Risk management in financial planning is the systematic approach to the discovery and treating risk. The objective would be to minimize worry by dealing with the wide ranging losses before they happen.
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personal financeThe process involves:
Step one: Identification
Step two: Measurement
Step three: Method
Step # 4: Administration
Risk Identification
The method begins by identifying all potential losses that can induce serious financial problems.
(1) Property Losses - The direct loss that will require replacement or repair and indirect loss that will require additional expenses as a result of the loss.
(As an example, the damage with the car incurs repair cost and extra expenses to lease another car while the car has been repaired.)
(2) Liability Losses - It derives from the damage of other' property or personal injury to others.
(For example, damages to public property because of an auto accident.)
(3) Personal Losses - The loss of earning power due to death, disability, sickness or unemployment and also the extra expenses incurred due to injury or illness.
(For instance, loosing employment because of cancer as well as the required treatment cost along with normal living expenses.)
Risk Measurement
Subsequently, the utmost possible loss (i.e. the severity) associated with the event plus the probability of occurrence (i.e. the regularity) is quantified.
(1) Property Risk - The rc required to replace or repair the damaged asset is estimated by way of a comparable asset on the current price. Indirect expenses for alternative arrangements like accommodation, food, transport, etc, needs to be taken into consideration.
(2) Liability Risk - This really is regarded as unlimited since it will be based upon the degree of the big event and the amount the judge awards for the aggrieved party.
(3) Personal Risk - Estimate the current worth of the mandatory living expenses and extra expenses annually and computing it over a predetermined years at some assumed rate of interest and inflation.
Ways of Treating Risk
A combination of all or several techniques are used together to treat the risk.
(1) Avoidance - The complete removal of the experience.
This is actually the most effective technique, but the most difficult and may be impractical. Furthermore, care has to be taken that avoidance of 1 risk will not create another.
(For example, in order to avoid the risk related to flying, never require a flight on the flight.)
(2) Segregation - Separating the danger.
It is a simple technique that involves not putting all of your eggs in a basket.
(As an example, to prevent both dad and mom dying in a car crash together, travel in separate vehicles.)
(3) Duplication - Have more than the usual.
This method requires preparation of more back up(s).
(For instance, to prevent the loss of usage of an automobile, have 2 or more cars.)
(4) Prevention - Forestall the danger from happening.
This technique aims to lessen the regularity from the loss occurring.
(As an example, to prevent fires, keep matches away from children.)
(5) Reduction - Minimize the magnitude of loss.
This method aims to cut back loss severity and could be used before, during or following your loss has occurred.
(For instance, to cut back losses because of a fire, install smoke detectors, sprinklers and fire extinguishers.)
(6) Retention - Self assumption of risk.
This system involves retaining the risk consciously or maybe more dangerous as unconsciously to invest in one's own loss.
(As an example, having 6 months of greenbacks in savings to safeguard from the chance of unemployment.)
(7) Transfer - Insurance.
This technique transfers the financial consequences to a different party.
(This is covered in greater detail like a topic.)
Administration Of Method
The selected methods should be implemented.
And finally to close the loop for that process, new risks has to be continually identified and all risks needs to be re-measured when asked. Treatment alternatives should also be reviewed. - personal finance