“A man who does not think and plan long ahead will find trouble right at his door” Confucius – Chinese Philosopher. I like that little pearl of wisdom because it fits in perfectly with what I am about to talk about in this post. In my last post I discussed the definition of financial planning and focused on the first principle of wealth creation. The actual nitty- gritty of any personal financial plan is having a strategy in place to accumulate money and then also planning properly to protect it. In this post I am going to discuss the idea of “risk management” and why it’s the building block of any sound personal financial plan. Anything worth building is worth protecting and being able to identify your personal risk areas will go a long way to ensuring the master money plan for your life doesn’t end up in tatters when life throws you an unexpected curve ball.
What is risk management and why is it so important in my personal financial planning? Good question.
I guess this is the right place to start. There are a number of definitions floating around out there but I like this one the best. Risk management is “The process of analyzing exposure to risk and determining how to best handle such exposure.” That sums it up perfectly. While you are going about the business of accumulating wealth you need to be able to identify personal risk areas that could cost you money. Then you need to put in place measures to insure that if the unforeseen becomes a reality you can bounce back from it. In future posts under the financial planning category of the blog, we are going to go into more detail regarding these potential risk areas and how you can go about protecting yourself from them, but for now let’s look at an example so you start getting an idea of what I am talking about when I say “learn to identify potential risk areas in your life”. We will then apply the definition of risk management to the example to see the fit.
Not insuring the most important asset in your life (that would be you) is probably the biggest risk you need to address.
I must be honest, I don’t really get it and it’s not because I am in the insurance game. Guys don’t think twice before spending big bucks every month insuring a vehicle (which is really just a hunk of shiny metal), but ask them to part with some cold hard cash to insure themselves…oh..boy..you must be smoking your socks. What an absolute waste of money. Just remember this -If you pass away without any life cover in place and you owe money, you can kiss those assets goodbye. Goodbye house, bye to the cars, bye too everything you have spent your life building and instead of being a superhero in the eyes of your kids you’ll end up being less than zero when they need to pack up their stuff and move in with granny.
Ok, let’s assume that you are fortunate enough to reach the ripe old age of 80, what about the risk of picking up a critical illness like cancer or becoming disabled and not being able to work because you are lying flat on your back? You see, the unexpected sometimes happens and the question you need to ask yourself is “Can you run the risk of hoping the ugly stuff life occasionally dishes out never lands on your table?”. It’s about managing your risk. Ask any paraplegic if he thought that he would end up wheelchair bound and your answer will be “I never thought in a million years it could happen to me.” Remember this. You are the money making machine in your life and if you can’t make money you need a contingency plan. Let’s call it a backup plan. You see you might have been working the wealth creation section of your financial plan diligently but hadn’t given any thought to your risk when “bam” an unexpected event like being involved in a car accident happens. Not being able to walk again becomes your uncomfortable reality and just blows your entire financial plan out of the water. Kaput..Finito..Klaar..
A sobering thought.
So in this instance identifying the personal risk area would be fairly simple. You work and make money, but the risk is simply that if you die, become disabled or are diagnosed with a critical illness like cancer, your ability to generate income seriously diminishes. In the case of passing away before your time, your ability to earn income ends ( don’t pass begin and collect). Now that you know what the risk is you can work on how to put in place a contingency plan.
If we go back to the definition of risk management and applied the example above our calculation would look something like this:
The definition: Risk management is “The process of analyzing exposure to risk and determining how to best handle such exposure.”
Lets break it down using the example.
The process of analyzing exposure to risk – How would you do this? Sit down and look at the “what if”scenarios. The nature of my job means that I travel frequently. I’m on the road 50% of the day. What if I am involved in an accident? What if I die in that accident and can’t provide income for my family? What happens to the house because my wife doesn’t work? What if I become disabled and can’t work again as a result of the accident? Does the company provide cover? Is it enough?
Yes you are getting it. By asking the tough “what if” questions you will start to work out your exposure to the risk.
What is next?
Determining how to best handle such exposure – What would be the best way to go about handling this exposure to risk? Perhaps you need to get off the road and behind a desk? Maybe you need to buy a car with an airbag. Perhaps you need to simply take out insurance on your life and nullify the risk of not being able to generate income.
Now that you have a better idea of what “risk management means” and why it’s just as important as the wealth building aspect of your personal financial plan you need to keep reading the blog posts under the financial planning category of the blog because Lawrence is going to dig deeper and drill into the specifics. Look out for the next post on will drafting.
Oh, if you missed the post on weath creation as part of your financial planning strategy visit it now my clicking on the permalink. http://www.insurancefundi.co.za/financialplanningbasics-2.htm
I would love to hear your ideas on personal risk management, so feel free to post below.
Until next time.
Brendan
Related posts:
- Are You Willing To Risk Your Hospital Bills Not Being Paid In Full?
- Protect Yourself Against Your Biggest Insurance Risk!
- What is financial planning?
- Financial Planning | Who Has Legal Rights In An Insurance Contract
