How to Evaluate and Manage Personal Financial Risk


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While we continue to go through life, our economic stability continues to change. We constantly face the risk of uncertainty or possible financial loss. I am a great advocate of stability, which is only possible with good health and financial wealth. Therefore, this makes the evaluation of personal financial risk and management critical.

This article serves as a guide to help you evaluate, plan and manage your own personal financial risk. A good risk management plan can help you manage your exposure to uncertainty and financial loss, which can be achieved by identifying major risks and determining suitable ways to manage them.

Personal Financial Risk And Mitigation Options

Here are some risk factors and options to consider while managing your personal financial risk.

And as always, there information presented in this article is for informational purposes only. Therefore, please consult with your financial advisor before making financial decisions.

Healthcare Costs

It is not uncommon for families to be left in financial ruin when a loved one becomes critically ill. We have the most unreliable medical system that continues to demand more for us than it can offer. What’s worse, the cost of medical care is rising every day and the government is unwilling to ensure quality care is available to all through universal healthcare.

Thus, medical expenses and funeral expenses will continue to erode the wealth and safety net of many families and compound their economic fragility.

Proposed Solutions:

Therefore, to adequately mitigate this risk you’ll need both financial and non-financial solutions in order to position your investment portfolio for the long-term. Even with the best medical insurance, which can be quite expensive, not everything is covered. Therefore, you’ll need the following:

  • Good medical insurance that you can afford.
  • A financial cushion for uncovered medical costs.
  • Take on a healthy lifestyle by incorporating daily exercise, proper nutrition and preventive care

At the end of it all, we are seeking to reduce the potential hit to your finances by staying healthy.

Premature Death

The premature death of a breadwinner can seriously set back a family financially. The financial goals of a family can completely come to halt. It becomes quite difficult to secure the children’s future or the family’s retirement without a consistent flow of income from the breadwinner. Therefore, to ensure peace of mind, no matter what, you’ll need careful introspection and analysis to manage this risk.

Proposed Solution:

To manage this risk, you’ll need to take on life insurance. Life insurance is a risk tool that can be used to transfer the financial risk of a family, in case of the holder’s untimely death. You can choose to either take on term or permanent life insurance. Term insurance tends to be less expensive but doesn’t guarantee lifetime coverage. You can estimate your death benefit in simple terms as equal 10 to 18 times your yearly gross earnings.

While you do so, consider your financial position and other assets, which may reduce the amount of life insurance you may need. Also, remember that the cost of life insurance increases as you get older, as the probability of death increases with age.

Lean more: How Much Life Insurance Do You Actually Need?

Becoming Incapacitated or Unable to Work

As life happens as it always does while working in high-risk jobs or going about life, you may find yourself incapacitated or unable to work due lose of ability to perform everyday tasks.

Proposed Solutions:

Disability insurance and long-term care insurance, are two main insurance products to help through situations like these.

  1. Disability Insurance for when you are left incapacitated. This form of insurance insures the owners earned income against the risk that disability creates i.e. preventing you from performing your normal work duties.
  2. Long-term care insurance coverage for when you are unable to work and need specialized care. Another more affordable alternative to this is an annuity with an income benefit rider that lasts the owners lifetime.

A great policy that replaces at least 60% of your earnings during the working years will go a long way.

Learn More: Is Whole Life Insurance a Good Investment?

Outliving Your Money

Outliving your money is quite a big risk for those without proper financial planning. A proper financial plan will help you nail down your budget and estimate how much you’ll need to last your lifetime. It takes into account various factors such as interest rates, savings and inflation to get a realistic figure.

There are many ways to avoid outliving your money, however, I will only focus on the simple insurance and investment products that pay a series of guaranteed payments during your lifetime. How much you get paid is entirely based on how much you put in – a number you need to get right from the start.

Proposed Solutions:

1. Annuities. An annuity is a great product that guarantees income as a living benefit or a death benefit to the beneficiary.

2. Pension Fund. A superannuation, provides retirement income.

3. Social Security. The National Social Security Fund, commonly known as the NSSF. It is a government-run fund that provides retirement benefits for both everyone.

4. A diversified portfolio that you can withdraw 4% amount annually. Sometimes you can do everything right. Have a plan, invest early but market volatility threatens to wipe out your investment. A diversified portfolio is the best way to protect your investment against market volatility. So invest well.

Learn More: How to Produce Income From Investing Forever

Tame the Risk

Risk management as applied in financial planning can utilize insurance and investment products. Whatever products you select to mitigate your personal financial risk, evaluate their cost and determine their suitability to your own financial situation. Be thorough when making your considerations and remain honest with yourself.

If you read this and realize you don’t have an actionable plan custom-fitted to your goals, interests, resources and abilities, then consider working with us. We can help you develop an appropriate financial plan that works for you.

Happy Planning!

Image Credits: Top by Suzy Hazelwood from Pexels

Disclaimer: This information is provided to you as a resource for informational purposes only.

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Irene Makanga
Irene has an MBA in Finance and is an avid businesswoman, passionate about financial literacy.

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