There is so much wisdom in this one sentence that it needs careful reflection.
People expect life to be a smooth, sedate, upward ride, but it is anything but that. In fact, every facet of life has its ups and downs – sometimes, they are positive and at other times, they may be challenging.
Contingencies
But a challenging event or a situation should not completely disrupt our lives. If planned well, a setback like a job loss can be taken in its stride and even set the stage for future prospects.
Another such contingency is medical expenses for the elderly without insurance, infirmity and home care for elderly, assistance to someone in the family due to an unforeseen event (like an accident or death), need to stop working due to medical conditions, a sudden change in goals requiring additional money (like a child opting for medicine instead of engineering in college).
Apart from all this, there could be Black Swan events like the covid pandemic. It could also be in the form of geopolitical disruptions like we are experiencing now, which can unsettle careers.
Normally, a job loss occurs when a company loses direction and momentum, fails to adapt to the changes, or even pursues incorrect strategies and directions, leading to a steep downfall. This has nothing to do with an individual’s performance or competence.
Job losses also occur due to strategic reasons like shutting down a division which may not align with the company’s direction. Downsizing also happens when productivity improves dramatically through technology, making some people redundant. Some companies even let go of people when their profit numbers are not met.
What you can do
Still, there is much we can do to mitigate the risk of a job loss, or another such contingency.
We need to build financial resilience from the start—not when we are facing the prospect of a job loss. We need to have a financial plan, which is a blueprint for our future. There are a few things a financial planner does, which one can adopt.
The first thing to do is to have an understanding of all expenses and have a budget. This may look obvious. But most people do not know how much they spend and work without budgets.
Once the expenditures and loan instalments are taken into account, the remaining amount will be the surplus available. This surplus can first be used to provide enough liquidity. Normally, 3-6 months of expenses (including EMIs) is a good liquidity provision. Those in business or others in a turbulent industry may set aside up to one year worth of liquidity.
The next thing to do is to provide for contingencies. This is provisioning to take care of disruptions in income, spikes in expenses or goals, as well as provide for situations that are difficult to anticipate (like a pandemic) or others which can be anticipated but the timing is uncertain (like healthcare needs of the elderly in the family). We need to estimate such contingency requirements and provide for them.
Goals, insurance
The other important thing is to provide for upcoming goals, for up to three years. If we already have goals in the next three years totalling ₹22 lakh, we need to allocate money towards these from the assets available as well as invest regularly from the monthly surplus, to reach the targeted amount.
Sufficient personal medical insurance needs to be in place for the family always, which will come in handy in a job loss situation. An appropriate amount of life insurance also needs to be taken to offer a good security net to the family.
Lastly, the remaining monthly surpluses will need to be invested properly for wealth creation and retirement. The portfolio to be created needs to take into account the risk, returns, taxation, tenure, liquidity, etc.
These are some of the important elements of financial planning that we need to do.
A professionally crafted financial plan will also provide for lifestyle expenses and will allow us to enjoy life without going overboard and wrecking our future.
Being prepared for most uncertainties is just a matter of careful planning and putting a security net in place. While it cannot anticipate and provide for everything life might throw up, a carefully crafted plan would hold a shield to most situations.
But remember, we need to mend the roof when there is sun up there. The time to start is now!
Suresh Sadagopan is the MD & Principal Officer at Ladder7 Wealth Planners and the author of the book “If God Was Your Financial Planner”.
