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Basics of risk management that every person needs to know!

There are some basics of risk management that every person in the family should know to a certain extent. We live in a world of uncertainties where most of the times we do not even know the risks we are being exposed to on a daily basis. 

Risks are a part of life and not acknowledging them is as dangerous as not knowing about them. Risk management is very important for every family if they really care about each other. For this reason, here are some basics of risk management:

Basics of risk management 1 - Check your financial situation

The first step under risk management that you as a family or for your family members should take is a rain check on your financial situation. This means a critic review of your balance sheet, income and expenses statement and personal budget to determine your financial health.

Basics of risk management 2 - Convert your weaknesses and dreams into goals

Once you have identified your weaknesses you have to convert them into goals. For instance if your main weakness is that your cash flow isn’t enough to cover your expenses each month and that forces you to finance some expenses with your credit card, then you need to analyze your income and expenses statement with your budget. With this analysis you’ll find if:

  • You’re spending too much in any category (i.e. clothes)
  • Your income is stable from month to month or maybe you have some deductions, you didn´t foresee

So, your goals in this case might be:

  • Increase your earnings in $200 each month by setting up a small business doing what you love to do until the end of the year or
  • Just decrease some expenses to fit to your budget in a period of three months.

You can repeat this process with your dreams too.

Basics of risk management 3 - Think about what kind of events might prevent you to achieve your goals and the risks that you face everyday

Once that you have established your goals (based in your weaknesses and dreams) now you have to think about what might prevent you to achieve those goals.

As a third step of these basics of risk management, you have to identify the kinds of risks that you face everyday. It may be while driving a car, crossing the road, traveling in the train or while at work and even at home.

A risk may not be something that necessarily threatens your life, but it can also be something that endangers your financial stability. Consider a hypothetical situation like someone who walked into your drive way and slipped and fell because the snow wasn’t cleared and now he is injured badly.

The next thing you know is you are being slammed with a court case with a huge dollar amount attached to it as compensation. These are the kind of risks that are not in your control and the best thing to do is to transfer it to an insurance company.

Take note because there are many, many risks that you’re facing and that you don’t realize (yet!).

In our example: if your goal is to reduce your expenses, what could happen that prevents you achieve that goal? Many things, for instance:

  • An accident
  • A sick child
  • Etc.

Of all the basics of risk management the most difficult thing to do is identifying your risks. Once you have a clear picture of what are the kind of risks you face, finding a solution is relatively easy after that.

Basics of risk management 4 - Classify the risks

You’ll have to classify your risks considering if you can control them and the probability of occurrence.

The idea here is to identify which risks are manageable and which not and just evaluate if it’s possible to predict their occurrence. What for? Because you have to mitigate those risks. Therefore, you have to understand the nature of them.

In our example: You cannot do something to avoid an accident and could happen any time or not. It’s something unpredictable.

Basics of risk management 5 - Take action and mitigate those risks

After all the previous basics of risk management and the analysis you did, you have to do something about your risks right? Right! Just identifying the risks doesn’t make them disappear.

Once you have identified the risk you are facing you can take steps to prevent it, or avoid it. Some actions might be: increasing the safety measures for your house, getting a professional to safeguard it or buying property insurance and so on.

These are some of the possible solutions depending on the severity of the risk. Other possibilities of risk management include spreading your risks or transferring your risks.

There are many kinds of insurances available like, personal auto insurance, life insurance, disability insurance, home owners insurance, business owners insurance, and so on. Wherever the liability that might arise due to the risk is high it is best to transfer it to an insurance company.

In our example: you can buy a health insurance and transfer the risk at a very affordable price compared with all the medical expenses that an accident represent.

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