Ways To Lessen Financial Risks
- Diversify Portfolios
- Carry Adequate Insurance
- Keep Emergency Funds
- Avoid Debt
- Budget Properly
Everyone should be committed to mitigating their financial risk, whether in business or their personal lives. Taking on too much risk and not doing enough to mitigate it can result in disaster if something doesn’t go according to plan. These five tips can keep anyone out of a perilous financial position.
Diversify Portfolios
This tip can actually mean a few different things depending on the context. For investments, diversifying a portfolio means investing in several different types of investments to avoid the risk of great loss if a single investment takes a downturn. For small business owners, it can mean having a high diversity of clients so the loss of one does not have drastic repercussions for the business. Diversifying assets, income streams and more significantly reduces risk to finances.
Carry Adequate Insurance
Another step to mitigating financial risk is to carry adequate insurance, which covers both businesses and individuals in the case of a loss. For example, homeowners can mitigate their risk of losing everything and having to pay to replace it if their house burns down by carrying adequate homeowners insurance. Businesses can carry robust liability insurance to avoid the risk of the cost of a lawsuit bankrupting the company. Car insurance, whether for personal or commercial purposes, protects holders against the costs of repairs on the car or medical bills for anyone involved in the accident.
Keep Emergency Funds
Maintaining an emergency savings fund helps protect against the risk of not being able to pay for unexpected expenses, such as:
- an illness
- appliances and equipment failure
- fines
- any similar surprise bills
Businesses may experience a catastrophic loss from a cybersecurity incident or a workers compensation claim, according to American Express. This fund can be built up over time with even small amounts deposited into it each month. These small amounts can add up and be a real lifesaver in the case of an emergency.
Avoid Debt
Borrowing money is necessary for many things in life, such as:
- starting a new business
- buying a home
- getting a car when an existing one stops working
It can become a double-edged sword, however, when too much is borrowed. The cost of debt can skyrocket with interest and put any person or business in a precarious financial position. Even a slight change can leave an individual or organization unable to pay their debts. Avoiding debt and living within one’s means are important financial habits to get into whenever possible.
Budget Properly
Simply having a good budget and adhering to it can be a significant factor in risk mitigation. Budgets are useful for both personal and business finances. To create one, simply look at necessary monthly expenses in relation to expected income. Write all of this down and compare the two numbers. Most of anything left over should go into savings. However, in a personal budget some leftover monthly funds can go to desired purposes. If expenses are more than monthly expected revenue, start looking for where cutbacks can be made immediately. Noticing this well in advance avoids debt and other deep financial problems down the road.
Conclusion
There are a number of methods for safeguarding finances both in private life and as a small business owner. Too much financial risk can become very bad under the right circumstances, but there are ways to mitigate it by being financially responsible.
Related Resources:
