Similar to business houses, we as individuals, often face unforeseen events in our life. Risk is defined as a potential for loss, due to some action you have taken or if you fail to take action, in some cases. When we say personal financial risks, we mean risks involved with your personal finance. Let’s try and understand key personal financial risks through the following conversation.

Raj, a prudent financial planner meets his friend Rahul and they get chatting about personal finance. Although Rahul is in an excellent job with a good income, he has not done any planning of his personal finances.

Raj: Hi Rahul. How is work?
Rahul: It is great. I got a performance bonus of Rs. 5 lakhs last week.
Raj: That’s nice. So have you planned where to invest this amount?
Rahul: Well, I haven’t thought about investments now. I need to enjoy the money I have got; so I will be going on a foreign trip with my family.
Raj: That’s fine. But you will need to start planning on your goals.

No Planning of Financial Goals
Rahul: Is it important to plan? Any surplus of income over and above my monthly expenses lies in my savings bank account. So what is the need for planning?
Raj: Goal planning is very important. When you begin to pen down your goals along with the timeframe, it helps you plan your investments accordingly. Some important goals would include higher education for your children, their wedding expenses, medical expenses etc. Unless you plan your goals, you will not be able to achieve these goals.
Rahul: Ok, this makes sense.

Inflation risk:
Raj: Another factor you need to remember while planning your long term goals is inflation. An expense of Rs.10000/- can increase by more than 3 times in 15 years at an annual inflation rate of 8%. Thus when you plan your investments, you must ensure that the return from these investments exceeds the inflation rate.
Rahul: So should I withdraw everything from my SB account to invest?

No Emergency Corpus:
Raj: No. It is important to have liquid savings to meet unexpected expenses and contingencies. Some cash along with liquid investments which can be realised at short notice is a must.
Rahul: Where can I make investments?

Failure to diversify investments:
Raj: It is essential to diversify your investments in various asset classes. If you do not diversify, your risk is concentrated in one asset class. Diversification helps in reducing your overall risk and returns are also adjusted accordingly. The extent of diversification depends on your risk appetite, your goals and the market scenario. Do you have an insurance policy?

No or Inadequate Insurance:
Rahul: No. I haven’t taken a life cover yet.
Raj: Please do so immediately. If you do not have a life insurance cover, your family will be in trouble if something happens to you. It is also important to take a family health insurance policy as this will take care of any huge medical expenses. Acquire insurance that offers the best protection from loss, rather than irrelevant benefits. Have you planned for your retirement?

No Focus on Retirement Planning:
Rahul: No. But why should I plan for retirement when it is such a long way off?
Raj: That is exactly the reason why you should start now. In addition to your provident fund, you must also buy a good pension scheme, which will ensure regular cash inflows post your retirement.
Rahul: Thanks Raj. This has been a very useful discussion.

Financial risks are as pertinent to individuals as Corporate and it is important for you to take the right steps in mitigating these risks.

Team Getting You Rich