Tag Archives: Lagos

Risk Management (Part I of II): “I should get insurance? Why?”

… because it is a really smart thing to do :).

It is the first week of the year, and a lot of us have new year resolutions and “never again” predictions.  Happy new year by the way :D.  The new year usually brings along with it a heightened sense of hope and “can-doism.”  But how many of us think about how to protect ourselves from the things that can go wrong?   Have we included insurance in our financial plan?

This week we start the two-part introductory series on risk management; insurance is one of the most popular tools used for risk management.  “Big grammar” you say?  Ok, I will start from the top.

What is Risk?

In the simplest terms, risk refers to the possibility, no matter how tiny, that an undesirable event will occur. For example, the possibility that one’s car will be scratched by a danfo is a risk drivers in Lagos face every day.  Other risks we continuously face include:

So, life is full of risks – once we are born, we face numerous risks every day, whether we realize them or not; nothing new or special there.  Some risks are significant, i.e. have a very high probability of occurrence – how many cars in Lagos have been spared “the scratch”?  You get the drift :).  While others are not, e.g. the risk of a meteorite falling on your house.

What is Risk Management?

Now that we know that risk abounds everywhere, just like air, we can talk about managing it, as the option of avoidance does not exist.  Some people try to make themselves believe they are avoiding risk by claiming “it is not my portion,” but that is about as effective as an ostrich burying its head in the sand to escape from the trouble it sees ahead :).  Even if you sit in your house all day every single day, the risk still exists that a plane will fall on your house – minute, but a risk nonetheless.

So, risk management is the process of categorizing one’s risk exposures into various buckets ranging from “significant” to “barely”, and then checking around to determine if there is a way to minimise the possibility of the risk occurring, or finding someone else out there who can do a better job of bearing that risk in exchange for a nominal fee.

“What was that?!” you ask?  Here’s the breakdown:

Jummai resumed her first post-graduation job last year, and has been able to save enough money to buy her first car – brand new, cash down.  Yippee!  She has also been able to save enough to consider making a financial investment.

Jummai is the oldest of her 5 siblings, and has decided to assist her parents by taking on the financial responsibility of her youngest sister’s education; Halima is currently in elementary school, in Grade 5 (or Year 5, or Primary 5, depending on which nomenclature you are familiar with :)).

Her employer recently sent her on a training about personal risk management as part of her professional development curriculum, which she found extremely educational. She is now trying to apply what she has learnt.

The first step she is taking is to list the medium to significant risks she believes she is facing on a daily basis:

  • health: the risk that she will fall ill and (i) have to spend a lot of her salary on medical expenses; and (ii) not be able to earn her income as the illness may affect her ability to get her job done.
  • auto: her car may be involved in an accident that may, at best, result in damage to her car, another person’s car, or property.  It could also result in bodily injury to herself, or other people.
  • fire: her car or her residence may catch fire, destroying assets, some of which may be difficult to replace, and some which may be outright irreplaceable.
  • theft: burglars may break into her home or car and dispossess her of her belongings.
  • education of dependent: she may lose her ability to earn an income to continue to fund Halima’s education, either due to a long-term illness, a disability, or death.
  • job loss: she may have her employment unexpectedly terminated by her employer and not be able to immediately secure another source of income.
  • investment loss: she may lose some or all the money she has invested due to a general economic downturn, or a reversal in the fortunes of the entity(ies) she invests in.

In Part II, we shall look at each of these risks, and explore ways in which Jummai can either mitigate (i.e. reduce the possibility of the risk occurring) or manage (i.e. minimise her loss should the risk occur) them.

Are there any other risks you think Jummai is exposed to that she has not listed here?  Please share in the comments box below.

 

Advertisements
xmas-piggy-bank

Money Basics: Don’t Spend It All in December

For those of us in Lagos, Nigeria, harmattan – and Christmas – is very much in the air :-). The retailers have put on the show to draw people in and dispense the contents of their wallets, with the “mind-blowing offers,” the “you must haves,” the “must-visit places,” and the “must-do things.”  It is very easy to get caught in the commercial excitement of the moment, especially because the capacity to indulge for most is also increased during this period: bonuses, gifts, and most salaries get paid earlier this month.  For those who think the Joneses are the gold standard, it is an even more financially hectic period.

Here is a reality check for us all though: after December comes January, and 10 other months before the next December.  January is considered by many to be a long and gruelling month, primarily because the duration between the paydays in December and January is the longest in the entire year for most – an average of 37 days according to my guesstimate. It is also because December is filled with so many activities and holidays from school and work, while January is “empty” after the 1st day of the month / year.

Here is another major reason why January is so long: school fees are due at the beginning of that month! For some, rent is due as well; these two items are the largest monetary expenses for a lot of people.  In fact, for some, the financial behavior in December ruins the whole year ahead.

So, now that we have identified some of the ways financial problems are created, here are some of my proposed solutions:

  • Forget about keeping up with the Joneses! This will always be my number one advice because keeping up with the Joneses is not a sustainable basis for getting anything done in life because the truth is the Joneses are clueless and broke!

    free-your-mind

    Image courtesy freedomfromwithin.com

  • Create an income-expense plan (some people call this a budget :-)). It would interest you to know that income-expense plans have been saving lives and fortunes since the beginning of time!  No entity – individual or organisation – can have the kind of lasting progress a lot of us desire without one of these.create-a-working-budget
  • View your finances through an annual lens.  It is rather easy to focus on the cash inflows and outflows of each month on a per month basis.  The reality for most of us however is that both our cash inflows and outflows vary by the month, and this is the case regardless of whether we work for an employer (private or public) or we employ ourselves.  An annual view will help acknowledge this reality and make your income-expense plan more representative of your situation.  It will also make it a lot easier to appreciate why you cannot afford to spend it all in December.

    birds-eye-view

    Image courtesy thinkbeyondthedesktop.com

  • Save and invest.  One of the outcomes of your annual income-expense plan would be the need to save and invest, as some of the current income will need to be put aside to offset an expense later next year.save-invest
  • Remember the reason for the season: giving and sharing our fortunes with those less fortunate than ourselves, i.e. philanthropy. He who gives shall receive even more.  Let us not forget those around us who could really do with a little bit of what we take for granted.  Instead of buying your child that latest electronic gadget that she does not need, you could buy the monetary equivalent in rice and give to your domestic employees, or even school bags for their kids.

    philanthropy-and-giving

    Image courtesy philanthropistlist.com

  • And lastly, self-discipline. None of the above can be achieved without a healthy dose of self-discipline. We each need to love ourselves enough to be willing to forfeit instant gratification for a greater longer-term purpose.  Just as we need to apply this to weight loss and keeping our bodies healthy, so we also need to apply this to keeping our finances healthy.

    self-disciplines

    Image courtesy quotesgram.com

Do you need the assistance of a professional with (i) creating an income-expense plan (ii) creating a savings & investment plan?  Feel free to drop me a line at comments@finomics101.com.

It truly is the season to be merry; my family and I wish you and yours the best of the season.  Wouldn’t it be better if the merriment lasted all-year-long though? 🙂

seasons-greetings

Image courtesy motorweek.org