“Risk management.” That’s a phrase that might make you think of giant corporations run by stressed out people in suits. (Blame movies and TV shows for that one.) However, risk management is just as important for personal finances as it is for a big company.
Managing your financial risk doesn’t have to be complicated, nor does it have to involve fund managers or investors or stock brokers. All you need is some time to do a little soul-searching, perhaps a financial planner who’s got your back, and a thoughtful plan for your finances.
What is risk management, anyway?
Let’s get the big fancy definition out of the way. Risk management is the process of identifying, analyzing, and accepting or mitigating uncertainty in finances, according to Investopedia. In the corporate finance world, that might mean having a strategy for when the CEO of a company leaves, or diversifying an investment portfolio and allocating assets to manage risk.
In simpler terms that you can apply to your personal finances, managing risks means having a plan that will help you avoid losing money should something unexpected happen. Let’s get into some techniques you can use to do just that.
Nurture your emergency fund
We often equate “unexpected” with “emergency” when it comes to personal finances. Losing a loved one, losing your job, unforeseen medical expenses, and so on. Having an emergency fund to cover your expenses is one of the smartest and easiest precautions you can take to mitigate risk. You never know when you’ll need backup funds to cover you when life happens.
At minimum, you should strive to keep three to six months of income saved in your emergency fund. If you have a low tolerance for risk, where the thought of not having enough in your fund makes you anxious, save more. If you have a partner, kids, or other family members who depend on your income, save even more.
After the pandemic, we’re finding that many people are actually working toward 9-12 month emergency funds. It’s all about what you’re comfortable with, and what you want to have in place should something impact your income.
Diversify your income
If you’re relying on only one stream of income, and the dreaded “unexpected” happens, you could unintentionally lose everything. Having multiple streams of income can protect you should a financial crisis occur.
How might you set up several sources of income? Making smart investment choices is one way. Having a side hustle or getting a part-time job based on one of your hobbies is another. Even trimming your budget can free up some money to put toward savings or your emergency fund. There are rental properties, summer side jobs… the list goes on.
Consider your insurance options
Thinking about what to do in a worst case scenario is no fun, but choosing the right insurance policies for you and your family is an essential part of risk management. Insurance policies remove the burden of risk from you to an insurance company.
The most common types of insurance most people consider a must-have are:
- Life insurance
- Health insurance
- Auto insurance
- Long-term disability insurance
- Property insurance
What type you need and how much coverage you want will depend on your family, lifestyle, age, and many other factors. A financial planner can help you decide what’s best for you.
One of the best ways to manage risk in your personal finances? Know yourself. Think about your past experiences with and your attitude toward money. Your money story can have a big impact on what you consider risk and how you plan to mitigate it.
Reconnect with your money values. Check in with your short-term, mid-term, and long-term financial goals. Stick to a personalized budget that’s right for you. Keeping up to date on your finances, as well as understanding your financial strengths and weaknesses, will better prepare you to deal with unexpected events when they arise.
Plan for what you can
Our founder, Hannah Moore, is a Certified Financial Planner™ professional who helps clients plan for the expected and unexpected — but even she can’t plan for everything. That’s why you and your financial advisor have to take the information you have and build in wiggle room for what you don’t know. Doing that, plus using these risk management techniques, will help you feel more secure and ready to tackle whatever life throws at you.
If you’d like more frequent, personalized guidance on managing your finances, you can check out our BudgetingBlocks™ or Everyday Money Workbook.