“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? In the same token, how are you preparing the younger generations in your family?
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 unexpected emergencies.
An effective financial planning considers the four foundations of cash management, debt, management, risk management and wealth management. We have previously discussed about Cash Management and Debt Management. On this issue, we will look into the third foundation… Risk Management.
A personal financial risk 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 process 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 life’s twists and turns.
Some of the more common risks we face are job loss, unexpected medical expenses, natural calamities, pre-mature death and bad investments. With our rising unemployment and challenging economy, losing a job is a real threat for many Filipinos. Losing a job or taking a paycut can directly impact your ability to meet your financial obligations and maintaining your lifestyle. One of the top concerns of many Filipinos is getting sick. With the current state of health care system, getting sick can be very expensive and can literally wipe out your savings. An untimely death, especially of a breadwinner, can have a severe financial blow and burden on the family. Ours is a country often “visited” by natural calamities like typhoon, floods, earthquake. Sadly, the gravity and expanse is getting worse each year. Experiencing any of these will not only displace you but could adversely affect your finances. Market volatility can turn good investments to bad ones, causing the value of your stocks, bonds, etc., to go down and resulting to financial losses.
Which one of these risks are you most likely to experience? Knowing the potential risks that could impact your finances will allow you to take the necessary steps to minimize their impact. While we are exposed to all forms of risks, there are just those that we are more prone to. Do you live in the earthquake or typhoon belt area? Does your family have history of critical illness? Or are you an accident magnet individual? Assessing these will be the first important step of risk management.
Create an emergency fund that should at least 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 to pay the rent or mortgage, utilities, groceries and other basic household necessities while you work your way back to normalcy. The fund should be set up separate 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. Instead of worrying and personally shouldering all the related expenses resulting from these risks, your insurance will handle that for you. 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.
Diversify your investment portfolio. As the popular saying goes, “don’t put all your eggs in one basket”. This is especially true when it comes to investing. One trigger can cause market to go up or crash. 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 are in the position to influence and manage how they will impact us. We just need to be prepared.
Wealth Management – the last foundation of financial planning will be our focus next week.
Common Personal Financial Risks
Income Loss: Losing a job, getting sick, or becoming unable to work.
Unexpected Expenses: High medical bills or major house repairs.
Investment Losses: Losing money when the market goes down. [1, 2, 3]
Main Management Strategies
Risk Transfer: Buying insurance (like health, life, or property insurance) to shift large costs to a company.
Risk Reduction: Saving money in an emergency fund to cushion financial blows.
Risk Avoidance: Staying away from dangerous or unproven investments. [1, 2, 3, 4, 5]
