Common Mistakes While Doing Risk Mitigation in Personal Finance

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A cover that reduces either the probability or consequence of threat to the financial safeguard of a person (that may follow in the event of exigencies such as the demise of the individual in a road accident etc.) is referred to as ‘risk mitigation’. The rising cost of healthcare has made it necessary for every individual to cover himself and his family from financial instability that may arise in case of hospitalisation. Considering today’s lifestyle, every individual is exposed to various hazards such as road accidents, injuries, illness etc. while travelling to work place or back home.

Also, the impact of inflation is not taken into account by individuals. Inflation has a devastating effect on your income – eroding your wealth over time. Today most people do not take care to mitigate the risk inherent in their investments/savings as well as in insurance cover. They, thus commit grievous mistake by taking an ill-advised decision with their hard earned money – the key aspect of their future survival. In this article, we look into some of the mistakes, people often commit with regard to their money in not considering the importance of insurance and investments in their life.

Mistake #1: Inadequate or No Medical Insurance Cover
Despite being aware of the need of insurance, people tend to ignore it to cover themselves and their family against the risk of unfavourable aspects, thinking that they cannot afford premiums. This kind of mindset will not benefit you, if you pay large amount in the future for a mishap instead of paying small premiums today. In such a case the key earner of the family should feel responsible to protect his dependents (family members) by considering taking a good medical insurance cover. This helps you to reduce/eliminate the risk and danger of getting into financial ruin.

Mistake #2: Not Saving For Things Other Than Monthly Expenses
Today, a vast majority of the people in India don’t have any emergency fund to help them, if situation demands. People just ignore to save for things other than monthly expenses. This happens because of lack of planning for an emergency fund and lack of habit of regular savings. If you have a habit of saving money for the things other than monthly expenses, you can earn a profitable return on your savings for vehicle down payment, house purchase, marriage, computer etc.

Mistake #3: Avoiding Term Insurance – Focusing On Money Back Policies
There are term policies which provide only insurance cover till the end of policy term. There are ULIPs, money back and endowment policies in market that provide insurance cover along with the returns at the end of the policy period. Most people find the second option better and the insurance agent would also tell you the same, but indeed, that is not the case. Term insurance for a fraction of the cost of a money back policy can provide lot more insurance.

When you don’t have much income and have dependents whose financial needs are dependent on your income, you must take a term insurance policy on yourself for 7 times of your annual income. In case of your death, your family would be at benefit if you opt for pure term policy.

Mistake #4: Ignoring the Impact of Inflation
Inflation grinds to halt all your financial progress and the value of your investments. There are many people who simply buy sub-optimal financial instruments without calculating the risk with proper guidance or research. Many seem going overboard in high risk investments resulting low or no profits in long-term. Always proper research about the performance of the asset class or the financial instrument is required duly considering the impact of inflation. Else, you may end up getting negative returns on your investments.

Mistake #5: Delaying Investment – Ignoring Retirement Planning
A small investment today will make a big amount in future. If we have the benefit of safe deposits with power of compounding, then what is the need for delaying investment? Many people seem to think that they need to consider retirement planning only after getting the age of 50 years. In fact, retirement planning carried out at early age will give huge rewards. If you do not make investment decision now, you may not get the opportunity of earning a substantial surplus in future.

Mistake #6: No Proper Accident Insurance
Lastly, the accidental insurance, probably the cheapest of all types of insurance, is ignored by many people. The cost of the policy ranges from Rs.500 to Rs.900 for a large insured amount of Rs.10 lakhs. Many salaried individuals do not understand the importance of accident policy. Think practically for a moment; can’t you keep a side Rs.900 per year for an unexpected adverse incident? You can do this by deploying your bonus/surplus from your annual income. A casual attitude towards sudden disaster in your life will put your family members in a very vulnerable situation.

Thus, in order to ensure that your family lives a healthy lifestyle, get adequate insurance and pray that you get no diseases or meet accidents. Also, a small investment at early age will take you to better financial situation. So, overcome your mistakes by doing risk mitigation in your personal finance.