Finance is always of great importance, be it in a business or in one’s everyday life. People confront financial crisis and need to tackle financial risks on a daily basis. As it is important to manage risks in business, it is equally important to manage risks in life as well. Risk is nothing but an uncertain event that might damage your assets and when it is financial risks it creates loss of finance. Managing risks include few steps: Firstly, one needs to identify a risk followed by assessing it and thereafter reducing and controlling risks. This is relevant in project management and business process and also in managing risks in everyday life. You can face financial risks at different situations such as buying a car or investing on gold and so on. Before understanding how to tackle financial risks in everyday life, let’s have a look at the types of financial risks that one might witness in their daily life.
Here, we will define risks in terms of the loss of assets in our day to day life.
- Human Capital: One of the major sources of finance in everyone’s life is human capital that is monthly or yearly earning. Different types of risks might hamper this financial asset such as death, illness, recession or job termination etc. This is one of the unfortunate of cases where one faces financial loss. All such risks are unavoidable and many a times sudden. A sudden death of a person might cause financial loss for an entire family and it is the same with illness. Recession leading to job loss and job termination is another risk that a person might face in their life owing to various reasons.
The question is how you manage such risks when the risks are unavoidable. One cannot avoid death but can definitely maintain savings and insurance to avoid sudden downfall or financial crisis for families. Medical insurance takes care of financial risk occurred due to illness. On the other hand, savings and professional contacts help one to control risks caused due to job loss.
- Financial Assets: One might face loss of huge cash flow or profit due to unfortunate investments. Some are due to lack of knowledge and others are due to sheer misfortune. The risks that cause loss of financial assets are stock market decline, inflation etc. One might invest in the stock market to gain profit but due to decline in the stock market the same might not be the result. Similarly, inflation too leads to heavy loss of financial assets in everyday life.
To control such risks, one needs to be financially expert and vigilant of the market status, the rise and low. While investing on a plan, one should be well aware of the risks involved and should take it up only if it is worth taking.
- Real Assets: House, car, plots etc. are termed as real assets and risks involved with it might lead to loss of real assets. The risks here can be owing to natural disaster, accidents, weather damage and so on. People might face house damage, car accidents etc. causing huge financial loss. On the other hand, flood, earth quake etc. might create loss in terms of value of plot or property.
One cannot avoid natural damages and the loss caused by the same but can always insure valuable properties in order to control the risk impact.
These are the major types of risks that one might face in their everyday life. In order to mitigate such risks, one can follow the four key strategies of risk management – avoid, mitigate, insure or accept. Avoiding here will mean not accepting the asset as the risk impact is huge and not worth it. One can reduce the risk by being careful and managing savings. One can take up insurance in order to share the loss or get refund with insurance companies. Finally, one can accept the risk as the risk impact is lower in terms of the benefits that the asset might provide. For example: You can avoid buying a property in earth quake prone areas as you are already aware of the risks and the matter of fact that taking it up is not worth it. Similarly, one can mitigate risks caused due to illness or accident by being a careful driver or taking good care of health. Insuring car or flats is another way of tackling risks for the respective assets. On the other hand, one might choose to accept a risk if the impact is not huge or is worth it as compared to the benefits. One cannot stop buying refrigerators or washing machine thinking that the same might be damaged after few years. Thus, people face different types of financial risks in everyday life and manage the same with insurance, savings and other such ways.