Tolulope has worked with a reputable bank as an operations manager in one of its branches for 5 years, and being the breadwinner of his family, he took his job seriously until he was involved in an accident that led to paralysis of his legs, leading to the loss of his job earlier this year.
Tolani’s car engine failed, and her mechanic just sent her a bill of N400,000 for the repair work, an amount twice the amount of her monthly salary.
Alhaji Karounwi’s house, on which he had earned rental income for about 15 years, got engulfed in fire, and he didn’t have insurance on it. Similarly to that, Ikechukwu’s electronic store got razed down by a fire that same week.
Mr Saddiq had raised an overdraft in USD to purchase some foreign mutual funds through a bank, and not only had the market crashed, but because of the devaluation of the naira, it has become increasingly difficult for him to repay his overdraft.
The four scenarios given above, typically explain the four types of personal financial risks that exist, and they include: Income risk, asset risk, debt or credit risk, and expenditure risk.
Nothing in this life is risk-free, particularly when it comes to money. Numerous unavoidable and unplanned events could undermine our financial stability at any point in time..
A personal financial risk is one that results from an incident and negatively affects a person’s financial situation. However, just because financial risks exist doesn’t mean we can’t manage them. There are many steps you can take to reduce the possibility or impact of financial risks, but before we examine them, let’s look further into the four types of financial risks that exist.
1. Income Risk
A person’s capacity to make money may be impacted by a number of risks known as “income risk.” Examples include physical limitations that make it difficult to work, being laid off from work, and death, which negatively affects one’s beneficiaries.
2. Expenditure Risk
Expenditure risk is the risk that occurs when a person’s current expenditures are greater than their income, or when their current income is insufficient to cover their needs. Sometimes it could be a case of dealing with an emergency that necessitates large outlays of cash. For instance, car damage, house renovations brought on by a mishap, medical emergencies, and more.
3. Asset Risk
Asset, or otherwise known as investment risk, is the risk that occurs when one’s assets or investments run into a number of difficulties. Let’s look again at the example given above. A rental property engulfed by fire means that the asset in question will no longer be able to generate the returns that should come from it in the immediate future. Other asset risks can include losing investment assets, having one’s possessions stolen or damaged, and a decline in the value of an asset, among other things.
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4. Credit/Debt Risk
The inability to meet one’s debt obligations, interest-related financial penalties, being incapacitated by high interest debt, and other factors are all considered to be part of credit or debt risk.
Being intentional and aware of these risks will help put the right strategies in place to reduce their impact. To jumpstart this process, you need to write down your financial goals, review them from time to time, and ensure you work in line with them. Ensure to make a thorough strategy that takes into account both your current financial situation and your goals.
Oftentimes, no one foresees financial risks until they happen. These risks are inherent in our day-to-day lives, and here are a few tips to help mitigate them, category by category.
1. Earning a living from other sources is a way of mitigating income risks.
Putting in place structures to earn multiple sources of income will help mitigate the impact of losing one major source of income.Examples include starting a business on the side, working as a freelancer, and having a second job.
You won’t have to worry if something unplanned happens to one source of income, because your financial plans will still be secure. You should strive to always use your monthly income or investment earnings properly as well.
2. Budgeting and sticking to it will mitigate expenditure risks to a large extent.
You won’t be enticed to make unplanned purchases if you have a budget. Consequently, it will be simpler for you to reduce unneeded spending, and emergency funds will also help mitigate emergency expenses when they come knocking at your door.
3. Insurance Coverage for mitigating income risks
Life insurance, for example, mitigates income risk. Insurance can ensure that a family will be able to survive if the family’s primary provider passes away.
4. Having knowledge about how debt and credit work.
Knowledge of how credit works will help you make more informed decisions about your finances. Don’t be persuaded to take on debts that you are not adequately prepared for or able to meet. Borrowing to meet your spending habits or for consumables is not a good idea either. If you currently do so, it is an indication that your finances are not in good health.
5. Understand how investments work.
Adequate investment knowledge and asset allocation skills will help you understand the assets or investment instruments to invest in before starting out at all, and this is one of the ways to prevent the financial hazards that come from engaging in the wrong investments.
In wrapping up this conversation, please remember that life itself is a risk, and there are associated risks with every financial decision you make. The points listed above will help reduce the impact of such risks when they occur, as it is hard to totally eliminate them.
Having financial goals, embracing financial literacy, reviewing your goals from time to time, and enlisting the help of professionals will also help you mitigate these risks to a large extent.
