Being a financial planner, I always believe in risk management as the foundation for an effective financial plan. Anything that can’t be afford to be lost, should be protected. Else, one would end up with a dent on the financial assets or savings. Thus, risk management gains prominence.
Risk management provides financial security via financial strategies, tools and services. The idea is to reduce large financial losses in case of unplanned events. A comprehensive risk management strategy would include personal, property and liability risks. The risks can be effectively managed using three important tools: insurance, emergency funds and succession planning.
Get the right term insurance that covers all your financial obligations towards your dependants like education, marriage, etc. Additionally, your sum assured should also cover any non-insured liabilities. Besides, the medical insurance should cover the unexpected medical expenses if the family.
Other insurance products like personal accident, critical illness, cancer care etc. may also be taken depending upon the job profile, family medical history, demographic location, income etc.
The dictionary definition of emergency fund is ‘a serious, unexpected, and often dangerous situation requiring immediate action.’ Such a situation often ends up wiping out investments and savings.
Ideally, one should have an amount enough to cover at least 6 months committed expenses in the form of an emergency fund. This fund would come in handy for obliged expenses like EMI, groceries, rents, etc. in case of a layoff or job loss. The emergency fund would be useful even in case of any medical emergencies. Even though the medical insurance would be useful during such times, one needs to make the initial deposits before admitting the patient.
Wise way to park the emergency funds is in the liquid funds, which is the most conservative fund in the mutual fund category. It benefits in two ways – one can stop the money from getting eroded in purchasing power and at the same time reduces the individual’s tax liability.
After securing assets, it’s essential to plan the smooth transactions of all your assets to your legal heirs through a WILL to avoid unwanted claims by friends and relatives by law. Also, having a Will helps avoid the payment of additional money by your heirs to the courts to claim their hierarchy.
In conclusion, risk management is the base for an effective financial plan. Lack of risk management means, risk of withdrawing the investments made with long term goals or fall prey to liabilities during emergencies.