Personal risk management is a subject very commonly related with insurance, though the scope of it goes far beyond life insurance or general insurance policies available to individuals. Insurance is but only an important part of your personal risk management. There are different approaches to managing risk and it is in our interests that we know and understand them.

Risk management is the identification, assessment, and prioritization of risks (de fined in ISO 31000 as the effect of uncertainty on objectives) followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events [1]or to maximize the realization of opportunities. Risk management's objective is to assure uncertainty does not deflect the endeavor from the business goals.[2]

Risk Avoidance:
Risk avoidance is the first important method of risk management. Risk avoidance is the elimination of hazards, activities and exposures that can negatively affect an our health, well-being and assets. In other words, it deals with eliminating any exposure of risk that poses a potential loss i.e. not doing something that carries risks.

Depending on the circumstances, we may have opportunity to completely or partially avoid risks or not to avoid it at all. A change in our behaviour and attitude by becoming more cautious, careful and diligent can help use avoid most of the risks in our lives. The following examples will make things more clear...

Avoiding Accidents:
Following traffic rules, not over-speeding, wearing seat belts /helmets, knowing your body limits, avoiding adventure sports, always using proper safety gear, etc.

Avoiding bad Health:
Not smoking or drinking, taking regular medical tests, exercising regularly, eating properly, etc.

Avoiding damage /loss of Assets:
Using safe lockers at home, keeping valuables in bank lockers, using strong locks in shops, keeping re extinguishers handy, installing CCTV cameras, etc.

Risk Reduction:
Risk reduction refers to the precautions you can take to reduce the amount of loss in the event of the risk materializing into one. Risk reduction is a step that logically comes after risk avoidance where you are not able to avoid the risk completely. There are different methods of reducing risk for eg. Reducing the risk exposure Spreading /diversifying the risk Making a contingency fund ready for an event Being prepared with proper post event situation/actions Reducing costs /expenses in treatment/ rehabilitation Hedging the risk by doing something that will pro t when event occurs

Risk Retention:
Risk retention involves accepting the loss from a risk when it occurs. All risks that are not avoided or transferred are retained by default. This includes risks that are so large or catastrophic that they either cannot be insured against like war, flood, etc. Risk retention normally would happen when …

• The risk cannot be transferred or insured.
• The risks are small and losses are nominal in nature.
• Cost of insuring against the risk would be greater over time than the total losses sustained.
• You have the capacity & willingness to bear losses easily

A very common example of risk retention can be found in insurance policies which is known as – Deductible. A deductible means the amount which the policy holder has to bear before the insurance company starts to repay the claim. For eg. In a health policy, of say 5 Lacs, R10,000 is the deductible meaning you will bear claim expenses up to R10,000.

Risk Sharing:
Risk sharing is where you share your burden of risk or loss with others. The most common and effective form of doing so is to buy an insurance policy. Also known as "risk distribution" it works on the logic that the cumulative premium from a group of policyholders is more than enough to cover the losses from all the events happening in that group based on probability. This group of individuals typically carry similar characteristics and probability for the risk happening.

When you buy an insurance policy, the following things have to be kept in mind...

• Understand & compare the policy features & coverage properly
• Know the policy exclusions properly
• Disclose family & past history, habits, per-existing diseases, etc. honestly
• Fill ll the proposal form personally and do not sign an unfilled form

Adopting A Sound Risk Management Approach:
A question now arises as to how you will manage your risks? There is a suggested process to follow if you desire to do this yourself. No doubt, by following the below mentioned process, you will have a much better understanding and awareness of the risks that you carry with yourself while resulting into a situation where your risks are well covered at the least cost possible .

The risk management process is to Identify all the risks you are exposed to in your personal & work life Assess your vulnerability or probability of a risk event happening Estimate the financial loss /damage in case of each event happening Estimate the cost of transferring, reducing or retaining each type of risk Identify the right way to manage each risk type.

As an early 30's person, you must be recently married with or without a kid, or about to be married. Your parents and family is dependent on you and you have a whole list of targets which you want to achieve in life. You must be in the middle stage of your professional life and looking forward to own a house and a car or upgrade the existing in the near future.

Most people at this time take impulsive decisions and pay for them for the rest of their life. Some common mistakes that people in their early 30's tend to make are:

• People are mostly under insured. Most corporate employees rely on the corporate medical insurance.
• Early 30's is an age where we don't want to compromise on our lifestyle. People end up buying big luxury flats, which is something they don't require or afford at this age.
• Our tax saving is not properly planned. Usually we end up buying random traditional tax saving schemes at the end of the year.
• People may be modern in other things, but when it comes to investments; they will follow their parents and stick to conventional instruments of investments. Some might try their hands in the equity market, but with improper knowledge and guidance, they spoil everything and then return to conventional instruments.
• Investments are not aligned to goals. People invest randomly without calculating if they are sufficient to meet their goals or will that investment mature when needed.
• People think that it is too early to plan for retirement and they have the whole life to earn and save for retirement.
• People don't plan for emergencies. And many of them rely on investments / assets to meet these expenses when such emergencies arise.

You you need to polish your financial skills and plan your life as a financially intelligent person so that you can be financially much better later on. The idea is, not committing the silly mistakes, which an average Indian of your age would be making, and be smart in managing your finances.

Let's analyze our position and see if we are on the right track and if not, change the details where are going off track

Insurance:

• Medical: The insurance provided by the company usually does not include family, secondly the cover is small, and thirdly it will be gone in case of a job change. So, an individual would need another medical insurance for himself and his family. He can go for a family floater including his parents, wife and kids. The amount of the cover should be set keeping in mind the high medical costs plus the age of your parents. Another option is to buy a family floater with a relatively small protection and smaller premium and get a separate policy for your parents.

• Life: Most people view insurance as an investment and have traditional life endowment plans, but the premiums of these policies are very high and a corpus is created providing nominal returns. These plans however, do not serve the purpose, since the protection is not enough to take care of the family in case of any mishap. It would be best to go for a pure protection plans with big covers, which should be enough to support your family. The monthly premium would also be significantly lower for such policies taken at a younger age.
• Personal Accident: Most life and the health policies are structured such that they are useless if you meet any accident. Any permanent or temporary disability and hospitalization due to accident can ruin a bright future for you and your family. A comprehensive personal accident cover for a large sum is most adviced at this age where you are a bit more accident prone.

Car:

If you already have a car, the sale proceeds of this car can be used as a down payment for the next in line upgrade, and if you do not have one and can afford one, you have to arrange for the down payment from your existing savings or future bonus or may be start an SIP for this purpose. With professional growth and salary hikes, you would be able to manage the increased installments. If you have a decently working car without EMIs, we strongly suggest to continue with the car for couple of years more and instead make additional savings (in lieu of car loan EMI) during the period. This will help you save more for higher down payment and/or a better car.

Emergencies:

It is recommended that you save around 3 to 6 months of monthly cash inflow /income as emergency funds. This does not mean that you need to keep cash at home; the idea is to keep money in reasonably liquid investment avenues like liquid /debt mutual fund schemes. Emergency funds are needed for those long gaps between job change or any unexpected event might lead to need for money to meet the family's daily expenses.

House:

There is often a debate on whether you should buy or rent a home and it is often pointed out renting is better. But buying a home is often more driven by emotions and social pressures than pure finance. If is also better to delay the buying decision for home and start saving aggressively for same with a target of say buying home at age 40. By then you will have adequate wealth already created to buy a decent home and without too much of financial burden.

If you have decided on buying a home, firstly analyze your requirement according to your income and family members. Don't aim for a house which is too big to fit in your pocket as you can always trade the one you have for a bigger one later in life. Always take a life cover / insurance with you home loan to not burden your family in case any eventuality happens.

Retirement: If you are in a private job, you won't get any pension. You might have EPF and PPF, but these have lower interest rates which will mostly be offset by inflation. So, in order have a huge corpus at the time of retirement to maintain your lifestyle, you should change your strategy and divert the money towards equity, as amount invested in equity over a long term can yield returns higher than any other mode of investment. You may start an SIP and continue with the EPF and PPF, but with the minimum required amount. These will provide for your annual tax saving investments plus will serve as an investment for retirement too.

Putting some money towards retirement at this age is highly recommended since time is your friend for a comfortable retirement. With the power of compounding in equities over say 2-3 decades, your wealth can be substantially boosted which can never be made up even with much higher savings later.

Managing money may not have been one of our worries in the early stages of our life and thus, we may have developed some habits which may not be well suited to the current times and needs. So the question comes, what habits can we develop now to take better control of our money. Here are a few habits one can focus on:

1. Budgeting

2. Prioritize Spending

3. Using Debt Wisely

4. Pay Yourself

[1] Budgeting:

Budgeting starts with most basic steps of managing money, and goes to an advance level of allocation of money for various goals. It includes following steps:

A. Recording Expenses

B. Classification of Expenses

C. Setting Limits

A) Recording Expenses:

So, we start with the most basic steps of accounting for our expenses. If you have been spending without recording your transactions, first step is to record your outflows and inflows every day. This exercise may seem tedious in the beginning but, going forward this will become the most

useful and effective tool towards the total control of your money. Once you have your expenses recorded at one place move to the second step of clubbing your expenses under various heads.

B) Classifying Your Expenses:

Purpose of various expenses can be similar and different. We can classify all of them based on their importance in our lives or based on our own obligation towards them. For example: We may not be able to postpone home loan EMI payment but we can postpone the home theatre purchase to another month. Another way of classification (more popular one) can be by putting them under heads depending on the area of life they relate to. For example: Rent, home maintenance, kitchen expenses can be put under Household Expenses, similarly travelling and fuel expenses can be put under Commutation expenses to better understand the area of spending.

Major Expense Heads in an Individual Life are as under:

> Household Expenses

> Utilities Expenses (incl. electricity, water, phone, mobile etc.)

> Travelling/Commutation Expenses

> Lifestyle Expenses (incl. outings, weekend exp., dinner etc.)

> Education/Children Exp.

> Subscriptions

> Insurance & EMIs

> Other regular Out-flows

C) Setting Limits:

Different expenses have different value in our day to day life, for example: Money spent on commuting to office from home is a choice between taking a metro, auto, taxi or own car. Similarly some expense, do give us choices some do not. Going forward you’ll find that most expenses give you options, though, exercising these choices may be easy or difficult at times. Providing a limit to the expense head in the beginning of the month will give you sufficient motivation throughout the month to keep it within that limit.

[2] Prioritizing Spending:

Priority of expenses depends on the obligation or avoidable and unavoidable nature of expenses. Like we discussed above, some expenses can be postponed and some cannot be, will define the importance of that expense in your financial life. Likewise, EMIs, Insurance Premiums, Children’s School fee etc. have priority over, weekend dinners and outings, but kitchen expenses are even more important.

[3] Using Debt Wisely

Use of debt is almost common in today’s lifestyle to provide for various expenses and investments. Problem with the

Debt comes in two forms:

A. It can make things expensive

B. Creates a long term obligation

Use of debt can be tricky as you’d not like to take a long term obligation for purchasing something which will depreciate over time, for example: Purchasing expensive electronic items on EMIs. With such purchases you will quickly find that the obligation of paying EMIs for long period is a toll on your savings and may create more dissatisfaction than satisfaction from material ownership.

When and How to Use Debt?

Most intelligent place to use debt is to purchase assets that:

> May increase in value over time,

> Give you tax breaks and

> Are too expensive to be paid for in one go.

Best example for the same is real estate. But this will also mean that you can make certain investments which are riskier than a deposit but have the potential to return more than the interest paid on borrowed money. But investing by borrowing is an advanced concept and not recommended for people with weak cash inflows.

How to avoid use of Debt?

The best way is to plan in advance. Though, it’ll be difficult to avoid use of debt in all possible purchases, but planning in advance will allow you to not only avoid huge amount of debt, but will also allow you to purchase something better. Also for purchase of assets which are going to depreciate early planning will ultimately save money as well, as you can earn interest on the savings you do towards it

[4] Pay Yourself

This is a method which gives you a definite amount of money regardless of total inflow, and even when you are trying really hard to save more and more money, paying yourself first will enable you to be satisfied even with major cuts in expenses. This is what you need at a bare minimum to enjoy life as it is and not just live it for money.

The Amount you pay yourself will depend on couple of things like:

> Your Personal Expenses

> Expenses for activities to de-stress you

These are generally the expenses that keep you going and help you achieve satisfaction from your day to day life. For example: when you go to your business or office, you cannot just roam around with an empty pocket, some or the other petty expense, where it’s about an occasional coffee with colleagues or fare

for an urgent commute you will need some money which cannot be planned.

Improving Outflow to Inflow Ratio

This is the ultimate objective of whole budgeting exercise. You would want to improve your savings ratio to meet your future demands. Since, we are focusing on good financial habits, budgeting counts as the most basic and most important one. All habits and their consequential purposes as discussed above can be summarized as follows:

1. Plan in advance

2. Budget your expenses

3. Prioritize Your Expenses

4. Avoid Debt for small expenses

5. Pay Yourself

Any kind of habit takes time to sink in and become a part of your conscience. Financial habits are no different, what is required is practice and if you sincerely practice, within no time you will be living them as per your convenience. Good thing is, small concessions now grow into huge benefits later, and this is what good financial habits are all about.

Everything gets measured. Thats' how things work, information is collected, decisions are taken; all based on measurements. Every thing around us, whether it is physical or non-physical has a measure.In the field of finance & corporates, these measure assume a great significance. There are measures for evaluating stocks, valuations of companies, credit quality of lenders, returns potential for opportunities, and so on. Most of the measures are in form of ratios like for eg., Price to Earnings (PE) ratio, Dividend Yield ratio, etc.

Amidst all these measures, have you ever wondered about how can you evaluate your own financial health? What measures would be appropriate for you? Well in this article, we would be presenting few measures that you can use to assess your own financial health. We hope, our readers would take the effort of actually measuring their financial health after reading this article.

RATIOS FOR ASSESSING FINANCIAL HEALTH:

EMERGENCY FUND RATIO
Formula: (Cash + Bank Balance) / (Monthly Living Expenses)

Ideal Value: 3 to 6

This ratio measures your ability to pay for expenses with cash in hand.

This ratio indicates an individual’s ability to meet its' monthly expenses in case of an emergency or a catastrophe. Typically, one should have enough cash + bank balance to cover for 3 to 6 months of living expenses. There is no exact measure but typically would be higher for those with high chances of unforeseen expenses, variable income, change in job or unemployed, start-ups, etc where risks are higher. Those with stable jobs and settled in life stage can follow the ratio at a lower end. It does not include voluntary expenses like those on entertainment, vacation or those that can be avoided, if needed.

LIQUIDITY RATIO
Formula: Liquid Assets / Net Worth

Ideal Value: 10% to 20%

This ratio helps a person to know his financial liquidity.

Typically any person would be investing in multiple avenues / asset classes and products – both financial and non-financial. Prudent personal finance planning requires us to maintain a certain level of liquidity in our holdings to face any unforeseen financial challenges. Investments in say property can be a good investment avenue but lack of liquidity is its' biggest negative. Typically, we must have at least 10% to 20% of holdings into liquid assets/products which can be redeemed at a short notice. Anything less is not healthy.

Liquid assets can include all cash (near cash assets), equities, Equity Mutual Funds (except ELSS with lock-in period, FMPs & closed-ended funds), Debt Funds and other assets which can be redeemed within three to four working days.

SAVINGS RATIO
Formula: (Amount invested per month) / (Total Income per month)

Ideal Value: 20-30%

This ratio indicates the savings made from the total income earned for a given period, say month.

Every family must save some portion of their income to ensure some wealth creation over time. AThe extend of savings depends a lot on the income earned, life stage,expenses of the person and so on. A minimum 10% can be considered as a must while we must aim for at least 20-30% savings from our total income. The savings can be in form of cash, bank balance, mutual fund, etc. Total income includes income earned through business, profession or in the form of salary, bonus, EPF contribution, interest, dividend, rent/royalty and any other form of income.

DEBT SERVICE RATIO
Formula: (Total debt payments /EMIs) / (Family Gross Monthly Income)

Ideal Value: Below 40%

This ratio shows the ability of a person to pay the loan installments on a regular basis. It indicates how much percentage of your monthly income is used for paying loan EMIs. Typically, the disposable income of a family would be portion which remains after paying the EMIs as such payments cannot be avoided. The lower this ratio, the better it should be for you to manage your finances and save. Typically you will have to manage your investments and expenses with the remaining amount. The lower this ratio the better your debt management skills. It is advised that debt servicing should not take up more than 40% of your income.

SOLVENCY RATIO
Formula: (Financial Assets) / (Total Liabilities)

Ideal Value: >= 1.5

This ratio assesses the total assets and total liabilities to find if the person has the ability to pay off his debts.

The higher the ratio, the better is the person's financial situation as the ratio indicates the debt carrying capacity of the person. Ideally, the total debt on a person should not exceed 50% of his disposable /financial assets. A ratio of less than 100% simply means that you are in a bad financial situation and you need to get rid of your debt soon. A higher ratio of over 150% would mean that you could easily sell of some of your assets and pay off the debt.

NET WORTH
Formula:Total Assets (less) Total Liabilities

This last measure ie., Net Worth, we are covering is not a ratio but an important direct measure of your financial strength. It is the amount left after deducting total liabilities from total assets. Your net worth is a snapshot of your financial life at one moment in time, a single number representing your financial health.

Net worth is a concept applicable to individuals and businesses as a key measure of how much an entity is worth. A consistent increase in net worth indicates good financial health; conversely, net worth may be depleted by losses /liabilities or a substantial decrease in asset values relative to liabilities. One can use the measure to set say yearly Net Worth targets or to track changes to find if you are getting wealthier or not.

CONCLUSION:
The personal finance ratios help you to evaluate your financial position and take next steps. The ideal ratios can be used as general targets and you can then plan your finances / portfolios accordingly. To keep a period record of your ratios and tracking them over time can reveal a lot of information / insights into your financial situation. Only with proper information and insights can you plan and take measures to improve your financial health.