Insure first before you invest

Risk planning is critical and ones own mitigation strategy should be taken with the same seriousness as evaluating an investment option

Ravi Dikshit started investing in mutual funds,bonds and fixed deposits and kept insurance pending. While his financial planner tried to caution him against such a strategy,he felt he would be better off by opting for products that helped him earn rather than those that could cover unlikely risks. Unfortunately for Ravi when the earthquake stuck Gujarat couple of years ago,he did not have any kind of insurance to fall back on.

Nick Murray says,Only when you have taken care of all the bad things that may happen to you,do you earn the right to aspire for the good things. Bad things can happen you may fall critically ill,meet with an accident,your employers may decide to close down operations overnight and move on8230;

That is the reason risk planning is critical,sensitive and there is a reason why it is placed on priority before investments in the financial planning process.

Risk Planning

Risk planning involves four steps:

One,identify what all risks exist. Please note,we say risks exist. Whether you like it or not,the risk exists. Risk of loss of life,resulting loss of income,risk of falling sick or meeting with an accident and resulting hospitalisation and loss of income,risk of dependents falling sick and resulting expenses,risk of assets getting stolen or destroyed. Bad luck,if any of these happen,that will burn a huge hole in your pocket. You are not special that it will not happen to you.

Two,if the risk happens how much would you be impacted financially? What would it cost you to pull your life together again? That is the starting point. If your car gets stolen,the cost of repurchasing the car would be the impact of the risk.

Three,how would you like to deal with this risk? You may choose to avoid or reduce the risk partially. Like old people can stay indoors in the dark and avoid or reduce the possibility of falling down. Not all risks can be avoided or reduced. You may retain or fund the risk. Create a backup resource to handle expenses if the risk happens. You may start saving up for long-term care in old age,right now. Finally you may transfer the risk through insurance.

Four,choose the right option and implement the action point. You may have a choice to fund or transfer the risk. You would choose whichever option makes economic sense like insurance against critical illnesses for senior citizens,if at all available,may be ridiculously expensive. You may just provide for such a risk with available resources if available and the cost of that would be the opportunity lost of investing and yielding higher returns.

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Finally,implement or act on the option chosen. Do the paperwork for insurance or start building the funding corpus or move resources allocated for the risk to safe options or just whatever has to be done.

Now,this sounds like a lot of work. Yes,it is a lot of work and your financial planner would do this for you. What you need to do is understand what might happen if you do not plan for emergencies or risks?

Ravi was not adequately prepared to tackle the ricks,and that is not a situation that one would want to land up in; it is not worth the risk. Build the emergency fund. Assess risks and take appropriate insurances. Then,invest in peace and enjoy the benefits.

8211; Author is Founder amp; CEO,Freedom Financial Planners