There’s a personal finance skill that you need to master if you want to survive any financial crisis. This is a skill that will help you, not just during the current crisis, but all the others that you will go through. Because the recession will happen again. The market goes through a cycle that will ensure that it happens.
You need to equip yourself so you can set up your finances to be resilient enough for any situation.
According to one survey, comprehending risk is the biggest financial blindspot of Americans since 2017. While they know what risk is, the average American has a hard time understanding when the circumstances are risky for them – or not.
In the survey, the respondents were asked what they think were the difference between 2 outcomes: 10% to 6% and 12% to 4%. The answer should have been the same because these two scenarios have an average of 8% expected return. Their inability to answer the question correctly shows how ill-equipped they are to assess risks.
Now before you think that this is just for investment purposes, it’s not. If you know the basic principles, you can use this personal finance skill to make any type of financial decision. You can use risk management to ensure that you can avoid mistakes that can ruin your financial situation.
Why risk management is an important personal finance skill
You might be thinking, isn’t risk management for business owners only? No, it’s not. Besides, if you really want to be successful in managing your finances, you have to start treating it like a business. Every time you use your money for something, you have to think about the risk you are putting yourself into. How will this affect your finances? Will it have a positive effect? Or will it make things worse?
This is something that you should consider – especially if you plan on using debt. Your personal finances are at most risk when you have debt. And the more debt you have, the more you are at risk.
So if you really want to protect your finances and everything that you have you need to learn how to manage your risks.
So what benefits will risk management bring as a personal finance skill?
Prepares you for the unexpected
First of all, your skill in risk management will teach you to prepare for the unexpected. There’s no way for you to avoid it. But you can prepare for it so it won’t have a huge effect on your finances. Take emergency funds as an example. This is one of the ways you can implement risk management. When you have an emergency fund, you can face unexpected situations without fear. You know you have the means to survive it.
Protects your loved ones
Another benefit of learning this personal finance skill is the fact that it can protect your loved one. Managing your risks means you have made sure that if anything happens to you, your family will be okay. This is not just about death. It’s also for when you become ill. If you got into an accident, your family has the means to take care of you – and for their own needs as well. A perfect example of this is insurance. The claims that you or your family can get will help with the financial burden. It will make things easier to start over.
Keeps your financial status secure
Finally, your knowledge of risk management will make you feel secure about your financial situation. You know that whatever happens, your financial status will not be compromised. Whether it’s a recession or a job loss, you don’t have to make drastic changes to survive. According to reports, 12% of Americans have already lost their jobs because of the COVID-19 pandemic. If you know how to manage your risks, this information will not rattle you – because you have done your best to ensure that your finances are secure.
Tips to develop your risk management personal finance skill
Now that you know why risk management is important, it’s time to know how to learn this personal finance skill.
You can think about this as part of your financial planning efforts. There are many ways to do this. But the bottom line is preparation. Risk management is all about how prepared you are for unexpected events. That is the goal. You are managing your risk because you don’t want to be vulnerable when something happens in the future that will threaten your financial position. When you have successfully managed risks, that means you have thought ahead. You have anticipated what could happen. If a crisis does happen, you are prepared for it.
So how can you learn this personal finance skill? Here are tips that you can use.
It’s always a good idea to start with yourself. You have to understand your profile before you can think about your risk. Because the best way to manage your risk is to use your strengths. It is what you can use to minimize risks. So analyze yourself first so you can make plans accordingly.
Keep improving yourself
You are your greatest asset. So if you want to manage your risk, you need to make sure you are strong enough to do it. How do you make yourself strong? You have to keep improving yourself. Work on your skills. Keep feeding your mind. Read and research. Even if you lose everything, what you have in your head and what you can do with your hands will help you rebuild your life.
Save up for an emergency fund
This is one of the basic things that you can do in risk management. Make sure you have enough emergency funds. It doesn’t matter if you have a stable income. Or if your business is doing great. You have to make sure you have enough cash reserve for any unexpected event. After what happened with the coronavirus pandemic, we now know that anything is possible. So just be prepared for anything.
Diversify your income
This is a tough personal finance skill. Because it can be tiring to work long hours or two jobs just so you can manage your risks. But the truth is, you don’t have to work harder. You have to work smarter. Diversifying your income means you have to make sure your money is working for you. That means investing your money. Open up another source of income. It doesn’t even have to be big – at least don’t expect too much at the beginning. What’s important is you get it started. The more sources of income you have, the more secure you can be. That means the lesser the risk for you.
Get yourself insured
Getting insurance is also something that will also help you lessen the risk. Whatever you can insure, it will make you feel secure. From life insurance, home insurance, and health insurance – find areas in your life that need protection. Then you strengthen the weak areas by insuring them. That is another layer of safety for you and your family.
Limit credit use
If you really want to be aggressive with risk management, you need to limit your use of credit. Take note that it does not mean you should stop using debt. Because the use of credit can be beneficial to your finances. But if you don’t use it correctly, it can damage your financial situation. So make sure you know how to be wise with your use of credit. Manage your debt properly so it will not make your finances worse. Use it as a last resort and do not abuse it. Borrow only what you really need. And make sure you know how you will pay it off. If you use debt well, that is another layer of protection that will make you feel secure.