|Dealing with Financial Risk
||[Aug. 31st, 2006|07:16 pm]
Is Your Financial Security at Risk? by the University of Illinois Extension. This is an interactive thing where you rate a long list of risks according to the likelihood that they will occur for you and how devastating their occurance they would be if they happened.
Then they talk about four ways to deal with risk:
* Bear it (the stereotypical male response)
* Transfer it (get insurance)
* Reduce or control it (the Girl or Boy Scout response)
* Remove it (uh, the extremist response?)
Then they recommend a different technique for each combination of likelihood and severity:
High probability and severity:
Suggested technique: Remove the risk or reduce it to an acceptable level.
Why: Insurance will probably be unaffordable. If you bear the risk, you might face bankruptcy or loss of major assets.
Low probability, high severity:
Suggested technique: Transfer or reduce the risk.
Why: If you bear the risk, you might face bankruptcy or loss of major assets. Totally avoiding an event is not always possible, and it may be highly inconvenient or costly to do so, especially for an event that is unlikely.
High probability, low severity
Suggested technique: Bear the risk and reduce the likelihood or the amount of damage.
Why: Even if insurance is affordable, the cost will be high in relation to the benefit.
Totally avoiding an event is not always possible, and it may be highly inconvenient or costly to do so, especially for an event that does not pose severe financial risk.
Low probability and severity
Suggested technique: Bear the risk.
Why: Insurance is generally unnecessary for events that have little financial impact. It's probably not worth the effort to remove the risk, and may not even be worth the inconvenience of reducing it.
My strategies actually match up fairly well (although the part that displays this for you seems to be broken). Here are the risks they list:
Death - this is the weirdest one. Obviously we are all at extreme risk of dying and it would be completely devastating. However, I don't have any dependents, so I decided to say that the financial results would not be very severe. Recommended strategy: reduce or bear the risk. I'm bearing the risk. My estate will certainly be large enough to cover any costs having to do with my death. I really should write a will, though.
Disability - I've read that chances for this are pretty high over one's lifetime for the population in general, though less than 50%, and the results would be financially severe. Recommendation: reduce the risk because insurance is not affordable. Actually I can afford disability insurance, so I have that.
Major surgery or hospitalization - unlikely but severe. Recommendation: transfer or reduce the risk. I have health insurance.
Long-term care - Same as disability, above, except that insurance is extremely expensive. Therefore I should try to stay safe and healthy.
Liabilities for injuries to others - I guess unlikely but pretty severe. I have homeowner and car liability insurance. I don't know how to try harder than I do not to hurt people. Oh, except that I should re-surface my front porch, which is slippery in the rain, or at least get a bigger door mat.
Burglary of home - I think this is unlikely and wouldn't be that severe. I have insurance anyway as part of my homeowner's insurance. It's pretty affordable. I really don't like a lot of the ways you're supposed to reduce this risk. I do lock the windows and doors all the time, and I have pointy holly growing along the back wall under the windows, but that's it.
Destruction of house and contents - Unlikely but severe. Homeowner's and flood insurance cover most things though not terrorist acts. I don't do anything to reduce this risk, except I did cut down one tree before it fell over.
Car totaled in accident - unlikely and not severe. Suggestion: bear the risk. I do this! No collision insurance on my old car. And I save $50/month toward my next car.
Minor fender-bender - see above. Also, I don't fix problems that don't affect how the car works.
Doctor's office visit - I'm not sure what they mean, I guess other than for regular check ups. Over my lifetime I suppose this is fairly likely. Some things don't cost too much, but lots of things do. I have health insurance but also reduce the risk by having regular check-ups and wearing seat belts, etc. I don't refrain from everything dangerous, though, like roller skating down hills (hi, fraeuleinchen) though I do wear a helmet and pads. I'm also a big fan of ear plugs.
Divorce - One answer: impossible because I'm not married. Other answer: a break up would be similar. I don't know how likely it is, and it would be something I could deal with financially, though I wouldn't want to. My strategy is to bear the risk. I do reduce it slightly though by keeping some of my crap that we are not using because we are using his. And I still have everything of mine in my own name, so I'll still have credit.
Marriage - There's definitely a risk of this. It is unlikely to have negative financial side-effects, though, partially because I'm not into expensive weddings and partially because I won't marry someone totally financially messed up. So, my strategy would be to bear the risk. But I also like the idea of each getting our credit reports and cleaning up any mistakes or other fixable problems first.
Job loss - unlikely but severe. Suggestion: transfer or reduce the risk. There is such a thing as unemployment insurance. Also my employer rarely lays people off. Also I generally don't quit a job without having another one lined up. (Some people do that with boyfriends. Ugh--I'd rather bear those risks.) And I discussed some job skills I have in a recent post.
Victimized by investment fraud - I'd like to think there is virtually no chance this will happen to me. However, I do invest money, and even large, national, legitimate businesses can defraud people (hello, Enron). I have some money with the state (pension), some with a small mutual fund company (IRA), and some in my house. I have smaller amounts in a credit union, and online bank, I-bonds, and a discount broker. If I totally lose everything in any one area except my pension fund, I can still be just fine. If my pension plan changes too much, however, I don't have a good back-up plan yet. Well, I have one (acquire savings twice the size of my IRA), but I'm not doing it. Actually I have another plan, too (quit immediately, even if I don't have a job lined up yet), but that might not be such a great plan, so I might not go through with it.
Child going to college - again, terribly unlikely since I don't have any children, use birth control, and am starting to get too old to conceive easily anyway. But I now have neices and a nephew and a cousin who are not yet done with college, and it's certainly possible that a whole bunch of our mutual relatives will all die in a freakish set of incidents that spares the kids which could possibly result in my getting custody. So, my plan would be to bear that expense except for the part where really they have to bear most of it themselves.
Using up your sick leave - I believe I have four months of sick leave, so my strategy has been to reduce the likelihood of this happening by only using sick leave when I'm actually sick or when I'm visiting health professionals during work hours.
Professional liability - I just don't have one of those kinds of jobs.
Other - I can't think of any except the risk of becoming a bitter person. I think it's unlikely but could be severe. That is a risk that should be reduced, not borne. I'm very good at thinking of good reasons why people are doing the odd things they're doing. But after a while I often develop opinions about my favorite ways of doing things, and those sometimes lead to grumpiness when I'm around people doing things in other ways. And if you get grumpy and hermitlike and then start sliding into a fantasy life you enjoy better than your own, and then slip too far and don't even pay your bills, and, well, that could affect one's finances in a bad way.
Well, this entry has seemed oddly personal in a scary way. Like if someone slips on my porch (or just pretends to), now they can successfully sue me because I clearly already knew it was slippery and did nothing about it. And you know how easy it is to break into my house, and that it's totally worth it because we have two sets of crap!
Well, don't mess with me, or, or, or I'll stab you with my holly bushes!
The punch line to this entry made me laugh out loud!
> Obviously we are all at extreme risk of dying and it would be completely devastating.
Life *is* 100% lethal, with one reported exception, widely held to be only a myth.
I recently saw a really cool bumper sticker. It went something like this: "I never expected life to take up so much of my time." [I know that's not exact, because when I say or write that I don't get the same sense of slightly morbid glee that came over me when I saw it, which, incidentally, I did while a passenger, so I have no excuse for not having written it down. It just make so much sense at the time that I thought I'd retain it easily. Alas...] In any case, there are just so many ways of understanding and thinking about this statement.