How to Minimise Your Financial Risks and Plan for the Unplannable
Are you taking risks that could lead to financial disaster?
There are a range of financial risks that might end up costing you a little—or a lot—of money. While we tend to think about bad financial decisions in terms of hasty investments and pyramid schemes, there are many more run-of-the-mill scenarios that could end up with you out of pocket.
- Investments taking a dive, which don’t recover in time before you need to access the funds
- Sick leave or unplanned leave from work that isn’t covered by your leave allocations
- Unexpected home, car, or appliance repairs that cannot be delayed
- Loss of your job, or a pay cut. While this scenario seems outlandish, with COVID-19, many people experienced a drop of income that was completely unforeseen
- Death of a spouse, which could mean less income or more childcare expenses
- A natural disaster such an earthquake, tsunami, or fire
- An accident or health diagnosis that results in permanent disability. This could mean a change in career or being unable to work at all. It also could mean an increase in costs
- Theft, vandalism, or a man-made accident such as a car crashing into your home
- Relationship breakdown or divorce.
There are other risks that are unique to your situation. A financial risk is basically anything that could negatively impact your finances and stop you from achieving your goals.
So all of these things; can you protect yourself from them? Can you mitigate the risks or resolve them altogether?
How Can You Mitigate Financial Risks?
While you can’t avoid risk altogether, there are three main ways you can minimise the harm from risk.
- Be well insured
There are a variety of insurance types that can cover a range of scenarios.
- Contents insurance covers all your possessions in case they are stolen, damaged, or lost
- House insurance covers your home from physical damage in the case of disaster
- EQC insurance is unique to NZ, and is part of your home insurance. This covers you in case of a natural disaster such as a flood or earthquake
- Third party car insurance covers you for damage you cause in an accident, but does not cover your car
- Comprehensive ‘full’ car insurance covers your car and all damage you do in an accident
- Income protection insurance pays out a percent of your salary in case you are unable to work, and some policies cover redundancy
- Health insurance can cover all medical expenses, or surgery only, or a mix. This covers medical bills from outside the public system
- Trauma/ critical illness insurance pays out a lump sum if you’re diagnosed with a incurable illness or you suffer from an injury
- Mortgage protection insurance will pay your mortgage for you if you’re unable to work for some reason
- Disability insurance will pay out a lump sum if you suffer from a permanent disability from accident or illness
- Life insurance pays out either a lump sum or cover for a fixed term to your surviving family
- Travel insurance covers you for loss, medical bills, and holiday interruption when travelling. This covers a variety of scenarios.
- Have an Emergency Fund
A savings buffer for ‘a rainy day’ will save you from financial ruin. Most advisors recommend that having enough money to cover three to six months of expenses in case of emergency. This also can be used to pay for unexpected repairs or replacement of vital items such as a refrigerator or car. Of course, this will also cover you for periods if you’re unable to work. Even if you’re fully insured, most policies will have a stand down time ranging from a few weeks to a few months.
- Live Below Your Means
By consistently living below your means, you decrease risk in two ways. Firstly, you have less outgoings, so you need less money to get by from day to day. This means any savings you have will last much longer, and any insurance you have doesn’t have to cover as much, which saves you with premiums. Secondly, you can save more.
The Biggest Risk of All
The biggest risk is the one you don’t see coming and don’t plan for. Everything is going well, life is ticking over nicely, the economy is good, and then… COVID. Or a child is diagnosed with an illness. Or any one of hundreds of events that king hit you on a random Tuesday afternoon.
This is when having flexibility in your budget and adequate savings is vital. You can get all the insurance you like, but no-one predicted a global downturn, a drop in 20% of the workforce, and incomes being trimmed or cut altogether.
It’s simple, but can be challenging to do, especially if you’re on a tight budget.
- Save more than you need.
- Get the right level of insurance cover.
- Live below your means.
- Have an emergency stash of money.
Contact Sam Kodi to make sure you’ve planned for the unpredictable.