Risks in life are expected and unexpected, some with low impact, others with severe impacts causing personal and financial distress. Investing for your personal finances involves risk as well. When preparing your financial plan, learn which areas you may be at risk, such as income, investments, and capital. Investing cautiously means never putting all his eggs in one basket. Investing in a diverse portfolio will protect you against volatile markets. The first step towards tackling these risks is to determine and classify them. We can divide them into the following categories:

Income Risk –

As the name suggests, this risk is related to your earning potential. There are a number of external factors contributing to the risk. Below are several risks that could disrupt income –

• Disability
• Loss of employment
• Death
• Unemployment
• Poor planning and a smaller amount of retirement funds due to underinvestments or overspending.

Expense Risk –

When expenses aren’t managed properly or they aren’t planned for, they become a risk. Knowing and anticipating expenses in advance can help reduce risk. The following factors can result in expense risk:

• Overspending your income.
• A lack of sufficient income.
• A sudden emergency can drain your funds.

Asset Risk –

The term “assets” refers to all types and forms of investments, including real estate, jewelry, vehicles, stocks, bonds, etc. All of these come with risk and cannot be avoided. Assets may be subject to the following risks:

• Theft
• Destruction
• Investment losses
• Property depreciation.
• The absence of a diversified portfolio.

Credit/Default Risk –

As debt mounts in size, default risk is a very dangerous situation. Excess borrowing or negligence can put you at risk of default.

• Overextending yourself with loans will lead to high EMIs (equated monthly instalment) every month, leaving less income with you to spend.
• Interest component in these EMIs will be huge.
• Any delay or default by you in repayment can send your credit rating lower which can lead you to difficulties in obtaining loan in future if needed.

How can we manage these risks? There are two ways to deal with risk: either you can avoid it or you can transfer it.

How to manage risk – By planning ahead, you can manage risks as you will be well prepared. Risks can be unexpected and when that happens, prepare a backup plan or use your contingency fund. Another way to deal with risk is to transfer it. Among the examples here are companies offering insurance to take the risk on your behalf.

Knowing about risks lets you prepare so that when you face it, you are not caught unprepared. When faced with unexpected risks, it will be useful to have savings or plans for an emergency. Preparation is half the battle won. Our award winning financial planners can give you risk management advice and help you reach financial freedom. Get in touch today.