Risk Checklist
Originally submitted in the Upbeat Wealth September 2021 Newsletter. Click HERE to subscribe for more articles like this + exclusive content straight to your inbox.
A general checklist for evaluating risk in your financial life.
1) An emergency fund sets the basis for your risk capacity in other areas of a financial plan such as investments. Take the time to review how much you need and are comfortable having in your emergency fund. Consider factors such as dependents, job security, mortgage/rent, and fixed essential expenses such as auto and utilities. If you are self-employed, you may want to consider exceeding the 6-month rule of thumb.
2) Emotionally, you may be unphased by market volatility. But if your portfolio turns down at an inopportune time, will you have to dip into your funds at 50 cents on the dollar to keep a roof over your head? Be honest when assessing job security and risk tolerance. No one plans on losing their job or getting a hit with an inopportune medical bill but events like these aren’t all that uncommon. After your emergency fund, consider investing money in a diversified approach and into different buckets. For instance, unlike a 401(k) – you can always pull out contributions into a Roth IRA tax-free. With equity positions, consider powerful trading tools like trailing stop orders for downside protection.
3) Death of a loved one Is already unfathomably difficult. Even the best policies will never come close to replacing a loved one– but they can help provide a foundation for stability and enable the healing process. Premiums of a term-life insurance policy are nominal relative to their payouts. If you are younger and healthy, it’s a no-brainer to explore purchasing a policy if your income is being counted on. I’m against using a rule of thumb calculation for this. Consider the lives you want your spouse and/or children to live and calculate from there. Is it important that the home is paid off? Will your partner stop working, continue working, or need to go back to work? If your partner needs to continue or start working, will they need extra hands to help around the home?
4) Humans first. Possessions second. For folks in New Orleans or other areas prone to natural disasters, thoroughly review your homeowner’s policy and ensure your flood insurance policy is adequate. Also, don’t let policies just auto-renew annually. Homebuilding costs more since the pandemic, and if you do find yourself in such an awful situation – chances are many around you have as well. Prices will be inflated. Find a reputable local professional that can help you assess and price-check your policy on an annual basis to ensure you’re getting the most affordable coverage. If renting, check with your auto insurance provider if it makes sense to bundle your coverages for a better rate. If you have significant assets or investment properties, explore getting an umbrella policy. Like term life insurance, umbrella policies are an affordable and effective way to protect yourself in the event of a claim that exceeds your homeowner’s insurance or auto insurance coverage.
5) The black swan. Investopedia describes it as “an unpredictable event that is beyond what is normally expected of a situation and has potentially severe consequences.” Personal finance’s Category 5 Hurricane. Scenario planning can be a powerful exercise, and it’s worth incorporating into your finances. While it’s unrealistic to plan for everything, what-if scenario analysis is a proactive way to mitigate the financial consequences of an improbable event.
