Financial risk is a risk whose loss impact can be assessed or measured in money.
Financial risk can be divided into short-term and long-term based on the timeframe—short-term risks, aka needs that arise unexpectedly in the short term.
An example is an illness, loss, or damage to productive assets, such as a broken down/lost motorbike. This case causes us to be unable to work as usual for a while or require additional costs such as treatment or repairing something damaged.
To anticipate this risk, you can buy health insurance or vehicle insurance. Next is a long-term threat, namely unforeseen circumstances that cause financial losses in the long term. An example of a long-term financial risk is death.
For a family backbone, death causes the loss of the primary source of income in the family. So, Friend, you can buy life insurance to manage this risk.
Types of Financial Risks
1. Pure and speculative risk
Pure risk is a risk that, if it occurs, will result in a pure loss, for example, if the vehicle breaks down or is damaged so that it cannot be used for work.
At the same time, the speculative risk is a risk that can cause losses due to the possibility of minimal profits. An example is someone who invests simply following the trend without knowing the characteristics and risks of the chosen investment product.
2. Specific and fundamental risks
A special risk is a risk that occurs only in a personal nature, and the impact is felt locally.
For example, a fire in a house is only felt by the people who own the home and environment around the burning house.
Meanwhile, the absolute risk is that the loss can be very extensive or catastrophic if the impact occurs. For example, a natural disaster hits an area. In both instances, one of the instruments that you can use to manage this risk is to have property insurance.
3. Static and dynamic risks
Static risk is not affected by economic conditions, such as the possibility of losing property due to fire and theft.
Conversely, the dynamic risk is any form of loss due to changes in the economy, such as fluctuations in currency values, stock values, and inflation.
Unlike other insurable risks, dynamic risk is a type that cannot be insured. What can be done to anticipate emotional risks is to diversify assets and investment instruments, for example, by combining property, gold, stocks, bonds, and mutual funds.
Personal or Individual Financial Risks
A financial risk is an event that can happen to anyone, including yourself. There are at least four chances: income risk, expenditure risk, asset or investment risk, and credit risk.
1. Income Risk
Income risk is a variety of risks that affect a person’s ability to earn income. Examples include physical disabilities that make it difficult to work, getting laid off or losing a job and death.
2. Expenditures Risk
Expenditure risk is the risk that arises when we use money to meet our needs.
Still, expenses are more significant than income, the income is not enough to meet our needs, and we are experiencing an emergency that requires us to spend a lot of money.
For example, accidents, vehicle damage, home renovations due to an incident, and many more.)
3. Asset / Investment Risk
Asset or investment risk is the risk that arises because the investment instrument or asset owned experiences several obstacles. Among other things: loss of investment assets, theft or damage to assets that you own, asset values depreciating or depreciating, insufficient savings to continue investing, and others.
4. Credit / Debt Risk
Credit or debt risks cover several points, including the inability to pay debts, financial penalties, being trapped in debt with high-interest rates, and others.
Financial Management Tips
Financial risk is something we cannot predict. To avoid various financial risks that might occur, you can apply some of the tips below.
Revenue Risk Management
1. Having Other Sources of Income
Having another source of income is one way you can minimize risk. For example, having a side job, freelancing, opening a business, and others.
You don’t need to worry if something unexpected happens because your finances will remain safe.
2. Financial Plan
A financial plan is critical to obtaining financial security. Make careful planning regarding your financial condition and what you want to achieve. So, every time you get monthly income or profit from an investment, you can use it wisely.
3. Insurance
The presence of insurance can help anyone to save their financial condition. For example, life insurance can guarantee that a family can live well when left by the family’s breadwinner.
Another insurance that is no less useful is health insurance. As we know, the cost of treatment is quite expensive. Therefore, to keep your finances or finances safe, it’s a good idea to have health insurance.
Expenditure Risk Management
1. Make a Budget / Budgeting
With a budget, you will not be tempted to spend some money outside of your financial planning. So, you will find it easier to cut unnecessary expenses.
2. Setting up an Emergency Fund
Unexpected expenses can come to you anytime and anywhere. Therefore, prepare an emergency fund to keep your financial cash flow safe.
3. Insurance
The presence of insurance can help anyone to save their financial condition. For example, life insurance can guarantee that a family can live well when left by the family’s breadwinner.
Another insurance that is no less useful is health insurance. As we know, the cost of treatment is quite expensive. Therefore, to keep your finances or finances safe, it’s a good idea to have health insurance.
Asset and Investment Risk Management
1. Studying the Assets / Investments We Will Choose
Before adding assets or starting investing, it’s a good idea to equip yourself with sufficient knowledge of the assets or investment instruments you choose. This is done to avoid future financial risks that could harm you.
2. Check Your Financial Goals Routinely
Make a financial plan that you can track or see progress from time to time to get closer to the financial goals you want to achieve.
Credits and Debt Risks Management
1. Learn About Credit and Debt
Equipping yourself with sufficient information about credit and Debt will make you wiser in choosing the distinction that suits your financial goals.
2. Avoid Debt
You should not need to owe if you find paying off your installments challenging or disrupting your cash flow; moreover, if the Debt is used for consumptive needs.