Your income is defined as any means by which you can earn money and use that to pay your bills and provide for your family. Based on what you do, the type of services you provide, the products you sell, or investments you have made, each individual derives his or her income in a different way. Your Personal Finance includes this income with a certain degree of risk. We will examine the different sources of income here and the risks that are associated with them, as well as ways to manage these risks.

Source of Income –

Even though there are many means of income, they are all used to spend, save or invest.

• Salary –

It refers to your earnings as an employee of an organization. Typically, you are paid on a monthly basis.

• Wages

You get paid hourly or weekly for working for a business or organisation.

• Bonuses

Bonuses are extra cash given by your employer to share in a company’s success.

• Investments

Dividends and interest are common forms of earning from investments.

• Profit from sales

After meeting costs and expenses, this is how much a businessman would earn.

Risk associated

It is possible for you to lose or diminish the ability to generate income due to one of the following reasons.

• Disability

The incapacity can be the result of an accident or illness, which can reduce or completely eliminate your earnings potential. You might not be able to perform at the same level as before and have to look for an alternative job that pays less or you might be totally disabled and lose all income.

• Unemployment

Unemployment can be due to

• Under qualification

This can either hinder your ability to obtain a lucrative job, or you may have to settle for a job with an insufficient salary.

• Under employment

Due to a lack of jobs, you may be unemployed despite your qualifications. Again, this may result in getting a low-paid job or being unable to find one which will result in income loss.

• Volatile Market

Investing in shares, mutual funds, and stocks can be considered a form of income risk. No one can predict the market’s performance, and you could either make money or lose money in it.

• Death

Risk in this case would be loss of income and more so to your family than to yourself.

• Old Age

As you enter your golden years, you would want to have saved enough to live a quiet and peaceful life. You will be in a soup without any income if your investment does not yield the benefits you expected or if you fail to make adequate savings.

In order to protect your income from these risks, what can you do? Risk can either be avoided or transferred.

Avoiding the Risk

In order to minimize the risk, you should avoid it, but that is easier said than done. The risk cannot always be avoided, but it can be planned for —

• Keep up to date with the latest technology and applications in order to stay competitive and avert unemployment.
• By diversifying your portfolio, you can minimize the damage from market volatility.
• Plan a proper retirement fund keeping in mind the lifestyle you want to lead. Keep some investments going so that you don’t run out of money.
• Having a contingency fund can be useful in case of job loss.

Transfer the Risk

Some risks will never be avoided, but you can secure the risk by transferring it to a third party. An insurance company falls into this category.

• Having life insurance will help cover the risk of death and your family will be able to sustain themselves with the money they will receive.
• A disability insurance policy will come in handy if you become disabled because of some unfortunate event. You will be able to cover any medical bills and sustain yourself this way.

There will be risks along the way in life, and you must be prepared. Likewise, in your financial life, unexpected changes may result in income risk; it’s wise to plan for such contingencies to ensure your daily routine isn’t affected until you’re able to recover.