Risk Management Strategies in Financial Planning That Are Often Overlooked

   When it’s about financial planning, discussions generally revolve around common topics like diversification, risk tolerance, and asset allocation. Undoubtedly, these are some of the most common aspects of financial planning, but there are a few risk management strategies that are overlooked by many.

These strategies are all about identifying risks that could affect business operations and growth. They also help in recognizing problems and planning ahead to address them before they occur.

Through this article, let’s shed some light on some of those risk management strategies that people usually do not talk about, in spite of their importance.

Planning for Contingencies and Lifestyle Audit:

In their financial planning strategy, what people often miss out on is the creation of a contingency plan after assessing lifestyle expenses. A lifestyle audit might sound complex, but it is a simple process of evaluating areas where costs can be cut in emergency situations.

It is identifying the expenses that can be reduced so that an emergency fund can be created to cover expenses in case of financial distress.

Let’s consider a few expenses that can be easily reduced to build an emergency fund or contingency fund:

●Entertainment and Dining: Any financial management plan or strategy should include tracking spending on entertainment and dining out. Cooking at home or choosing low-cost entertainment options can save a lot of money.

●Subscription Services: Gym memberships, subscriptions for various streaming services, and magazines can be reduced, especially those memberships that are not frequently used. This can free up funds for emergencies.

●Shopping Costs: Non-essential shopping for clothing, home décor, gardening, and even gadgets can help reduce spending. It’s necessary to prepare a list of priorities and cut down the list of wants. Mindful shopping can contribute significantly to building a pool.

●Commuting Expenses: Fuel and maintenance costs of vehicles can inflate your expenses. Alternative options like biking or carpooling can easily reduce commuting expenses.

There are several other miscellaneous expenses that are unique to an individual and can be cut down on. The need is to identify and track all these.

Reconsidering Insurance Plans:

It’s all about planning your finances in such a way that your money lasts as long as you do. Our medical and healthcare facilities have seen unprecedented growth and advancement in the last few years. 

People are conscious of their health and do their best to stay fit and healthy for a long time. In such a scenario, there is concern about ‘longevity risk’.

It’s time to think about the concern about outliving savings if financial planning is not done early. Traditional retirement planning tends to underestimate the time or how long retirement savings should last. 

It’s now necessary to consider strategies like annuities or purchasing longevity insurance, which will provide some sort of income for life, depending on the policy or scheme selected.

Planning for Longevity:

It’s all about planning your finances in such a way that your money lasts as long as you do. Our medical and healthcare facilities have seen unprecedented growth and advancement in the last few years. 

People are conscious of their health and do their best to stay fit and healthy for a long time. In such a scenario, there is concern about ‘longevity risk’.

It’s time to think about the concern about outliving savings if financial planning is not done early. Traditional retirement planning tends to underestimate the time or how long retirement savings should last. 

It’s now necessary to consider strategies like annuities or purchasing longevity insurance, which will provide some sort of income for life, depending on the policy or scheme selected.

Cybersecurity Measures:

Digital transactions and other online activities have become a part of our lives now – but along with this there is a big concern of online frauds, scams and activities that can wipe out your bank balance. 

Nowadays, implementing cyber security measures with use of multi-factor authentication, strong passwords and continuous software updates can help in protecting identity theft and cyber theft.

Business Owners Strategies for Contingency Planning:

Business owners (whether online or offline) face uncertainty and risks related to the continuity, success, and maintenance of their businesses. Here are some risk management strategies that can help you thrive:

●Establishing an Emergency Fund: Setting aside funds, especially for unexpected expenses and emergencies, is always helpful. Financial planning should include a strategy to build cash reserves for challenging times.

●Revenue Diversification: Trends suggest that reliance on one service, one product, or a single client can be risky. 

Businesses should have strategies to expand into new sectors or markets, or even offer complementary products. It is also a good option to target different customer segments.

●Having a succession plan: Creating a succession plan is key, considering crucial personal changes that include retirement, unexpected departure, or even disability. 

It is about creating a plan that will help in identifying successors and defining their roles and responsibilities.

Thus, in case of any untoward incident, the business continues to run without facing hindrances.

Considering Black Swan Protection:

Black Swan events signify those events that are highly probable and have extremely impactful occurrences. This strategy is about preparing for these unforeseeable events that could disrupt the financial stability of the business. 

These can include purchasing unconventional insurance products, investing in pandemic risk insurance, or investing in catastrophic bonds.

For those who wonder if it is still worth investing in such occurrences, here is a glimpse of some of them:

●Global Pandemic: The outbreak of the COVID-19 pandemic is something no one was prepared for. The world closed down, and public health was deeply impacted. Businesses shut down, and people lost employment.

●Natural Disasters: Tsunamis, earthquakes, and hurricanes can have devastating effects on economies. It comes suddenly and has far-reaching consequences.

●Collapse of Financial Markets: These are sudden and severe. Think about the 2008 global financial crisis, which is said to be one of the biggest black swan events.

Black Swan events cause immense financial losses, and businesses should be prepared to meet such circumstances.

A strong approach to risk management can help mitigate the impact of different unforeseen events. It also helps in unlocking opportunities that are necessary for prosperity and sustainable growth.