Sometimes, no matter how positive we look at life, there would come a time that we would be facing problems that would rattle and take us off balance. If there are a lot of opportunities around, there are also a lot of risks to consider– especially when it comes to our personal finances.
For this reason, we need to prioritize all the decisions that we are going to make in order to have some sort of safety net. Money doesn’t grow on trees, as they say. This is to prepare for the unexpected events–whether good or bad– that may occur. So what are the ways to balance or, at the very least, mitigate the risks that we take as an earner, consumer, or breadwinner? (Read: 3 Things Every Newbie Investor Should Know)
What is financial risk?
You might have heard financial risk when talking about investments– personal or company-wise. Basically, it’s about the cash flow and the possibility of losing money. (Read: Investment 101: The Most Basic Terms You Need to Know)
As a regular earner and consumer, we are constantly dealing with financial risks. It is one of those we cannot run away from. This could either be an effect of the decisions we make, or a circumstance that we are not in control of. No matter the reason, these financial risks can make our break our earnings– it can even take away everything we have.
Financial Risk Management
In order to balance the risks, one must practice financial risk management.
Financial risk management is the process of identifying risks, analyzing them, and making investment decisions– accepting or mitigating the risk. These risks can either be quantitative or qualitative. To do this, you must do a financial needs analysis for you to know the gravity of each risk you will decide to take or not.
For example, your fear of not having your own car this year might be a lesser fear compared to not having an emergency fund. In this example, you decide on whether to take the risk of buying a car and not having enough in case of an emergency, let’s say, a hospitalization. So you weigh what is more important: the risk of having a critical disease and not being able to afford medication or the risk of not driving your own car. Another example is saving up your earnings compared to being broke once you stop working. (Read: Knowing Your Money Personality Can Lead to More Money in the Bank!)
Why do we need to practice this as a habit?
Most people’s spending habits and financial decisions are driven by emotions. It could be greed, jealousy, desperation, or even happiness! These emotions can somewhat alter our rational minds to go with what is practical and sustainable, or what can satisfy us at the moment. (Read: 5 Ways to Manage Your Finances Amid COVID-19)
Mindfully practicing financial risk management involves a calculated and careful identification of the risks in accordance to what we need at the moment. Through this, we are able to channel self-discipline, which contributes to a well-balanced checkbook and life.
Text by John Caballes and Yen Cantiga