Reducing risk is a large chunk of what financial planners will do for you. They don’t just help you make money, but a good financial planner will help you mitigate the risks and pitfalls of life that are sure to happen.
What is a Financial Risk?
No, I’m not talking about the marathon board game of Risk your brother-in-law makes you play at Christmas. I’m talking about decisions that exposes you or your family to potential financial danger(s).
We all have different risk tolerances. Some of you drive 100 m.p.h. and disregard the seat belt law, while others of you drive 5 m.p.h. below any posted speed limit and have extra air bags installed–just in case.
No matter what your risk tolerances are in life, taking financial risks (especially with family) are a sad country song waiting to happen.
We Don’t Know the Future.
This thing about taking financial risks is that we don’t know the future.
This might seem like a no brainer, yet you don’t know what’s around the bend. I know this is a party killing topic, yet death, divorce, disability, disease, a job layoff, or other unforeseen personal tragedy can all spell financial ruin if you’re taking on financial risks.
I have taken on financial risks at times in my life and thankfully survived without a scratch. There was a time period when I was single that I didn’t carry health insurance; I was invincible anyway. A trip to the emergency room would have lead to immediate bankruptcy or a decade of debt payments. This was an unwarranted risk.
Reduce Financial Risk
While it is impossible to shield ourselves from everything life throws at us, we can avoid taking risks with our finances.
Emergency Fund - Emergency funds keep the repo man away, keep the lights on, and food on the table when hard times come. Reduce financial risks by keeping at least 3-6 months in the bank.
Health Insurance- The number one reason for bankruptcies is medically related. Living without health insurance is like a kid sticking pennies in a light socket–sooner or later they’ll get shocked.
Debt- Debt is risky. Pay off student loans, credit card debt, and over leveraged property to reduce the amount of risk in your life.
Life Insurance- We just don’t know when we’ll die and when we die our income dies too. Especially if you have a family, have term life insurance in place that will replace your income should you die.
Long Term Disability Insurance- The odds are good enough for bookies to take bets on the fact you’ll be unable to work for several months of your working life. Having long term disability can reduce this risk.
Home Owners Insurance and renters insurance protect your home and belongings from the future unknown natural disasters and theft.
Make a Will- If you have a pile of stuff or dependents–you don’t want to take risks here. Plan for your estate and the care of dependents with a written and notarized will.
Risky Investments- Reduce risk by diversifying or minimizing risky investments. All investments are by their very nature risks, yet some carry more than others. See this spectrum of investment risks. Other high risk investments include day trading or forex trading.
Final Thoughts on Reducing Financial Risk
A strong financial plan not only enables you make money, but protects your estate from unknown risks. Begin to implement the above strategies to reduce the financial risks in your life.
Have you taken a risk financially? What other ways can you reduce risk in your financial life?