Much of life carries some sort of risk, from natural disasters to vehicle accidents and global pandemics. Most risk also carries with it an impact on financial health.
When the consumer thinks about their finances and risk management, there are four ways to think about it. Each involves taking stock in your own financial comfort level.
Avoid the risk – In some cases you may decide not to own items or participa
te in activities that could expose you to financial loss.
Retain the risk – It’s impossible to avoid all risks, so in some cases you may decide to cover any financial loss yourself. For example, if you own an older vehicle and decide not to maintain collision insurance, you retain the risk that you will have to pay to have the vehicle fixed if you are in an accident.
Reduce the risk – Taking steps to control or reduce the size or frequency of a financial loss is a way to reduce risk. For example, by locking the doors of your house, you reduce the risk of theft in your home.
Transfer the risk – When you pay someone else to cover a financial loss you are transferring or sharing the risk. For example, buying insurance to cover losses.
Having at least some cash set aside for an emergency is good. Depending on your situation that might be a relatively small amount or it might be more. Every dollar that you have in your emergency fund is a dollar that you don’t have to borrow from friends or family members or put on a credit card when something unexpected happens.
By: Brenda Langdon
