Personal financial risk management is the process of identifying, assessing, and mitigating potential risks that could affect the financial security of you and your loved ones. Risks could include illnesses, accidents, loss of income, natural disasters, or legal liabilities. After you assess these potential risks, you’ll be in a position to take steps to minimize their impact through purchasing life insurance, creating an emergency fund, or making informed decisions about investments.
What is financial risk?
Personal financial risks are occurrences that can put a dent on your finances, health, safety, and overall quality of life. While risk can’t be eliminated, understanding and learning how to manage risks can give you a more secure financial future.
Types of Financial Risk
These are the types of personal financial risks that you may face:
1. Income loss
Job loss or a significant reduction in your income can lead to difficulties meeting your financial obligations and maintaining your lifestyle.
2. Unexpected medical expenses
High medical expenses due to illness, injury, or an unexpected health issue may not be fully covered by your medical insurance.
3. Premature death
Passing away unexpectedly can place severe financial burdens on your family.
4. Market volatility
Market fluctuations could cause investment losses, affecting the value of your stocks, bonds, and other investments.
5. Property damage or loss
Property damage or loss due to events like fires, floods, theft, or natural disasters could affect your finances if your property isn’t fully covered by insurance.
6. Legal claims
Legal claims and lawsuits can result in financial losses, especially if you don’t have liability insurance in place.
7. Personal legal liabilities
Personal legal liabilities from accidents or injuries may not be fully covered by insurance.
8. Outliving your savings and investments
Outliving your savings and investments may force you to rely on family members for financial assistance or on government programs such as Medicaid and Supplemental Security Income (SSI).
Risk Management Strategies
To prepare for the unexpected, consider taking these personal financial risk management steps:
1. Assess your risks
Identify potential risks that could impact your financial security, such as loss of income, illness, injury, or natural disasters.
2. Emergency fund
Open an emergency savings account and set aside funds to cover three to six months of living expenses. This includes expenses like rent or mortgage payments, utilities, groceries, and necessary household items.
3. Insurance coverage
Evaluate your insurance needs, including health, life, disability, and property insurance. Make sure you have adequate coverage to protect you, your family, and your assets.
4. Healthcare planning
Develop a plan for dealing with unexpected healthcare expenses. Making contributions to a Health Savings Account (HAS), if you are eligible, is one way to implement such a plan.
5. Diversify investments
Spread your investments across a variety of asset classes and in different investments within asset classes. This can help reduce the impact of market volatility on your portfolio. Of course, diversification does not guarantee a profit or protect against market loss.
6. Estate planning
Work with an estate attorney to create a will to ensure that your assets are distributed according to your wishes, and consider setting up trusts to minimize tax implications and avoid the probate process for any assets held by the trust.
7. Budget and debt management
Maintaining a budget can help you track your spending and manage your debt, which can help you stay financially resilient.
8. Review your risk management strategy regularly
Review and update your risk management strategy as your financial and life circ*mstances change.
9. Seek professional guidance
Work with a New York Life agent to gain more insights into some of these risk management strategies that align with your short-term and long-term goals and fit your unique circ*mstances.
