Risk management in financial planning is the systematic way of the invention and treating risk. The goal is to minimize worry by working with the possible losses before they happen. – financial plan
The procedure involves:
Step one: Identification
2: Measurement
Step three: Method
Step four: Administration
Risk Identification
The method begins by identifying all potential losses that induce serious financial problems.
(1) Property Losses – The direct loss that needs replacement or repair and indirect loss that will require additional expenses because of the loss.
(For instance, damages from the car incurs repair cost and extra expenses to lease another car as the car will be repaired.)
(2) Liability Losses – It derives from the harm of other’ property or injury to others.
(For instance, the damage to public property due to an auto accident.)
(3) Personal Losses – Losing earning power due to death, disability, sickness or unemployment and the extra expenses incurred due to injury or illness.
(For instance, losing employment because of cancer and also the required treatment cost as well as normal bills.)
Risk Measurement
Subsequently, the utmost possible loss (i.e. the severity) from the event as well as the odds of occurrence (i.e. the frequency) is quantified.
(1) Property Risk – The rc necessary to replace or repair the damaged asset is estimated by a comparable asset in the current price. Indirect expenses for alternative arrangements like accommodation, food, transport, etc, needs to be considered.
(2) Liability Risk – This can be considered to be unlimited since it will depend upon the degree of the event and the amount a legal court awards towards the aggrieved party.
(3) Personal Risk – Estimate the present worth of the mandatory cost of living and additional expenses each year and computing it on the predetermined number of years at some assumed interest rate and inflation.
Types of Treating Risk
A combination of all or several techniques are employed together to take care of the risk.
(1) Avoidance – The whole reduction of the activity.
This is the strongest technique, and also the hardest and may even be impractical. Additionally, care has to be taken that avoidance of just one risk does not create another.
(For instance, to prevent the risk associated with flying, never take a flight on the flight.)
(2) Segregation – Separating the risk.
This is a simple technique that involves not putting all your eggs in a single basket.
(As an example, to prevent both dad and mom dying in a car crash together, travel in separate vehicles.)
(3) Duplication – Have an overabundance than one.
This method requires preparation more back up(s).
(As an example, to prevent the loss of use of a vehicle, have Two or more cars.)
(4) Prevention – Forestall the danger from happening.
This system aims to cut back the frequency from the loss occurring.
(For example, to avoid fires, keep matches away from children.)
(5) Reduction – Minimize the magnitude of loss.
This system aims to lessen loss severity and could be used before, during or after the loss has occurred.
(For example, to reduce losses due to a hearth, install smoke detectors, sprinklers and fire extinguishers.)
(6) Retention – Self assumption of risk.
This system involves retaining the chance consciously or even more dangerous as unconsciously to finance your own loss.
(As an example, having Six months of greenbacks in savings to protect up against the likelihood of unemployment.)
(7) Transfer – Insurance.
This method transfers the financial consequences to a different party.
(This will be covered in greater detail being a topic.)
Administration Of Method
The selected methods should be implemented.
And finally to shut the loop for that process, new risks has to be continually identified and all sorts of risks must be re-measured when needed. Treatment alternatives should also be reviewed. – financial plan
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