Winning Personal Finance Secrets

To live is to risk. No matter where you live, what you do, or who you are there is risk in your life. For instance, we all die and some of us prematurely. What will that mean to the ones I leave behind? Can my family continue to live their prior lifestyle after I am gone? How will they pay for any final expenses left behind? These are just a few of the issues related to risk. In this paper we will attempt to address most of the primary risks facing our personal lives.

 There basically three ways you can manage risk. You can attempt to avoid risk. You can retain the risk and pay for it from your own assets. Finally you can transfer some or all of the risk away and let someone else pay for it. The concept of Managing Risk comes from the appropriate application of all three, avoiding, retaining, and transferring some portion of the risk.

If we are to be honest about the risks we face we will agree that we must deal with them. If I just put my head in the sand and ignore the risks, they do not go away, they remain and either I or someone else in my family is going to have to deal with them. Sometimes dealing with the risks means bringing in others to help such as family members. Children are often willing to help care for elderly parents when the parents need assistance. However, not every family can undertake such help.

 How do we attempt to avoid risk? Here is an example. Suppose you have a history of diabetes and heart disease in your family. If you do not take care of yourself you face a higher risk of having one or both of those serious diseases sometime in your life. You can attempt to avoid this risk by keeping your weight under control and regularly exercising your body. However, no matter how much you control your health you cannot guaranty that you will not face these or some other serious disease.

Clearly avoiding risk may seem the preferred method from a financial perspective, but it is most likely the least trustworthy method for managing risk. I cannot know for sure whether my diet and exercise will in fact cause me to avoid serious illness. I cannot guaranty that driving defensively and safely will result in my never being in a serious accident of my causing.

In any event the fact that I am attempting to avoid the risks associated with my life also means that in the absence of transferring the risks, I am retaining the risks. This means if something should happen that I am financially responsible for, I will have to find some method for paying for the associated costs of the occurrence. Keep in mind these financial costs are often substantial. More than 30% of bankruptcies in 2008 were due to medical expenses! This could have been avoided for many.

Avoiding risks when it comes to life or health related issues can at best be helpful but is only part of a realistic risk management plan.

One must be ready for the potential costs associated with a catastrophic event. We carry liability on our automobiles. We carry liability on our homes. We should create some form of catastrophic liability plan for our life and health issues also. A plan like this only makes sense!

Retaining risk means that I will pay for the event if it should happen. The average cost of the heart surgery previously mentioned when it is all said and done is roughly $100,000 today. This is the retained risk amount if we do not have some other way of managing this risk. I may have assets that I can position to potentially cover this risk. That would be one way to manage the risk by retaining it. This is only one such risk and we may have many to retain. How will we retain them all?

From a financial perspective retaining risks might also seem like a financially astute means of saving money. If an expensive event should take place, most individuals wished they had transferred the risk to someone else. For example, health insurance is not cheap, which is why many do not have it. However, if I have a heart attack I will wish I would not have avoided buying it previously.

Since many of the risks we face in life can be financially catastrophic we must have another way besides avoidance and retention to fund these risks should they occur. When we transfer risk, we leverage some of our finances to pay for someone else to bear some or all of the risk for us. The primary way an individual accomplishes this is through insurance. When we buy auto insurance it is not really for the dents and scratches that may happen to our vehicle, but rather the immense cost of accidents that incur large liabilities such as medical costs or severe property damage. The average cost of large truck accidents involving injury was over $217,000 in 1999 so reports auto-accident-resources.com. This is one reason why many states today have mandated the minimum auto insurance regulations requiring at least certain limits of liability coverage and also uninsured motorist laws.

What does it mean to leverage assets in this way? Let's assume I am a 50 year old male non-smoker with some minor health issues. It may cost me as much as $100 a month to purchase a $300,000 death benefit. Now let's do the math here and find out what it really cost me for this insurance. The annual cost is $1,200. Over 20 years this will add up to costing me $24,000. Over 30 years it would end up costing me $36,000, a significant amount of money!

If I am currently 50 statistically I will have likely passed on before the 30 years is over. Therefore my beneficiaries are left with $300,000. I have spent $36,000 if I live the full 30 years and my loved ones get $300,000. That is leveraging. I have transferred most of the risk to the life insurance company! Almost every type of risk can be transferred or leveraged in this manner.