Risk Management

Adjusting Budgets for Unexpected Life Events

In the past few months I have been a little frustrated with the progress of my financial situation. Due to a few unexpected life events, I’ve had to deal with a few cash flow issues which took me out of my financial comfort zone. In addition to a temporary loss in revenue, I also had a few large and unexpected bills that I had to pay. This situation had a substantial impact on my day-to-day activities as I wasn’t able to implement my financial plan as I usually do.

Despite my temporary financial situation placing me at unease, I was prepared for it and made it through relatively unscathed. The experience reminded me of a few financial management words of wisdom and three important personal finance concepts.

Being Prepared is Critical

All of us will be affected by changes in our financial situation regardless of location, culture or material wealth. However the impacts of unfortunate life events and their subsequent financial hardships will vary significantly between families. More often than not, the difference between critical and negligible impacts to your finances will be based on your level of preparation.

Being prepared for a financial emergency starts with having an understanding of your financial risks. Taking an inventory of your financial risks will help you avoid them and adequately prepare for them if and when they occur, this is also known as risk management for financial planning. The best way to understand your financial risks is to make a list of life situations that can affect your ability to earn income and all potential large expenses (vehicle maintenance, medical procedure, etc.).

While insurance is a great way to offset the financial impacts of certain life events, your insurance policies will not cover everything. This is why a safety fund is so important. Having 3 to 9 months of your salary saved for a financial emergency will help you deal with a tough situation.

Keep Your Attitude in Check

Mental attitude is an important factor when it comes to dealing with stressful situations. This is especially true when considering the impact of financial constraints on your emotional state and lifestyle. It’s natural to become frustrated and lose hope at times, however don’t let your emotions dictate your financial decisions.

The most important element of savvy financial decision making is keeping your emotions in check. One of the best ways to clear your mind and make logical decisions is to understand everything about your situation.

To bring clarity about your financial situation, begin by determining how long your new financial situation will last. Next attempt to calculate how large the financial impacts will be on your budget. These two pieces of information will help you determine what changes you will need to make to keep your finances under control.

Making Lifestyle Changes

Once you have a checked your emotions and measured the financial impacts of unexpected life events, you can begin to plan how you will get through this tough situation. More often than not you will have to change your lifestyle to reduce your monthly expenses and remain under budget.

Making lifestyle change is difficult, however it's often necessary. The easiest way to remain under budget is to make a list of all of your priorities from most to least important. Next you should assign the cost of each priority (i.e. monthly car payments), then go down the list and scratch the ones that you can’t afford, starting with the lowest priority first.

This is the easiest way to adjust your lifestyle and budget without causing too much turbulence in your daily life.

Adjusting budgets due to unexpected life events is a challenging, yet often necessary, endeavor. When facing an unexpected life event that creates a financially challenging situation remember to check your emotions, understand your situation and strategically reduce your expenses.

A Few Benefits of Financial Planning

Personal finance affects most of Earth’s population. However many of us do not understand the benefits of financial planning. Creating a financial plan will help you with a wide variety of financial and non-financial aspects of your life.

A common misconception of financial planning is that only the wealthy need a financial plan. This couldn’t be further from the truth, in all actually I personally believe that we, non-wealthy people, need a financial plan more than those with huge portfolios. This is primarily due to the fact that having a well designed and properly implemented financial plan can enable us to improve our life through increases in our financial resources.

Understanding What’s Important to You

One of the first steps in the financial planning process is to clearly list your goals and objectives. When going through the mental process of determining your life’s goals and objectives, you will quickly discover what’s important to you and your family. This understanding can have a huge impact on your self confidence and attitude.

In addition to defining your goals and objectives, creating a financial plan will provide you with the direction and clarity required to make sound financial decisions. When you have a clear understanding of what you want and where you want to go, you will gain more control of a seemingly chaotic world.

Improving Your Standard of Living

An obvious benefit of creating a financial plan is the eventual increase of one’s material wealth. However, keep in mind that it is the effect of increased wealth that is most important. To many, an increase in wealth is accompanied by an increase of freedom and independence from the restriction of finite resources. Increases in financial resources enables you to live the life that you want without having to take on the burden of debt.

Improving your standard of living begins with the prioritization of expenses. To accomplish this the financial expenses that provide you the most value should have a high priority and expenses with a low priority should be reduced or eliminated.

When cutting expenses, you will subsequently increase your free cash flow. This additional cash should then be placed into your savings and investment accounts. Overtime, this increase in material wealth will provide the resources that you need to live the life that you want.

Protecting Your Property and Financial Assets

An often overlooked benefit of financial planning is the protection of property and financial assets. Many see financial plans as a way to increase material wealth, versus protecting what they already have. A comprehensive financial plan includes risk management and insurance to ensure life’s unexpected events have little impact on your family’s finances.

A comprehensive financial plan will also include an estate plan, which will help protect your assets from entering probate. This ensures that your estate's beneficiaries receive the property that is intended for them with minimal Government involvement, or in other words headache.

There are many financial and non-financial benefits of financial planning. Creating and implementing a financial plan will help you increase your standard of living, protect your property and provide focus and direction in your life.

Introduction to Long Term Care Insurance

As the baby boomer generation begins to retire en masse, more and more attention is being paid to long term care insurance. Despite the fact that many of us do not like to pay insurance premiums, insurance of all types play an important role in our financial plans. Long term care insurance, like all other types of insurance, helps to reduce the financial impact of unforeseen and dramatic life events. Without insurance, an event such as a car accident or house fire can quickly drain any and all of a family's savings.

Today there is a growing risk to our financial well-being; advances in modern medicine and technology. With the help of advancements in the medial industry we are living longer than any other generation. Despite the obvious great things that come with a longer life, to the retired, living longer will significantly increase all types of medical costs.

Common Long Term Care Insurance Questions

Who Should Buy Long Term Care Insurance - Long term care insurance should, more than likely, be purchased before retirement or as you approach 65 years in age. The additional costs of long term care insurance premiums will be enough to turn a few people away. However the costs of not being insured will be much more.

Why Purchase Long Term Care Insurance - The Government sponsored medical insurance, Medicare, only provides 100 days of skilled nursing care. In addition to this restriction, Medicare beneficiaries will not qualify for long term care needs unless it follows a hospital stay and after significant personal cost.

How Much Does Long Term Care Insurance Cost - Market research (conducted in 2013) has shown that purchasing long term care insurance can cost from $1,300 to $4,600 annually. Most of these policies provided a benefit of $150 a day with a term of 4 years. When compared to the cost of the average nursing home stay of $89,000, the costs of long term care insurance premiums are insignificant.

Popular Long Term Care Provisions

Guaranteed Policy Renewal - A life insurance policy is inherently a business contract, one party agrees to cover the potential large costs of an individual while the individual agrees to pay a small fee consistently overtime. If the contract (policy) does not include a provision that the coverage must be renewable for life, the policy and any coverage can be cancelled.

Medical Cost Inflation Protection - In addition to education, medical costs are one of the fastest growing personal expenses in the U.S. economy. A good long term care policy should included a provision that protects the policy holder from the increasing cost of medical care.

Pre-hospitalization Coverage - As mentioned previously, Medicare will most likely not cover the costs of long term care if a hospital stay was not required. To avoid this situation ensure that your policy does not require that your coverage require hospitalization first.

Comprehensive Long Term Care Services - When comparing different long term care policies, keep in mind that assisted living, home health care and nursing home care is available. It is unknown what the future holds, thus its a good idea to have all three services in your policy.

Long term care insurance is an increasingly important element of a financial plan. Long term medical issues can place a large financial burden on a family in it's most pressing time of need. To avoid financial catastrophe, ensure that you and your family are properly covered.

Common Risk Management Techniques

As you begin to develop your financial plan, and more specifically your risk management strategy, there are a few ways that you can manage everyday risks. Some risk management techniques are mandated by laws, such as car insurance. However, not all risks and hazards are as regulated or as obvious as automobile accidents.

When evaluating the risks to your financial security, you will have to make the decision on how you will manage them. There are three common techniques to manage risk, avoidance, transfer and retention.

Risk Avoidance

When posed with the opportunity to engage in an activity that creates an exposure to a loss (either financial, health or property), risk avoidance will eliminate any probability of loss from the event.

Choosing to completely avoid a risk is only possible for a few hazards of everyday life. Choosing not to build a pool in your backyard will help avoid the risk of drowning. However, we cannot completely avoid the risk of weather damage to our property as we have very little control over it.

Risk Transfer

An extremely common risk management technique is risk transfer. Transferring risk from one party to another helps reduce any potential liability or other financial damages when engaging in an activity that exposes you to a loss.

There are two types of risk transfer, insurance and non-insurance. Risk transfers through insurance is also referred to as one of the methods of financing risk. Through insurance you pay a fee, usually monthly, in-order to transfer the financial risk of large losses to insurance companies.

Non-insurance transfers can also occur through legally binding contracts, such as insurance. However you can also decide to transfer risk to another party through the use of services and subcontracting. The use of third parties through contracts will place the financial liability of damages on them, alleviating you of the risk and any sub-sequential loss.

Risk Retention

The last of the common risk management techniques is the retention of risk. This method is in direct contrast to risk avoidance. When you decide to retain risk you are inherently financing the risk yourself. All losses incurred through hazards will be paid by you.

Companies that have a sufficient capital reserves may choose to retain some risks rather than purchasing insurance to cover any potential losses. In addition many consumers choose to retain some risk through the use of a high deductible.

Protecting your financial future begins with financial planning and proper risk management. These risk management techniques, should help you protect against large financial losses.

Understanding Risk Management Terms

Despite it's common perception, financial planning is much more than creating a budget, saving money and investing. One of the most important functions in the planning process is to protect assets, capital and the clients way of life.

There are a few risk management strategies that will help you protect what you own and maintain your current standard of living if an catastrophe does occur. However, before we begin to discuss the various risk management strategies, it's important to understand the terms and definitions of the elements of risk planning.

The Definition of Risk

In financial planning, risk is often defined as the “potential of loss”. As uncertain as this world is, there is always a chance that an event could cause the loss of something we value. In this sense loss doesn’t have to be strictly financial. Engaging in dangerous activities places your health at risk. This is due to the fact that there is the potential that you will become injured.

Additional Risk Management Definitions

Probability - The risk management and insurance industry heavily depends on statistical models to assess the probability of losses. Probability refers to the frequency of times an event can or will occur. You can also think of probability of chance, as there can be a large or small chance that something can happen.

Loss - As mentioned earlier, risk is the potential of loss. Loss can be defined as a decline in value, utility or possession. For the purposes of financial planning, loss usually involves the reduction in value of an asset such as a financial instrument (stock, bond, etc.) or property (house, car, etc.).

Exposure to Loss - In consideration of our unique and individual circumstances, we are all exposed to different types of losses. People that do not have a fire extinguisher in their kitchen have a greater exposure to fire losses than those that do.

Peril - The cause of losses are often referred to as perils. Perils can also be referred to as the list of events that could potentially cause loss. Perils include events such as earthquakes, floods, fires, car accidents and theft. Our exposure to perils determines the probability of risk and losses.

Hazards - There are three main types of hazards; physical, moral and attitudinal. Hazards refer to a behavior, incident or act that increases the probability that an loss will occur. Additionally a hazard can also increase the impact or severity of a loss.

Physical hazards include tangible dangers such as an icy road or leaky roof. Moral hazards include behaviors, such as dishonesty, which increases the probability of loss. Finally the last type of hazard is attitudinal, which often consists of the general lack of concern of the consequences of an action.

Risk management is a critical element of financial planning, the terms listed above will help you develop this part of your financial plan.