Whether you realize it or not, you constantly face the risk of losing your hard-earned money. The bad news is, the risks will not stop, but the good news is, there are simple ways for you to solve these problems so keep reading and I will fill you in shortly!
Risk #1: Income Risk
Income risk has to do with losing your source of income, such as your job or your business. Your most vital asset is “human capital”. This is the economist’s term that refers to “your capacity to earn money.” For you to successfully manage your money, you simply have to possess some money in the first place. This means your first financial goal should be to generate as much money as you can.
Since economists believe that human capital is the biggest asset you can possess, then this income risk is your biggest financial risk. So what can you do about this? Let me explain now. To mitigate income risk, you simply have to focus on developing and improving skills that can make you more money. It’s entirely possible to feel like there aren’t a lot of opportunities in this world; however, that’s just not true. The ways in which you can make more money are infinite! One method that’s worth your consideration is establishing a scalable side hustle. By scalable, I mean that the side hustle’s earning potential should be limitless, although you probably aren’t guaranteed to make any profits at first.
For example, if you developed a skill in writing and improve yourself through enough reading and practice, you could begin working as a freelance writer. With that to supplement your regular 9–5 paycheck, you can double your income sooner than you’d image! In no time, you may attain a level of abundance where your net income is equal to your paycheck. With an income diversification such as this, even if you happened to lose your job, the income from your side hustle could very easily cover your living expenses.
Now, this forms another layer of managing your income risk, thereby reducing the possibility that you’ll ever have to depend on your financial capital for the rest of your working days. This implies your financial capital will keep compounding and can comfortably support you during your retirement days.
Another way to handle this risk is to work on your savings rate. Maximizing your financial capital is a great method for supporting for ensuring future financial stability. Losing your job without any money saved up could usher you into a hellish world of financial damnation. Conversely, if you lost your job but have investments and savings that are enough to last you another 7 months or longer, then you will have given yourself enough time to get back on your feet.
With a higher savings rate, you will have increased your financial capital while reducing the risk that a potential job loss may pose to you. If you’re unfamiliar, a savings rate is the percentage of a person’s paycheck that is saved. For instance, if you earned $1,000 as take-home-pay and saved $200, that would be a 20% savings rate. But how can you increase your savings rate I hear you ask? There are two ways to do this. First, maintain a constant income and reduce your expenses, and second, maintain your expenses and increase your income. Reducing your monthly spending by $100 impacts your savings rate in the same manner as when you increase your income by $100. Actually, when you decrease your living expenses, it does you more good than when you increase your income as it is more tax-efficient. If the marginal tax rate is at 30%, spending $500 less than your usual monthly expenses leads to a theoretical increase in your monthly income of $715.
Although you could achieve this by increasing your income, spending a few hours cutting down on unnecessary expenses might prove less tasking. You might think this is hard, but if you’re ready to cut your spending, I’ll suggest you take a microscopic look at your top 3 expenditures.
Risk #2: Hesitancy Risk
This second risk has to do with the fear of investing due to being hesitant about losing money. The last market crash is still fresh in the minds of a lot of people, and it can be quite hard to conquer your fears and restart your investment plans. But as they say, if there is a will, there is a way, so now let me explain to you the way!
Many people are successful today because they did not give up but tried one more time. Shame is the one thing you must give up to be rich and successful! Life as an investor can be quite daunting. The thought that you could possibly lose everything you’ve struggled to build in a second is beyond paralyzing. Then throw in the fact that the economy’s is as volatile as never and you’ve truly given yourself a good scare. Bad or good economy, investments such as the stock market will always come with risks.
Therefore, if you give in to fear, you will simply be passing up on some wonderful opportunities and end up missing out on huge returns which you could have had your name on. Like the old saying, there is no time like the present, and presently, there is no better opportunity for you to get into the investment game than now.
Simply consider the market downturn in the same light as the Black Friday sales. Wouldn’t it be smart to shop when the prices are low, knowing that soon they will rise? Part of the problem is that most people still think they have a choice. Most people still cannot embrace the fact that investing isn’t optional.
Let’s take a look at the fears of many non-investors: The emotional fear of failure that says, “I will look stupid if I fail”; The rational fear of failure that says, “I cannot afford losing all my money”; Fear of people treating them like a fool; Fear of seeming ignorant when confronted with unfamiliar subjects. These are all valid and sensible. However, you cannot let valid and sensible fears tie you down and deprive you of the more sensible and valid pleasures of success. So what do you do?
Firstly, you should do your homework. For the experienced and well-versed investors, the investment terms are plain and natural. However, to a newbie, it might as well be gibberish. Also, it can be very frustrating when those you go to for information also use terms you don’t understand. A situation like this keeps outsiders out and the insiders in.
So to kick-start your investment lessons, you should get yourself some insightful books on the subject matter. You could visit investing sites to find recommendations from experts. You can also freely educate yourself on the web. One good investment site for you is Investopedia. On such websites, you’d find a glossary of investment terms covering over 8,000 items. This will help to demystify those mysterious investment terms. Moreover, on such sites, you’ll also find many tips on investing that you can implement into your own investing game plan.
Another method is to devise a viable plan for yourself before you start investing. Settle yourself and write out your goals and the deadline for each. Be clear on your reasons for investing and when you would want the money back. For example, if you find that you’ll need the money back within the following two to four years, preservation has to be your top aim.
As a newbie investor, you should search for a safe and accessible investment vehicle to put your money. You could check out instruments like mutual funds or a bank certificate of deposit.
However, do not forget that the goal is to lock-in your money for the long-term. If you possess a small fortune that you want to invest, but are scared to, you can start by taking small baby investment steps. This is done by investing little portions at intervals via dollar-cost averaging. Let’s assume the entire sum you have is $12,000. Divide that by the time period you plan to invest over. Let’s also assume it’s 12 months. Then you invest your $12,000 at the same time for 12 months, which equates to $1,000 per month. During a rising time in the market, you will undoubtedly be buying a lesser number of shares however in slower months, this same $1,000 will buy you more hence the approach of dollar-cost averaging.
This method of spreading your money over a time-frame reduces the risk of losing all your investment. Another step to take is to ensure you diversify your portfolio. Several investors commit the rookie error of favoring the stock of a particular company or putting all their money in only one kind of stock. This is a bad move because in this uncertain world and uncertain times if a terrible event was to happen to that company, you may damage your savings goal permanently. An investment vehicle like mutual funds can provide the diversification you need as your investment will go into multiple stocks.
The final step in countering your hesitancy risk is one bitter truth that cannot be denied, and it is the fact that you have to be ready for losses. The fact is everything will not run as planned; therefore, as an investor, a time will definitely come when you’ll make the wrong move. So what are your options against this? Just as I said earlier, you have to learn as much as possible, especially from your mistakes. Learning from your past errors is even more valuable because knowing better means you’ll fare better in the long run.
Risk #3: Longevity Risk
The final risk to your money refers to the possibility of you outliving your retirement savings. Most people in their retirement age cover their living expenses by dipping into their financial capital. At this point, your biggest financial dilemma is longevity risk which sees you outliving your savings and no longer having the means to cover your routine expenses.
Once you begin spending from your financial capital, the countdown to when you run out of money starts. The longevity risk is a scenario where you establish a financial plan that would cater to your living expenses till you’re 85, but what happens if you live to be 100? That means you’ll live another 15 years with no capital to maintain your lifestyle. So what can you do to prevent a situation like that? I will go into that now.
Years back, when people could access a pension through work, longevity risk wasn’t a big issue. Unfortunately, very few private-sector workers can access a reliable and lucrative pension now. These days everyone relies on the money they managed to save to cater to their retirement. Saving for retirement is now a difficult task with life expectancy on the rise, which means the number of retirement years, has also increased.
There are two options that I recommend. The first is ensuring you build up abundant financial capital capable of funding your lifestyle all through your old age. For instance, with $10 million saved up for retirement, you could generously live off $50,000 every year. In this case, the odds that you’ll outlive such a plan are literally zero. Of course, that example is extreme. However, you get the basic idea which is to save as much as possible in order to have more than enough to sustain your retirement days on the planet.
This option is not available to most people since it demands a huge amount of savings yearly throughout your pre-retirement. However, if you’re opportune to be capable of amassing such amount of wealth as is necessary, then you might as well forget about longevity risk. Now, as to the other solution we talked about earlier, although a pension might not be readily accessible now, you can buy one just before you retire. Did I hear you ask, ‘what is he talking about?’ well, I’m talking about you buying a product known as a lifetime annuity.
This is a financial product that is provided via insurance companies. The lifetime annuity guarantees you a monthly income till you leave this earth. In this manner, it serves the same purpose as a pension. To get this, you’ll have to hand over at least the major part of all your retirement savings. However, it’s pertinent you know that annuities are complex and, as expected, do not come cheap. If you want to go along with this option, I suggest you have a seat with a fiduciary financial planner. They’ll break down the details for you.
Always remember, everyone goes through at least one of these risks at one point in their lives but if you follow the examples of those who have succeeded before you, you too can overcome all three of these risks to your money!