15 Ways To Manage Risk In Your Financial Life

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Over time, I've learned that the best way to manage my money and financial health is to be acutely aware of the relationship between financial risk and monetary return.  We all want to optimize our returns yet many of us forget that by doing so, we may be taking a lot more risk than we should.

By managing our risks, we are better equipped with addressing unpredictable scenarios that can wreak havoc with our finances. Risk isn't a bad thing, just as long as it's controlled or "calculated". So let me share a few strategies that I employ for keeping risks in check:

1. Know yourself.

To know yourself well is the cornerstone of many a financial lesson. With every mistake I've made I've filed the experience in my memory bank to remind myself not to repeat it.  That was true when I tried to short the market during heavy volatility, and when I got involved in MLM marketing without realizing how lousy I was with sales.  More lessons I've learned: understanding your risk profile and capitalizing on your strengths can increase your chances of success.

2. Keep your skills up to date.

At work, it's not a good idea to become too complacent, especially when you work in a competitive, dynamic industry. As the cliche goes: "nobody's indispensable." My takeaway? Develop skills and keep them honed in order to stay valuable in your field. Also develop skills to manage aspects of your life that will allow you to stay flexible and self-sufficient.

3. Carry the right amount of insurance.

Have you got the right amount of insurance? Many people take the massive risk of not having any auto insurance coverage, while many more are skipping out on health insurance or other important coverage. Unfortunately, sometimes there's not enough in the budget to cover premiums. But if you can afford it, make sure to keep policies up to date and sufficient for your circumstances.  

4. Diversify your income sources.

When I read about the troubles of auto industry workers, it emphasized to me the importance of developing multiple streams of income. My best tip: invest early to allow your money to start working for you. Think of your money as yet another income generator for your household. Other ways to create new income sources?  Some people are able to make money blogging, while others turn a hobby into a small business. Or how about moonlighting and getting a part-time job?

5. Build an emergency fund.

When I first started saving, my first priority was to build an emergency fund. I determined how much of my savings should go into short term savings (preferably in a high yield savings account) and how much to deploy into long term investments. I personally hold about 9 months' worth of expenses in my liquid accounts.

6. Check the financial ratings of institutions you work with.

After witnessing the downfall of many a financial company in 2008, I've realized how important it is to review the financial ratings of our banks and institutions. I keep regular tabs on my mutual funds and online bank accounts, along with the companies that house them.

7. Keep your savings under FDIC limits.

Many people grew lax about following FDIC guidelines and lost money when their banks folded. If anything happens to your bank, remember that your money is only guaranteed up to certain FDIC limits, so diversify your funds across several savings institutions.

8. Own stocks!

The current investment climate has scared many people away from stocks, and for some, it may have been for good!  But owning stocks is one way to fight inflation risk. The best way to beat inflation is to own equities and invest for the long term.  Work with reputable mutual fund companies, strong banks and solid online stock brokers as you manage your equity portfolio. I am particular about keeping my costs down with no load funds and low cost trades.

9. Diversify your investments.

Here's some proof that demonstrates that stock market diversification works and is the best way to balance overall portfolio risk and return.

10. Don't time the market.

Short-term or day trading hasn't worked well for me, and I doubt that it's worked for most people.  You really need to know what you're doing if you're going to participate in this activity.

11. Limit debt and use credit wisely.

I don't carry much debt. But I do own credit cards, which I pay off in full each month and which I use to gain rewards.  If you have great control over your spending (and only if you do), then using cash back credit cards is one way to leverage the use of credit to gain something extra for the spending you already do. But be aware that credit is a tool that shouldn't be abused.

12. Watch out for schemes that sound too good to be true.

Avoid get rich quick schemes, but it's easier said than done: just ask the Madoff investors!  If you do ever fall for a scheme that turns out to be a scam, rule #9 (diversify) should help alleviate the sting of loss.

13. Don't burn your bridges.

I found my best jobs through my personal network of friends and former colleagues whom I remain close with. As yet another saying goes: "it's not just what you know, but whom you know".  A good reputation and a social and professional network (have you tried Linked In?) can go a long way with providing a safety net, especially when times are tough.

14. Stay healthy.

The most common cause of bankruptcy is ill health.  Unfortunately, good health is one of those things that we easily take for granted until it's too late. One of my highest priorities is to keep fit and say healthy: I've made the requisite changes in my lifestyle to ensure that I maintain these goals, by cutting down on the stress and improving my diet.

15. Do your due diligence.

And finally, whenever you purchase or sign up for anything that requires your dollars, remember that it's "buyer beware!", so make sure that you perform your due diligence and look over the "fine print".

The bottom line here is that it's best to be prepared.  Prepare yourself well for emergencies and the unknown. But there may be times when no matter how well you do things right, you may still find yourself facing money troubles.  In that case, hang on and hold on. The better you can anticipate and accept what does happen, the easier it will be for you to ride out the rough spots until your luck eventually improves.