Managing your Risk - Part One

Risk is something we need to manage every day. We determine risk with almost every decision we make. What we will wear; what we will eat; how we will live; how we will drive; how we do our job. Everything we own we protect from risk. Our cars, homes and personal belongings are insured against damage and theft. Now aside for being legally required to own such insurance, I haven’t met a person who wouldn’t own insurance if it wasn’t legally mandated.

It’s not hard to make an argument for owning home and auto insurance. The point is quite simple, if your house burned down, would you be able to afford to rebuild it and still keep making the outstanding mortgage payments. I think probably not.

The same holds true for your car. If it was damaged to the point of replacement, would you have the cash or ability to borrow or lease in order to get the new car and pay the lease buy-out or continue making the remaining finance payments? Again, I’m thinking probably not.

The easy solution is to insure the home and car against damage or replacement. Yes, there is a cost for this insurance protection, and I hear people complain about it constantly. I’m not sure why there are complaints? If you really thought about it, what is the real problem? Is it the insurance premium or the replacement cost?

Generally, the severity of a risk is categorized into three areas:

1.??????Critical - very serious financial consequences (possible bankruptcy)

2.??????Material - serious consequences (leading to a reduction in standard of living)

3.??????Minor – little financial consequence (leading to minor income loss or manageable expense)

With these three categories, it’s clearer to understand why the management of risk is important. If we understand the financial impact of the damage or loss, then it should become a “no-brainer”. Your home is certainly “critical” while your car and other personal belongings are probably “material”.

Let’s switch gears and look at another issue. Rather than focusing on specific items let’s think bigger. From a risk perspective, answer this question. Given that your home is considered a critical risk, would you agree that it is your most valuable possession? Is there another possession that is more valuable and have more risk? HINT – “What” was used to purchase your home or car? Who provided the “what” to make those purchases? Is your home really your most valuable possession? Read Part Two… there is someone I want to introduce to you.