The Importance Of Risk Management In Financial Planning

Planning

Managing your money is an art. If you take care of your money now, it will take care of you in the future.

So, you might be doing proper financial planning like following a realistic budget to set up a spending plan to keep a tab on your finances.

However, some unexpected emergencies can lead to financial hardships in your life. Eventually, you may have to compromise with your financial goals.

That’s why risk management should be an integral part of your financial planning. Risk management is the process of anticipating the risks and evaluating them to avoid possible losses so that you can focus on your financial goals.

The process of risk management mainly involves 4 steps namely:

  • Assessing your risks
  • Evaluating or analyzing your risks
  • Finding the options for a way out
  • Implementing the strategy

Broadly speaking, risk management helps you to prepare for the unexpected. Life is uncertain and anything can happen at any moment. Being prepared can help you to reduce the effects of any adverse situation.

In your financial life, risk management can help you to protect yourself from:

High medical costs

We all want to lead a healthy life. But at times, you may have to face risks like catching common flu or any other diseases or meeting with any kind of accident.

Eventually, it can affect your mental and physical well-being. And you may have to shell out a lot of money for medical expenses. According to HealthCare.gov, the average cost of a 3-day hospital stay is around $30,000.

Isn’t it too much?

If you don’t have health coverage, you will have to bear these costs. And it can make you fall prey to medical debt or even bankruptcy!

Opting for a health insurance policy can help you to refrain from the risks of getting exposed to high medical expenses.

You can find some affordable options in your state’s Marketplace. But while choosing the best health insurance plan for you, make sure to consider some factors, like

  • Deductible: The amount that you have to pay to your insurer before your insurance plan starts to cover your expenses.
  • Premiums: The monthly payments that you need to pay to your insurer for the insurance coverage.
  • Copays: It is usually a flat fee that you need to pay while receiving the care. The amount of copays varies with your healthcare plans.

So, keeping the above factors in view, I would suggest you opt for an affordable health insurance plan which will be within your budget. And helps you to fulfill your health needs to eradicate the risks of bearing high medical expenses.

Taking out loans during emergencies

A study by Forbes reveals that about 63% of the people in our country don’t have adequate funds to cover a $500 emergency. Isn’t it shocking?

When you don’t have an adequate emergency fund, you are likely to take out loans to cover sudden expenses.

Financial experts often suggest that you should have an emergency fund consisting of your expenses of 3 to 4 months. This way, you can mitigate the risk of losing your job or a sudden reduction in your income or any other unexpected expenses like emergency room visits, car repairs, house repairs, etc.

However, make sure to use your emergency fund during the situations that are true emergencies. You might be tempted to use that fund for a summer vacation or any other unnecessary expenses. But if you do so, you may become out of funds if any ‘true emergencies’ arise.

Market volatility

Investing can help you to grow your money with time by putting it in stocks, bonds, mutual funds, real estate, etc. And thereby, it can help you accomplish your financial goals!

You can earn the money through appreciation, dividend income, interest payments, or any other kind of liquidation.

If you are planning to invest, you should be prepared to take risks. Different investments have different types of risks. Usually, investments with low risks offer low returns, and investments with higher risks offer higher returns. So, to become a smart investor, you need to do proper homework and shop around different types of investment options.

To reduce the overall risk and volatility in your portfolio, you can diversify your investments into different types. You can spread your portfolio by investing in bonds, exchange-traded funds (ETFs), real estate investment trusts (REITs), etc.

However, make sure to spread your portfolio that is manageable. Otherwise, it will become cumbersome for you to manage your portfolio. So, I would suggest you limit to 3 to 6 different investment options.

Falling prey to unsecured debt

Usually, unsecured debt has high-interest rates as you don’t have to keep any collateral while taking it out. But this convenience comes with a hefty price of interest payments.

Credit cards and payday loans are some of the common examples of unsecured debt. You might be using your credit cards to maintain a decent credit score. But if you fail to make payments on time, the hefty interest payments can burn a hole in your pocket.

In most cases, payday loans have much higher interest rates than credit cards. And due to its fast cash disbursement, many people fall prey to it.

If you think that taking out payday loans will be a quick fix to your finances, then you might be wrong. You might be bound to rollover your payday loans due to its high-interest rates and other charges. A report by the Consumer Financial Protection Bureau (CFPB) shows that 4 out of 5 payday loans are rolled over or renewed.

So, taking out a payday loan can take a huge toll on your finances. And you might be putting your financial life at risk as you will have to sacrifice a substantial amount of your paycheck to pay off your debt.

If you are already having payday loan debt, you might be struggling to get rid of it. In that case, you can try settling payday loan debts by approaching a genuine debt relief company. They can help you to repay your payday loan debt strategically and without much hassles.

So, opting for payday loans means you are risking your financial life for taking out fast cash. Instead, manage your finances in such a way that you don’t need urgent money.

So, the bottom line is, risk management is undoubtedly an important part of your financial planning. It can help you to make financial decisions in a better way by avoiding potential risks as much as possible.

Author Bio: Phil Bradford is a financial content writer and an enthusiast. He has expert knowledge about personal finance issues and he is a regular contributor of Debt Consolidation Care. His passion for helping people who are stuck in financial problems has earned him recognition and honor in the industry. Besides writing, he loves to travel and read books.

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