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Managing Personal Financial Risk

By Meredith Murphy, SVP & Senior Operational Risk Officer

Do you know what your personal financial risks are? Risk management is a term most commonly associated with large corporations. However, it can also be helpful to your personal finances and assets to apply some of the main concepts of risk management. Essentially, anyone with a financial asset or obligation should reevaluate their financial position, risks and goals regularly. To evaluate your financial risk, you must consider your past (debts), present (savings), and future (goals). In this article we will look at identifying, evaluating, controlling, and monitoring personal financial risk.

 

Image of girl with piggy bank.

 

Identifying and Evaluating Personal Financial Risk

There has been a lot of research into the field of risk management recently. To get started with evaluating your own personal financial risk, ask questions:

  • Do you have an emergency fund? The amount in your emergency fund should reflect your risk tolerance. Having a higher amount stashed away in an emergency fund means you can take bigger risks with any extra funds because you have plenty put away to recover should that risk turn into a loss. This is very personal and will be different for everyone.
  • What are your life goals? Your financial decisions and risks should always be in pursuit of your goals. For example, if your goal is to graduate from a certain degree or certificate program, pay off any resulting student loan debt before spending excess funds to go on a cruise. Delay the vacation as part of a future goal.
  • What is your existing debt situation? The higher the amount of debt, the less risk you can afford in your personal finances. Analyze the type of debt and consider consolidating or restructuring to reduce interest rates or payback period.

Ultimately, the amount of risk you take on is up to you. Some people are naturally more cautious and risk-averse, while others may have life goals that require more risk, such as starting a business. Always evaluate the risk-reward proposition before making a decision.

 

Be prepared. Insurance can provide peace of mind.

 

Controlling Risk

Once you’ve identified your personal risk level and the specific risks you’re taking on, the next step is to employ some strategies for controlling your risk.

For example, the purpose of insurance, whether medical, auto, or home, is to protect you from the really big losses you wouldn’t be able to afford on your own, such as treatment for a serious illness or replacing your vehicle or home. When it comes to smaller expenses, it may be better to use cash reserves instead of paying higher insurance premiums in exchange for lower deductibles. That’s why a robust emergency fund is such an important part of mitigating financial risks.

In addition to building an emergency fund, diversifying your investment portfolio could protect you from losing everything if one stock declines in value. By putting your eggs in more than one basket, so to speak, you can protect yourself from feeling the swings of the market too harshly. Remember, investing requires a well-conceived long-term strategy. If you’re not close to or in retirement, you likely need not worry much about whether the market is up or down on a given day. There is still plenty of time to reach your retirement savings goals. Diversification has long been considered a worthy risk management strategy. Consult your team of advisors to understand how any strategy relates to – and could impact – your situation.

One of the biggest personal financial risks you can take is starting a business. But you may feel that starting your own business is a risk worth taking! There are ways to control risk associated with starting a business by planning for success while anticipating the worst. Don’t put so much of your own money into your business that you’re left without an emergency fund. Also, select a business formation, such as Sole Proprietor, LLC, or corporation, that reflects what you feel is an acceptable level of personal liability. Consult an attorney for advice.

 

Check your credit report.

 

Monitoring Risk

When it comes to monitoring your personal risk, there are several tools to help.

Free Credit Reports

Consumers are entitled to receive their free credit report once every 12 months from each of the three national credit reporting companies (Equifax, Experian, TransUnion). Make sure you visit this website to take advantage of your free reports—it’s the only source for your free credit reports authorized by federal law. Currently, all three reporting companies are offering free weekly reports during the COVID-19 pandemic.

Additionally, a lot of credit card companies offer credit scores as part of their online account monitoring services. Take advantage and monitor your score. A big change, especially a lower score, without a known reason should trigger you to get a copy of your credit report and check for anything out of the ordinary.

Track your budget and spending

Utilize some sort of budget to track and manage your spending habits. It can be very structured, such as the cash envelope method, or more of just a framework to guide you, such as a spreadsheet that helps you monitor your expected budget versus actual expense. Also, how will that budget play out in real life with unexpected expenses? The process of budgeting can also help you realize that you need to grow your emergency fund or extend the target date for one of your personal goals. 

Online Bill Pay

Automating payments for your mortgage, credit card, utilities, and other bills will ensure you never accidentally forget a due date or miss a payment and incur late fees or other financial penalties. Not paying bills on time will most assuredly lead to a lower credit score.

 

Use strong passwords

 

Financial Statements

Whether you receive eStatements or physical ones, review your monthly bank and credit card account statements to make sure there are no fraudulent or erroneous transactions.

Cybersecurity

Protect yourself against identity theft by keeping your computer and devices up to date on their operating systems, browser, and anti-virus software. Find more information, read our Digital Security Resources page.

Schedule a free estate planning consultation!

Lastly, estate planning is a good way to anticipate and control risks, especially when you have a family to worry about. Vision Bank’s Trust Services team will work with your attorneys and other advisors to help you create and execute a personalized estate plan.

Contact our Trust Officers to schedule a free, one-hour estate planning conference to discuss your personal and financial goals, as well as how to manage your personal risk. Our experienced team will help you understand the options available to you and your family before you meet with an attorney to draw up legal documents. For more information call (888) 332-5132, visit one of our convenient locations, or email us at vision@visionbank.bank!