Personal financial risk management—prepare for the unexpected

Personal financial risk management is the process of identifying, assessing, and mitigating potential risks that could affect the financial security of you and your loved ones. Risks could include illnesses, accidents, loss of income, natural disasters, or legal liabilities. After you assess these potential risks, you’ll be in a position to take steps to minimize their impact through purchasing life insurance, creating an emergency fund, or making informed decisions about investments.

What is financial risk?

Personal financial risks are occurrences that can put a dent on your finances, health, safety, and overall quality of life. While risk can’t be eliminated, understanding and learning how to manage risks can give you a more secure financial future.

Types of Financial Risk

These are the types of personal financial risks that you may face:

1. Income loss

Job loss or a significant reduction in your income can lead to difficulties meeting your financial obligations and maintaining your lifestyle.

2. Unexpected medical expenses

High medical expenses due to illness, injury, or an unexpected health issue may not be fully covered by your medical insurance.

3. Premature death

Passing away unexpectedly can place severe financial burdens on your family.

4. Market volatility

Market fluctuations could cause investment losses, affecting the value of your stocks, bonds, and other investments.

5. Property damage or loss

Property damage or loss due to events like fires, floods, theft, or natural disasters could affect your finances if your property isn’t fully covered by insurance.

6. Legal claims

Legal claims and lawsuits can result in financial losses, especially if you don’t have liability insurance in place.

7. Personal legal liabilities

Personal legal liabilities from accidents or injuries may not be fully covered by insurance.

8. Outliving your savings and investments

Outliving your savings and investments may force you to rely on family members for financial assistance or on government programs such as Medicaid and Supplemental Security Income (SSI). 

Risk Management Strategies

To prepare for the unexpected, consider taking these personal financial risk management steps:

1. Assess your risks

Identify potential risks that could impact your financial security, such as loss of income, illness, injury, or natural disasters.

2. Emergency fund

Open an emergency savings account and set aside funds to cover three to six months of living expenses. This includes expenses like rent or mortgage payments, utilities, groceries, and necessary household items.

3. Insurance coverage

Evaluate your insurance needs, including health, life, disability, and property insurance. Make sure you have adequate coverage to protect you, your family, and your assets.

4. Healthcare planning

Develop a plan for dealing with unexpected healthcare expenses. Making contributions to a Health Savings Account (HAS), if you are eligible, is one way to implement such a plan.

5. Diversify investments

Spread your investments across a variety of asset classes and in different investments within asset classes. This can help reduce the impact of market volatility on your portfolio. Of course, diversification does not guarantee a profit or protect against market loss.

6. Estate planning

Work with an estate attorney to create a will to ensure that your assets are distributed according to your wishes, and consider setting up trusts to minimize tax implications and avoid the probate process for any assets held by the trust.

7. Budget and debt management

Maintaining a budget can help you track your spending and manage your debt, which can help you stay financially resilient.

8. Review your risk management strategy regularly

Review and update your risk management strategy as your financial and life circumstances change.

 9. Seek professional guidance

Work with a New York Life agent to gain more insights into some of these risk management strategies that align with your short-term and long-term goals and fit your unique circumstances.

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