Everything in life comes with risk, and our finances are no exception. This reality can be particularly worrisome if you aren’t prepared for the possibilities of the future. The “what ifs” are endless, and that could provoke some financial worry. While you can’t eliminate risk, you can manage it so that you are better positioned. So, here are five tips for helping to successfully manage risk that you can use to assist with reducing your risk and build your way to your financial goals.
1. Purchase the Appropriate Insurance Coverage
Insurance coverage pushes some of your financial risks onto someone else—your insurance company. The common questions about insurance usually surround what types of coverage you need and how much. When purchasing insurance, consider what you couldn’t replace if they were damaged or lost—your home, car, boat, other recreational vehicles, and other large assets. Consider also the role that life insurance would play in your family’s lives if you were to pass away. Overall, the coverage you need depends greatly on your age, family situation, financial standing, assets, and more. It’s crucial that you talk with a financial professional about the insurance policies you should purchase to protect yourself in a comprehensive way that manages the most amount of risk.
2. Build Your Emergency Fund
Your emergency fund is your fallback. It keeps you out of debt when the unexpected happens and gives you the financial confidence you need to make moderate financial risks. If something comes up that you hadn’t accounted for, a true emergency, you will be ready. So, what constitutes an emergency? And, how much should you save?
The term emergency is highly subjective. Though it varies from person to person, an emergency is an unexpected event that dramatically affects your life—such as car accidents, injuries or other medical emergencies, necessary home repairs, or a sudden loss of your job. The definition of an emergency might be different for you and your loved ones. Discuss your savings plan with your family to determine what the money can, and cannot, be used for.
As far as the amount of money that should be in your emergency savings, this opinion varies. However, the general consensus is that you should save between three and six months’ worth of living expenses. If you lost your income tomorrow, your emergency fund should cover all necessary expenses for that amount of time. To calculate this number, review your bank account to determine how much you spend each month and what would be considered necessary in an emergency scenario.
3. Get Out of Debt, And Stay There
No matter what happens in your personal or financial life, you’ll be grateful to be without a debt payment every month. Your interest payments reduce your income, and that’s income that you could be saving, investing, or donating. More than anything, a debt-free life helps you maintain your financial independence and positions you for a successful future.
4. Diversify Your Investments
The phrase “don’t put all your eggs in one basket” rings true when talking about our investments. If there were a significant downturn, and all of your assets were in one place, you could lose everything. On the other hand, by diversifying, you can manage the risk by spreading your assets across a variety of investment types that might be less volatile. Of course, diversifying will not eliminate risk, but it will help you stay true to your risk tolerance—which factors in your age, financial goals, and other elements that your financial advisor can guide you through.
5. Create Additional Revenue Streams
If you were to lose your job suddenly or had another unexpected event pop up in your life, having a second income source can help you recover quickly. This could come in many forms: a side business or strategic investments, for example. When you aren’t relying on one source for the entirety of your income, you can adjust easily and quickly.
Are you concerned about your current financial risk? We can help you reduce risk through a comprehensive financial strategy. Contact us today to schedule a consultation.
