Risk management is the process of balancing anticipated returns from your wealth against potential loss of assets or loss of purchasing power.
Risk comes in a variety of forms. The most important thing to recognize, however, is that it actually exists – and to make sure your business plans include barriers and contingencies for each type of risk.
The first type of risk we experience, from the beginning, is loss of income. Death, illness, the economy, or interpersonal relationships (lack of…) can all create conditions in which the primary income earner is no longer able to bring home a paycheck.
How do you mitigate this risk?
Death and illness are the easiest. By applying a measured amount of insurance coverage to your estate – you “assure” yourself of some level of continuity in the income stream. At the same time, you have a mechanism in place (health insurance) that minimizes cash outflow for catastrophic illness care.
The economy is a bit harder to control – but by positioning yourself within your workplace in some area of indispensability – you reduce the chances of being laid off. This is usually accomplished politically and by an ongoing program of self education that expands your skill-set and offers your employer “more employee” for the money.
Loss can also occur in that portion of your investments allocated to the equity market. The value of your assets will ebb and flow due to a variety of factors. Being an expert in managing your personal equity and debt assets is beyond the scope of this discussion – but there are organizations that make a living by successfully managing business. Al Rasch & Associates knows wealth building strategies very well – and will advise you on how best to assign your savings to a opportunities that safely return much more than current savings account rates and the consumer price index.
Did we say Consumer Price Index (CPI)?
The CPI measures the amount of inflation that occurs in our economy on a quarter by quarter basis – to an annual rate at years end. Inflation is a hidden risk. If you start with a dollar and don’t do anything with it – a year later, you will have less purchasing power than the original dollar. That is because the price of everything went up during the year. Risk management has to also consider the erosion in purchasing power caused by the never ending inflationary creep we all live with. A good, though unhappy example of inflation are the price increases caused by oil market fluctuations we have been experiencing since the mid 1970’s.