Tag Archives: personal risk management

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Risk Management 101 (Part II of II)

Happy mid-week all ūüėÄ

Last week, we introduced Jummai and her self-assessed risk profile.  We shall now go through each of the risks she identified, and the ways she can go about managing them.  For each risk, we shall look at the following risk management strategies:
* preventive – to reduce the probability of the risk occurring, and
* curative – to reduce Jummai’s negative financial impact should the risk occur; these have to be implemented before the risk occurs though, otherwise it would be synonymous with campaigning after an election ūüėģ

 

Health

health-care-hi

image courtesy clker.com

This is the risk that Jummai 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.

  • Preventive
  • Curative: purchase health insurance^ (also called medical insurance). ¬†Many employers already provide this as part of the employee benefits package. ¬†This is the case for Jummai. ¬†She, however, needs to obtain from her employer the details of what the insurance policy covers, and all relevant limits so that she understands the extent of her cover. ¬†If she thinks¬†the cover provided by the company health insurance policy is inadequate, she should consider:
    • obtaining additional health insurance coverage, either through her employer’s policy or by buying a separate policy on her own. ¬†Jummai should note that this will require her to be responsible for any additional payments to the insurance company.
    • establishing and maintaining a special savings account for the purpose of funding health-related expenses not covered by the insurance policy(ies).

 

Auto
front-rear-crash-car

This is the risk that Jummai’s tear-rubber¬†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.

  • Preventive
    • go for defensive driving classes (if you have ever driven in Lagos, Nigeria or New York City, USA, you will understand ūüėÄ )
    • ensure the car goes for regular maintenance checks and procedures
    • proactively check her tyres and various car fluid levels before setting out every¬†day
  • Curative
    • use her seat belt every time, and encourage all occupants of her car to do the same
    • purchase comprehensive car insurance^ (also called auto insurance)

 

Fire
house-fire

This is the risk that Jummai’s car or residence may catch fire, destroying assets, some of which may be difficult to replace, and some which may be outright irreplaceable.

  • Preventive
    • turn off the cooking gas supply whenever she is not cooking
    • take other necessary precautionary measures while cooking
    • be very cautious whenever there is a naked flame in or around the house
    • take necessary precautions when handling fuels, gases, and any petroleum products, e.g. do not have a naked flame nearby or use an electronic communication equipment such as a cellular phone while filling a car/generator tank with petrol/gasoline
  • Curative
    • install smoke alarms and water sprinklers in the house
    • always have functioning fire extinguishers in strategic locations
    • have a fire blanket, escape stairs, and other fire protection devices handy
    • purchase home insurance^ (also called home property insurance) and auto insurance^

 

Theft

3d-white-people-thief

image courtesy fotosearch.com

This is the risk that burglars may break into Jummai’s home or car and dispossess her of her belongings.

  • Preventive
    • choice of neighbourhood: we all know some neighbourhoods are more crime-prone than others
    • install¬†security deterrents: e.g. security doors, burglary proof bars, electric fences, burglary alarms, car alarms.
    • be security conscious
  • Curative: purchase home insurance^ and auto insurance^

 

Education of dependent

education-books-graduand-apple-globe

image courtesy frescodata.com

This is the risk that Jummai may lose her ability to earn an income to continue funding Halima’s education, either due to a long-term illness, disability, or death.

  • Preventive:¬†the preventive measures under “Health” above would apply
  • Curative
    • purchase disability insurance ^
    • purchase life insurance^
    • establish an education trust^

 

Job loss
stock-photo-job-cuts-and-downsizing-with-unemployment-and-losses-for-better-business-efficiency-with-a-green

This is the risk that Jummai may have her employment unexpectedly terminated by her employer and not be able to immediately secure another source of income.

  • Preventive: Jummai needs to be an asset to her employer by being an exceptional problem-solver that they cannot do without :).
  • Curative: setup a 6- to 12-month emergency fund

 

Investment loss
red-arrow-pointing-downwards-showing-crisis

This is the risk that Jummai 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.

  • Preventive: Even though it is impossible for anyone to prevent a general economic downturn (economic cycles are a fact of life), Jummai could optimise her investments by¬†engaging the services of a financial planner (like yours truly ūüėÄ ), who would advise her on the best strategies to diversify her investment risk.
  • Curative: ¬†Making a financial investment is making a conscious decision to take on risk. ¬†Consequently, it is impossible for Jummai to insure herself against losing her investment should that risk materialise. ¬†However, by implementing the prevention strategy above, Jummai can reduce the loss(es) she does incur.

 

^ Always consult with a financial adviser so as to properly understand the terms and conditions of any insurance or financial product.

 

Do you have any additional preventive and / or curative risk management strategies to recommend for Jummai?  Any risk exposures that she missed during her assessment?  Or do you need assistance including risk management strategies in your financial plan?  You could send an email to comments@finomics101.com, or leave a message in the comments box below.

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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.