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How Risk Management Ties Into Your Financial Plan

How Risk Management Ties Into Your Financial Plan

| February 07, 2017

This article creates consciousness on dangers you face outside of the funding international. Primary focus of risk management is to shield your achieved targets, dreams, treasure and personal well-being from your “what ifs” that would become “what now”?

Risk management has a fluctuating nature, the risks that we face and the techniques that we use to guard ourselves according to our fiscal status. As an example, at some point of our early incomes years we have a tendency to have many commitments, children, mortgages and automobile loans, and relatively little monetary property. Untimely loss of life and incapacity are key dangers to our desires so we study lifestyles and disability insurance to offset those risks.

Risk is just a fact of life, we might not like it, but it’s no longer going away.

There are two kinds of risks:

Pure Risk – We will simply lose if an event takes place: as an instance, the risk of a flood doing damage to your private home in any given year. Either the residence is damaged with the aid of flood, or it is not. This type of hazard is typically insurable.

Speculative Risk- We will lose, benefit or stay the same.  Gambling is an instance of speculative risk; you could win cash, lose money, or break even. This sort of risk is not traditionally insurable (although there are sometimes approaches to hedge those dangers, like diversifying your funding portfolio).

Risk Management involves three basic steps –

  1. The cause and nature of the risk needs to be identified. As an example: premature dying, which leaves the circle of relatives to cope with lack of income to pay money owed and living expenses.
  2. How much risk are you willing to accept? For example, with regard to home, car or medical insurance, how much risk are you willing to accept with respect to the deductible versus monthly insurance premiums or with regards to investments... do you have a long time until retirement?  If so, you may be able to wave the ride of stock ups and downs longer than a person within 5 years of retirement. 
  3. Decide a means to accept the risk that you don't maintain; ie you will have to weigh the expenses and determine the negative impact upon your personal or family finances.  We could insure ourselves from nearly any chance however more financially in deficit paying the rates.

5 Distinct Strategies of dealing with risk-

Risk avoidance – Just as it states, avoidance, you would need to avoid these high danger sports or activities that would be catastrophic to you financially should they happen.  Such activities could be sky diving, smoking, reckless driving, drinking and driving, etc. 

Risk retention – Self-insurance which means that you realize there isn't a financial threat to you because you don't have debts or obligations, family that will be missing out on your income, or the life. Similarly, if you have the financial means to cover out of pocket for the potential unexpected accident. 

Risk reduction – Included loss prevention and control basically involves means in which one would reduce various risks such as fire alarms, home security systems, air bags in vehicles, weight or smoking cessation programs and the like. 

Risk sharing – This one is touched on above in the "how much risk are you willing to accept" steps.  You are essentially sharing the risk when you take on a high deductible, for example.  Higher deductibles usually have a lower monthly payment/premium which counters the high deductible.

Risk transfer – Risk transfer is complete transfer of the risk to a 3rd party via an insurance premium. Examples of this are life and disability insurance as well as liability risks. 

Should you have any questions about risk management for your personal or family financial plan, want to discuss what you currently have in place or ready to establish all of these things, please contact GPS Wealth, as we are happy to help navigate the waters for and with you.

Securities offered through Securities America, Inc., Member FINRA/SIPC. Advisory services offered through Securities America Advisors, Inc. GPS Wealth Management and Securities America are separate companies. Securities America and its representatives do not provide tax or legal advice; therefore it is important to coordinate with your tax or legal advisor regarding your specific situation.  The opinions and forecasts expressed are those of the author, and may not actually come to pass. This information is subject to change at any time, based on market and other conditions and should not be construed as a recommendation of any specific security or investment plan. Past performance does not guarantee future results.