AS we do our day-to-day action routine such as that from home to work—driving a car, riding a bus or just simply walking—we usually forget that the present (today) will always be followed by tomorrow.
I may sound silly but the reality that there will always be tomorrow means there is always risk. If you believe that there is no more tomorrow, then we can easily eliminate risk.
Even the Bible has something to say about the matter from the writings of some of the earliest wise men, such as in Proverbs 27:1, which says do not boast about tomorrow, for you do not know what a day may bring. This means tomorrow will always be unknown.
And a college professor of mine had mentioned that if you have enough information, then you do not need to fear when making any business decisions. Taking these two statements, we can say honestly we can only prepare and plan to protect ourselves from the risk that may come with tomorrow, given our economic value to our loved ones against the uncertainty of the consequences of risk.
What is risk management?
Risk management is the defensive strategy a breadwinner can adopt against undesirable eventualities that could happen, such as job loss, disability, hospitalization and even death; and corporate risk such as death of a key executive, disability, disagreement, and even retirement. That is the inherent nature of being human—to seek protection and security against life’s peril. Risks such as the loss of life, financial wreckage or unfavorable health are some of those faced by any breadwinner, and against which one must consider in financial planning.
Why do we need risk management in personal finance?
I have asked a number of people about risk management, and 2 out of 40 of my respondents had thought about the idea of risk management. Majority said they had not thought about the possibility of dying today or tomorrow; “I will not gamble with my life, and I do not like the subject of dying.” The 5 percent who had any thoughts about risk management simply stated that, “I am trying to manage my personal risk because we do not know what tomorrow could bring to me and my family.” And it is not just about dying—it could also be disability, hospitalization and job loss. Majority did not see or think about the possible effects of economic risk, which primarily involves financial struggle and burden.
My personal view on this: the 5 percent of the respondents have translated their love into action. As the saying goes, “Action speaks louder than words.” They understand their economic value in case their income stops at any given time.
I can sum up three reasons why we should manage our personal risk: first is for what we call a clean-up fund—this should cover all expenses you would incur or leave with your family after your death, like hospitalization, burial and funeral expenses, and in case you have some unpaid debt and estate settlement. Second, risk management is useful for those who have children below 21 years old and who still go to school—this is the education fund. This is self-explanatory; if you are the breadwinner in the family, you need to prepare for continued payment of your children’s education even if and when you find yourself jobless, unless you’ve been able to accumulate liquid assets that match that cost. Third is for the replacement income fund. This is an important point to consider because your family needs cash to live on. This fund is meant to cover their daily and monthly expenses.
How do we manage risk?
First is to understand your current situation if you are a breadwinner. You can definitely identify it easily by asking yourself: If my income or ability to work should stop today, who are the people that will be affected by this loss? If you can pinpoint at least one family member who will be affected, then you need risk management. Second, you need to determine how much would be sufficient to cover your loved ones’ needs. You have to be precise with the figures here because this is very critical. Third, you must also seek advice from independent financial planners. Fourth, do diligent research on who are the best providers in the market that would suit your particular needs. This is to say that insurance is the best and most cost-effective means of risk management. Just be sure you pick the right company that has a good reinsurer and net worth.
Here’s wishing everyone the best in their journey toward achieving financial success.
Serge Barcenas Bargayo is a Registered Financial Planner professional based in Cebu. He is the Managing Director of Certa, Inc., a Family Estate Planning and Investment Advisory firm. To learn more about risk management in financial planning, attend the 55th Registered Financial Planner Program (RFP) program this July. To register, e-mail email@example.com or text <name><e-mail><RFP> at 0917 968-9774.