Financial risk management techniques should guard any kind of asset, from your personal pocket money to the funds of an entire company. Otherwise, the uncontrolled expenses might get out of hand.
No matter how big a budget may be, there is always a danger of damaging the financial balance if one doesn’t have a plan. So, let’s take a look at the following 10 financial risk management tips and how you can put them into practice.
1. Identify the Risks
Going into a battle without knowing your enemy might be counterintuitive. You must know precisely what you are up against so you can choose your weapons accordingly. Even though the assets you want to protect are personal or they belong to a company, they are not immune to human error.
This means that you should be honest with yourself for this first step to work. Your finances might be at risk because you sometimes yield to products that you don’t need but only desire.
Moreover, you should acknowledge other types of risks as well. These can be asset-backed, credit, foreign investment, liquidity, market, operational, and model risks. There can also be external hazards that unfortunately you cannot control or predict, such as cyber attacks or even theft. Make a list of the sources that drain your budget and be as candid as possible.
2. Measure the Financial Risks
In order to take control of your risk management, you need to quantify each liability you noted in your list. These measurements rely solely on statistical models, so you may need professional help or a set of complex financial tools to calculate the numbers.
The evaluation of financial risks can be one of the most difficult steps in your management plan. However, it is crucial for the wellbeing of your assets to make sure this stage is dealt with accordingly. The result will help you later on to take informed decisions regarding your future expenses.
3. Learn about Investments
A complicated financial risk management plan should also take the idea of investments into consideration. However, ignorance can hide behind greediness, and people are likely to fall for scams that sound too good to be true. Even in the trading market, people can use a risk management plan to avoid substantial losses after they’ve registered into a forex practice account.
However, if you take enough time to learn and understand the investment market, you will come to realize that it leads to robust and fruitful returns. So, you should start reading reliable investment websites, books, and articles, and get familiar with all concepts that rule this world.
4. Turn to Insurance Policies
Nobody wants to think of worst case scenarios, but this is actually an essential point in a well-structured risk management plan. It is not easy to think of how many ways your car can suffer damages or how many theft crimes happened in your neighborhood, but insurances have become a must in our society.
Furthermore, you should also consider a health insurance even though you are in great shape at the moment. Unfortunately, these can be too expensive for many people. However, you should do some research and try to sign at least a basic form of insurance.
5. Build an Emergency Fund
Even though you have a fruitful period as far as your finances are concerned, taking some precautions never hurt anybody. You can determine how much of your profit should go to a savings account each month. In time, these emergency funds will prove to be a life-saving solution to some of the financial risks that you’ll experience.
6. Review Financial Ratings of your Bank
After the 2008 global recession, people have learned a valuable lesson. You can have the biggest saving account on the planet, but if your bank has bad financial ratings, you can end up without a single penny in your pocket. So, you should include in your risk management plan the liability that comes with entrusting your funds to a certain bank. If something happens with your bank, you can lose your finances in the blink of an eye.
7. Invest in Your Skills
As your finances highly depend on a daily workplace, you should commit to your professional career as much as possible. In today’s competitive workforce, nobody is indispensable, and most people see there are others who can replace them if they become irrelevant.
So, you should avoid becoming too complacent at your job, and pursue the challenge to hone your professional skills. This will ensure recognition, and it will also keep your mind sharp.
8. Diversify Your Income Sources
The chances are that your income source might suffer a financial crisis. However, the likelihood of that happening to several sources of income at the same time is small. One day, geopolitical events might influence a financial fluctuation due to a decrease in demand. However, if you have several streams of income, your funds might not go through a significant negative impact.
Financial diversification is one of the most reliable risk management strategies. It has your back whenever a risk becomes a reality. The adverse side effects can be equally distributed among your different streams of income to the extent in which you are unlikely to suffer drastic consequences.
9. Reassess your Risks Frequently
Risk management is at the mercy of many external factors. These are the results of the volatile rules of the market that influence the risks to change their intensity accordingly. Consequently, you should also consider global financial events before completing a major investment.
An effective risk management plan will evaluate liabilities on an ongoing basis, as things can change from your last assessment. Whether one plans to get a new house or company, people should take into account the external factors that can put the investment in jeopardy.
10. Do your Due Diligence
Last but not least, you should be careful when you are in front of documents. Whenever you have to part with your hard earned dollars, you owe it to yourself to be wise and read the contracts and papers that regard your purchasing conditions. This kind of in depth inspection might be time-consuming and even inconvenient. However, it can save you from a lot of risks that can affect you in the long run.
All in all, these financial risk management tips are all about being wise about your funds. Money is an exhaustible resource and people should be careful how they spend their budget.
Ethan Featherly is a financial analyst and content manager at Financial Markets.
