what will be the impact of such an event in our lives. But we can surely follow the basics of financial planning where we should have
- Adequate Emergency Fund,
- Adequate Term insurance, and
- Standalone Health insurance for our family.
Thus it is really important to give a thought over the risks we may face anytime in the future and categorize them to deal with a proper plan?
We can make the following groups and categorize different risks into those.
Group based on the impact they can make on our lives.
- Insignificant
- Minor
- Moderate
- Major
- Catastrophic
Classify your life risks according to these categories.
Share your plan to mitigate the risks…
I tried to classify the risk which I may face in the future.
- Insignificant: Small loss of money in trying out new things
- Minor: Temporary loss in the portfolio value of long term goals, Misunderstanding in relationships
- Moderate: Reduction in business income
- Major: Prolonged illness, Permanent losses in the portfolio, Bitter relationships, Permanent stoppage of income
- Catastrophic: Being dead
What can be my plan to mitigate these risks?
# Insignificant
Small loss of money in trying out new things: I am not very well versed in the Future and options and intraday tradition. Normally I am never inclined towards it. But in the future, if I want to try out this option then I will make sure that I am using only that portion of the money that I have earned from the investment and that too only 10/15%. So I am betting on the extra money which is earned by my money instead of me directly.
# Minor
Temporary loss in the portfolio value of long-term goals: We all have experienced such loss in the month of March. I too experience a 25–35% reduction in the portfolio value. But as this reduction is primarily in my long-term goals I did nothing but just keep on investing as per my asset allocation. My short-term goals investment is mostly in FDs, RDs, and liquid funds. No change in FD RD value but yes liquid fund is slightly affected and I am putting more money into it to bear with the reduction in profit.
Misunderstanding in relationships: I may happen anytime in any relationship. If such a thing is prevailing I will try to close such a misunderstanding as soon as possible. I will talk to the person to understand his/her view and try to solve it as soon as possible.
# Moderate:
Reduction in business income: Fortunately I haven’t faced a reduction in my business income but I have already made the provision for such risk by increasing my emergency fund. I have set aside monthly expenses including my insurance premiums and taxes of 1.5 yrs.
# Major:
Prolonged illness: I am trying to keep myself fit and fine with regular exercise and a healthy diet. But because of the modern lifestyle and stress, we all have chances of getting any prolonged illness. To mitigate this risk I have taken an adequate health plan as well as the standalone critical policy.
Permanent losses in the portfolio: Sometimes we made mistakes by investing in a wrong product or a product that is not suitable as per our risk-taking ability. It may result in permanent losses. If such losses are substantial they may destroy your wealth. That’s why I always try to understand the risk associated with the product before investing.
Bitter relationships: This can be a major risk one can carry if due importance is not given in a relationship. Having a strong bonding between family members is very important to have a focused and undisturbed career. So I always prefer to have strong communication with my loved ones as well as my extended family members so that the slightest misunderstanding is addressed in proper time.
Permanent stoppage of income: This is one of the major risks which we all carry. Because of an accident If we get permanent disability then our income can be permanently stopped. To mitigate this risk I have taken a standalone accidental insurance policy. This policy will help me to get monthly income with a limit to my sum assured. The second provision is I am trying hard to accommodate certain kitty which will take care of my yearly expenses for 20+years. the target can be 40*yearly expenses.
# Catastrophic:
Being dead: This is the most common risk we all carry and this is the universal truth. We all know we have this risk only thing we do not know its time of occurance. We can never avoid this risk but we can at least reduce its financial impact on our loved ones. Adequate Term insurance is the perfect solution to this risk. I have one and my family members know about it.