Risk management in financial p lanning will be the systematic way of the invention and management of risk. The goal is to minimize worry by working with the possible losses before they happen. - invest
The process involves:
Step 1: Identification
2: Measurement
Step 3: Method
Step 4: Administration
Risk Identification
The procedure begins by identifying all potential losses that induce serious financial problems.
(1) Property Losses - The direct loss that will require replacement or repair and indirect loss that will require additional expenses because of losing.
(As an example, the harm with the car incurs repair cost and extra expenses to lease another car while the car will be repaired.)
(2) Liability Losses - It comes from the harm of other' property or accidental injury to other people.
(For instance, the damage to public property because of a vehicle accident.)
(3) Personal Losses - Losing earning power as a result of death, disability, sickness or unemployment and the extra expenses incurred because of injury or illness.
(For instance, losing employment as a result of cancer and the required treatment cost in addition to normal living expenses.)
Risk Measurement
Subsequently, the most possible loss (i.e. the severity) linked to the event along with the odds of occurrence (i.e. the regularity) is quantified.
(1) Property Risk - The rc required to replace or repair the damaged asset is estimated with a comparable asset at the current price. Indirect expenses for alternative arrangements like accommodation, food, transport, etc, needs to be taken into consideration.
(2) Liability Risk - This can be regarded as unlimited because it will be based upon the severity of the wedding and the amount a legal court awards towards the aggrieved party.
(3) Personal Risk - Estimate the current worth of the mandatory living expenses and further expenses annually and computing it more than a predetermined period of time at some assumed interest rate and inflation.
Methods Of Treating Risk
A combination of all or several techniques are utilized together to treat the risk.
(1) Avoidance - The entire elimination of the game.
This is the most powerful technique, and also the most difficult and may sometimes be impractical. Additionally, care has to be taken that avoidance of one risk doesn't create another.
(As an example, to avoid the danger related to flying, never require a flight on the airplane.)
(2) Segregation - Separating the danger.
This is a simple technique which involves not putting all your eggs in one basket.
(As an example, to avoid both mom and dad dying in a car crash together, travel in separate vehicles.)
(3) Duplication - Have an overabundance than one.
This technique requires preparation of more back up(s).
(For instance, in order to avoid loosing utilization of a car, have 2 or more cars.)
(4) Prevention - Forestall the danger from happening.
This method aims to lessen how often with the loss occurring.
(For example, to avoid fires, keep matches away from children.)
(5) Reduction - Minimize the magnitude of loss.
This method aims to reduce loss severity and could be used before, during or following the loss has occurred.
(For instance, to cut back losses because of a fire, install smoke detectors, sprinklers and fire extinguishers.)
(6) Retention - Self assumption of risk.
This system involves retaining the chance consciously or more dangerous as unconsciously to invest in one's own loss.
(For instance, having Half a year of income in savings to protect from the risk of unemployment.)
(7) Transfer - Insurance.
This system transfers the financial consequences to another party.
(This will be covered in greater detail as a topic.)
Administration Of Method
The selected methods should be implemented.
And lastly to close the loop for that process, new risks has to be continually identified and all sorts of risks needs to be re-measured when required. Treatment alternatives also need to be reviewed. - invest