“Unprecedented events occur regularly—be prepared”. – Seth Klarman
With all the Philippine economic indicators going haywire – rising inflation, depreciating peso, increasing fuel prices, worsening unemployment/underemployment, etc – how financially secure and confident are you to face life’s uncertainties such as job loss, unexpected medical expenses, natural calamities, pre-mature death and bad investments?
Whether we like it or not, it’s becoming more obvious how vital financial planning is. We just cannot leave our financial future to chance. Nor can we rely on our government . We need a clear roadmap for achieving our financial goals, managing money, and preparing for those “what ifs”.
One of the important parts of financial planning is managing personal financial risk. A personal financial risk (the what ifs) is anything that can put a dent on your finances, safety, and quality of life. While we cannot totally eliminate risk, understanding and managing it can give us a better chance to a more secure financial future.
Personal financial risk management is the act of identifying, assessing and lowering dangers that can affect your financial security and of your family. Its primary goal is to protect your asset, income and financial stability from the “what ifs”.
Are you ready for life’s “what ifs?” What if you lose your job? With our contracting and challenging economy, losing a job is a real threat for many Filipinos. Losing a job or taking a pay cut can directly impact your ability to meet your financial obligations and maintain your lifestyle. What if you get sick? One of the top concerns of many Filipinos is getting sick. With the current state of our health care system, getting sick can be very expensive and can literally wipe out your savings. Some, literally, die waiting for medical help to arrive. An untimely death, especially of a breadwinner, can have a severe financial blow and burden on the family. It can drastically turn to worst the lives of everyone in the family. What if your house is damaged by calamity? Ours is a country often “visited” by natural calamities like typhoon, flood, earthquake. More recently, we have seen how the gravity and expanse is getting worse each year. Experiencing any of these will not only displace you but could adversely affect your finances. Then, there’s market volatility which can turn good investments to bad ones, causing the value of your stocks, bonds, etc., to go down and resulting to financial losses. What if you incur investment loss?
While we are exposed to all forms of risks, there are just those that we are more prone to. Which one of these risks are you most likely to experience? Do you live in the earthquake or typhoon belt area? Does your family have history of critical illness? Or are you making calculated risks in investing?
Knowing the most likely “what if” that could impact your finances is the first step in managing your financial risks, as it will allow you to take the necessary steps to minimize their impact. Now, the next and more important question is, how prepared are you should they happen? Have you even made preparations for it?
First on the list is to create an emergency fund that should enable you to cover at least three to six months of your living expenses should any of the above risks happen. With an emergency fund, you and your family can continue, without needing to take out a loan or wait for dole-outs, to pay the rent or mortgage, utilities, groceries and other basic household necessities while you work your way back to normalcy. You may start with small amount but do it consistently. Once you have built the habit and the confidence, you will see yourself saving for more. It is suggested to keep your emergency fund in an instrument where your money earns interest but accessible as needed. Also, the fund should be set up separately from your other savings account to avoid being used for other purpose. A money that is kept together, is spent together.
Get yourself adequately insured. This includes health, life and property insurance coverage. Many of us have experienced how one sickness or one calamity can wipe out our lifetime savings. By having insurance, instead of worrying and personally shouldering all the related expenses resulting from these risks, your insurance provider will handle that for you. You can start with small coverage then upgrading it to suit your evolving life stages. Insurance should not be treated as an expense, it is an investment that you do to have the peace of mind and quality of life should the unexpected risks happen.
As the popular saying goes, “don’t put all your eggs in one basket”. This is especially true when it comes to investing. Diversify your portfolio to manage your financial risks . One trigger can cause market to go up or crash. A real estate bubble burst can cause property prices to drop fast across the market. Spreading your investments to a variety of asset classes may not guarantee profitability and protection against losses, but it will surely help reduce the impact of market volatility on your portfolio.
No matter how careful or mindful we are, risks and dangers will always be there. While we have no control over them, we can put ourselves in a position to influence and manage how they will impact us. What if any of the above happens? We will be prepared!
