Planning for Risks

In life, we can take the safe path of mediocrity or the ‘riskier path less travelled.’ The world is changing fast and necessitates measured risk-taking. There are other risks that we acquire by having valuables like loved ones and material abundance. Once you have someone or something to lose, you worry about losing them.

In this world of change we live in, the safe path (the one well-trodden) may not lead to the same outcomes as in the past, and the exciting path may be a very good, calculated risk. In the time we live in now, the only guarantee is change. You can cower in fear about these changes, or you can embrace them and seize them as an opportunity. You can let the change be the current that leads your flight to freedom.

We manage risks so we can experience more freedom. There are four main strategies; they are:

1. Risk avoidance – risk avoidance is just simply avoiding the identified risk. If you are worried about getting hit by a bus, you can decide not to cross streets where buses drive, for example. Risk avoidance works best by avoiding behaviours with negligible rewards or benefits for you.
2. Risk acceptance – Risk acceptance is the second strategy. This is a ‘do nothing’ strategy. If you cannot avoid the risk, you can accept the risk. This strategy works best for high-frequency but low-impact risks. An emergency fund facilitates this strategy. It can also be utilized in combination with other strategies.
3. Risk transfer – There are other risks we have to address because there is no way of avoiding them. Some of these risks are low frequency but would have a big economic impact. The classic finance examples are chronic illness or unexpected death. Insurance coverage facilitates the risk transfer strategy.
4. Risk reduction – Risk reduction is the temperance strategy. You can take the middle road where you satisfice, meaning you attain the minimum satisfactory outcome to reduce your risks based on your budget and other limitations. It could involve a combination of the strategies already discussed. Healthy habits and partial insurance coverage are both examples of facilitating this strategy.

My book covers this in more detail, but there are four main risk management techniques; you can use any combination of them for your situation. You cannot avoid risk, but you can shelter yourself and your family from their impact.   

What is your risk plan?

Disclaimer: This article if for educational purposes only and is not personal financial advice.