One reason risk can be such a confusing topic is that it’s not just one thing. There are many different kinds of risk.
Risk is just the chance of something bad happening.
Typically, when risk gets talked about in personal finance, people think of the risk of losing money on an investment.
That’s an important risk to think about, but it’s also just one among many.
Other risks include things like:
– Losing your job or your house
– Dying unexpectedly
– Getting sick or injured
– Never saving enough money to buy a home or help your kids through school or to reach your long-term goals more generally
– Running out of money in retirement
– Dying with a bunch of money that could’ve brought you joy
Risks are hard to eliminate entirely because living life is risky. You’re taking a risk every time you leave your house. And if you never leave your house, you run the risk of never really living your life.
But you can reduce certain risks and minimize their impact.
To reduce the risk of losing money on your investments, you can diversify, rebalance regularly, and most importantly, hold your investments for a long time.
To reduce your risk of running out of money in retirement, you can start saving and investing regularly now, buy a house you plan to live in a long time and gradually pay off the mortgage, and use a strategic Whole Life insurance policy that’s optimized for cash value.
To minimize the financial impact of an injury, you can get disability insurance. To minimize the financial impact of you dying unexpectedly, you can get life insurance.
Financial planning helps with all of the above. The more thoughtful and proactive you are, the better your options will be and the lower your chances of ending up in a tough situation.
And finally, more generally, it’s important to invest in your health. Eat well. Sleep well. Exercise regularly. Maintain good relationships with your friends, family and broader community. These all have a protective effect.
In the end, a life with no risk is no life at all. But if you take the right steps, you can give yourself better odds and avoid the worst outcomes.