Risk management is a methodology to mitigate negative consequences resulting from threats and uncertainties. In this article, I’ll be exploring financial risks focused on personal finance and how to minimize these risks. Since risk management is a huge topic, I am going to limit it within the scope of the REAL Wealth Building framework — specifically, we will be looking at (1) income risks, (2) expense risks, (3) assets and investment risks, and (4) credit and debt risks.
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This type of risks deals with your ability to produce income:
- You die.
- You become disabled and are unable to work.
- You lose your job.
- You are underemployed.
- You might outlive your income producing assets (for retirees).
Income risk management methods:
- My top of the list favorite is having multiple alternative income streams. These income streams can help you (or your family) mitigate most of the risks above.
- Proper level of life insurance coverage to ensure that the surviving family members could maintain the same lifestyle in case you die.
- Disability insurance to ease the financial pain when you become disabled.
- Proper career management and continuous learning to help mitigate the risk of unemployment and underemployment.
- Proper retirement planning, frugal living, and annuity to reduce the chance that you’ll outlive your assets.
Expense risks boil down to:
- You are spending more money than you earn.
- You are not earning enough to meet your needs.
- You have emergencies that force you to spend money.
Expense risk management methods:
- Practice frugal living to lower your expenses. You could also employ some of these geeky expense reduction techniques: Pareto Principle, Quick Wins, and Scattergram. This way, you could spend less than you earn.
- Learn how to earn extra income so that you could earn more than you spend.
- Start an emergency fund so that you have reserve cash to deal with emergencies.
- Carry proper insurances such as car insurance, home insurance, and umbrella insurance to ward against major catastrophe (thanks Tropper!).
This concludes the first half of personal finance risks and risk management series. In part 2, we’ll be looking at risks that deal with your assets and liabilities.
Pinyo Bhulipongsanon is the owner of Moolanomy Personal Finance and a Realtor® licensed in Virginia and Maryland. Over the past 20 years, Pinyo has enjoyed a diverse career as an investor, entrepreneur, business executive, educator, financial literacy author, and Realtor®.