Tri? No, this is not some fancy jargon, but, just means tri as in three. This article will give you an insider’s perspective of the three major risks involved in personal financial planning for salaried professionals. As most of us know Risk is that part of our life that we are unsure of, which cannot be predicted accurately. Every phase of our life is filled with risks. The good thing is that jeopardy in personal finance can be clearly defined. Once we have a clear definition we can always work on reducing the effects of the risk happening.
The risks associated with our personal monies can be categorized under 3 broad areas:
1. Personal life
2. loss of income
3. Rising prices (Inflation)
Let us look at what each one means to our personal finance.
Personal Risk: This is a very broad category and can be defined as all the types of risk associated with ourselves. This includes the risk of falling ill or any issues with our health. Personal risk also includes the threats associated with the people in our life about whom we care or are responsible for. There are many kinds of safety issues associated with our personal life, risk relating to travel, getting cheated by a friend or close one, even risk relating to emotional stuff.
Protecting oneself against personal risk – The best way to protect ourselves against the ill-financial-effects of personal risk is insurance. Take health insurance, fire insurance for house, vehicle insurance and most importantly life insurance. Nowadays there are very niche insurance policies like wedding insurance too that are available in the Indian market.
Inflation risk: Prices of thing we need and things we buy are always rising and this can lead to a loss of our ability to buy them. The biggest worry is about whether to buy something now or later. The risk with buying later is that the price may be higher then. The risk with buying now is that we may not necessarily need the stuff now and thus end up locking precious liquid money by buying it.
Protecting against inflation risk: The best way is to set goals for high cost purchases and keep a track of the prices continuously. If at a point you realize that the prices may jump very high and also have enough cash accumulated, buy it. Small value purchases and regularly used stuff cannot be really protected against. You cannot buy 100 kgs of onions and store just because someone said onion prices are going up. Stocking up is a good way to protect against inflation risk, provided the items can be stored for long time. Many families buy a year’s quota of pulses, cereals etc to protect against monthly price fluctuations.
Income loss risk: Although we would always like to believe that our jobs are forever, it may not always be the story. Companies which are stable could close overnight. We may be forced to quit our job at anytime due to personal reasons.
Protecting against income loss risk: The best way to protect against income loss risk is to have at least 6-8 months’ salary as cash balance in a savings bank account. At the same time keep honing your skills so that you can immediately get jobs if the need arises.