Addressing the chance that at some point in the future you’ll be confronted with some hit to your financial capacity sounds like a pretty negative exercise. Talking about the things that can go wrong in your life will make you sound like Chicken Little, but sound financial planning demands we act like grown ups and deal with it.
We’ll talk some other time about the process of identifying risks to your wealth, but let’s first put titles on the 4 ways you can improve your resilience to those risks.
- Avoidance. This method involves you not doing something that would expose you to risk. Don’t want the neighbor kids suing you for them breaking their legs on your property? Don’t buy the trampoline. Don’t want to be subjected to the chance you get sued for wrongful eviction by a tenant? Don’t become a landlord. Pretty simple.
- Mitigation. This approach tries to reduce either the severity of a risk (how bad it can be), and/or the frequency of a risk (how likely it is to happen). Instead of buying a 1000cc motorcycle as your first bike, maybe start with a scooter. Fire extinguishers, suppression sprinklers, and exterior brush removal are good examples, too.
- Financing. This is insurance. Paying someone else a manageable sum in exchange for a promise that they’ll pay an unmanageable sum for a pre-agreed set of risks is the concept of insurance.
- Transfer. This is where someone else takes responsibility for the consequence of your loss. This is not insurance. A hold harmless agreement, an indemnity agreement, an additional insured position are common examples.