How to manage financial risk | Tips | Example

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How to manage financial risk | Tips | Example

Hello readers! Here we will be discussing how to manage financial risk. Managing personal finance is one of the important things, because, if we can’t manage our funds properly then, there will be a financial risk in our life, which is difficult to manage. So earlier, we have to identify the personal financial risk for controlling and mitigating the risk level. Some common personal financial risks are given below;

  • Income Risk
  • Expense Risk
  • Investment risk
  • Debt risk, etc
How to manage financial risk

The above personal risk may occur due to some of the potential causes, which are identified in the below table,

Risk/ IssuePotential CausesConsequence
Income riskThis may be due to disability, unemployment, aging, death, personal business down, etc.Effect on P&L, Effect on liability, effect on wealth/ assets, etc.
Expense riskHigh expense, emergency expense, unwanted expense, etc. 
Investment riskInflation, depreciation, destruction, risky investment, etc. 
Debt riskBad debt, too much or unnecessary debt, etc. 

[Potential causes may vary from person to person]

If sometimes you are facing the above problems in your life then you are supposed to find out the significant causes considering all your factors and situations. After finding the significant causes you can take the adequate preparation to overcome the risks.

How to manage financial risk?

As all of you know that life is not a straight line, there are always up and down in life, so if you are planned and prepared yourself then you can easily control, manage, and reduce/mitigate your personal financial risks. From my own experience sharing here some common practices that you can properly manage your personal financial risks;

Risk/issue-1: Income Risk:

 Risk/ IssuePotential Causes
Income riskThis may be due to disability, unemployment, aging, death, personal business down, etc.

Here I am sharing my own experience on how I’m managing income-related risk and these practices are given below;

  • Currently, I’m generating income from several sources of income/ revenue like blogging, share market investment (e.g. mutual fund investment, investment on equity, etc.), Trading, and other investments. But there are other common ways for passive income like YouTube channel income, sponsorship income, freelancing, digital marketing income, etc. 
  • Stay employable, it can be benefited you to generate monthly salary income.

Risk/Issue-2: Expense risk:

Risk/ IssuePotential Causes
Expense riskHigh expense, emergency expense, unwanted expense, etc.

The best ways that I personally follow for managing my expense-related risks are;

  • Maintain adequate emergency funds, I personally keep the emergency funds at least per month average expense of the last 6 months multiplied by 6 to 12. (Emergency funds = average per month expense X 6 to 12).
  • Monitor the expenses.
  • Categories the “need” and “want” in your life then, plan your funds accordingly but if possible avoid the credit purchase, EMI purchases, etc.
  • As we know health is wealth, so take care of yourself and your family’s health conditions. So carry the proper amount of insurance that can manage your medical expense. 
Risk/Issue-3:  Investment risk:
Risk/ IssuePotential Causes
Investment riskInflation, depreciation, destruction, risky investment, etc.

A proper Investment may make your financial health or freedom. So we can plan our investment before doing the appropriate risk analysis, all investments have a certain level of risks like high risk, medium risk, and low risk.  According to your risk factor, we can invest our money in the long term or short term. I always try to diversify my investment so that I can get the maximum benefits. Below are some common ways of investments that I follow

  • Investment in PPF
  • Fixed Deposit (FD) Investment
  • RD-recurring deposit
  • Insurance
  • Investment in Pension scheme.
  • Mutual Fund –SIP investment.

Proper investments not only give you financial freedom/healthy but also help you related to inflation, depreciation, etc.

Risk/Issue-4: Debt risk:
Risk/ IssuePotential Causes
Debt riskBad debt, too much or unnecessary debt, etc.

Always try to keep your debt to a minimum. I personally follow the below steps to manage debt risk as;

  1. List out your EMI according to the interest rate
  2. Paid EMI amount according to interest rate i.e. paid more EMI amount on high-interest rate w.r.t low-interest rate.

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