What goes up must come down. This simple truth of life explains well enough the need to be prepared. Your financial planning must ascertain the risk that could lie ahead of you.  

 

By Chitra Iyer

 

Most high net-worth families we meet feel they have enough wealth. The wealth is usually spread across their business, a slew of properties both residential and commercial, PPF accounts across all the family member’s names, bonds, stocks, mutual funds, FDs, structured products, PMS etc. Most of the HNIs feel comfortable and content that there is a continuous source of income to take care of all their expenses and a lavish lifestyle – house, shopping, travel, entertainment etc. on a regular basis. Rarely does one feel the need to save from this income!

 

One is essentially relying on:

• Continuous flow of income.
• Future flow of money to foot all the future bills.
• Lots of assets that have been accumulated over years, either by way of inheritance from parents/in-laws or by way of impulsive purchases.

 

So, where does financial planning come in?

The first and most important step in financial planning is to assess all aspects of RISK’s that you and your family are exposed to. Some of the most common factors of Risk that one should be aware of include:

 

Income is coming 

The dependency on continuous income assuming nothing can go wrong is a huge risk. What if the business goes through a rough patch? How will you provide for your monthly expenses and your travel? Will you allow your lifestyle to take a hit?

 

We always prescribe a contingency reserve of at least 6 months to a year to be set aside in a mix of liquid plus arbitrage funds to cater to such emergencies. Some people prefer to keep FDs for the same too.

 

Knowing the Business Cycle 

World over, business owners know that growth is not usually linear; there is always a trough followed by a peak. This is the risk you face in any business cycle. Sometimes, business may also need an infusion of capital. Such infusions could be either to handle sudden working capital requirements or for some urgent mega expansion plans. 

 

Hence as a part of financial planning, setting aside money from the business itself for expansion or for temporary infusion is a must for HNIs. HNIs believe investing back in the business is more than enough as the growth is under their control and hence they cannot go wrong when they are putting in all their efforts. The risk of economy or bad business deals are rarely considered as part of planning. The foundation of the business must be rock solid and there should be enough assets invested outside of the business to dip into incase of rough weather.

 

Who’s watching medical expenses? 

The risk of medical expenses in case of any ailment can never be understated. Usually, you would feel that a good medical cover would take care of sudden illnesses. However, god forbid, if one needs to handle any major ailment that requires treatment from the top doctors or at the best hospital facility, one would only want to save the family member’s life regardless of the humungous costs involved or the dent in the pocket that such an ailment would cause.

 

It is important to first assess the risk cover needs and then ensure adequate medical cover, accidental cover, critical illness cover for HNI families. Evaluating andgetting the right health cover is an absolute must.

 

Wealth for Life After You 

Apart from medical cover, life cover is usually neglected by HNIs as they feel that there is enough wealth for the spouse and the children to be looked after. If the main contributor to wealth passes away, not only does the family get impacted, but also the business. In some situations, we have seen how difficult it is for the spouse to retain her standing in the business or even in the family. She may sometimes end up being dependent on others for her daily sustenance

 

A good life cover goes a long way in ensuring security of family goals and independence for the spouse, irrespective of wealth accumulated. Making a WILL is also an important action plan.

 

Risk exposure to every family in different. You need to be prudent to transfer the risk to an insurance company, by taking adequate cover or be ready with enough to be able to absorb the risk yourself. Once you have covered all your risks, you can be rest assured to take the next big step in terms of investment risk, which can affect your business or all your investments.

 

(The author Chitra Iyer is the CEO at My Financial Advisor)