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Course: Financial Literacy > Unit 6
Lesson 1: What is risk and how to manage itWays to manage financial risk
To manage financial risks, you can avoid them by not taking part in risky activities, reduce them by being careful and planning ahead, keep them and be ready to deal with the consequences, or transfer them to someone else by using insurance. These strategies help you stay in control of your money and make smart decisions. Created by Sal Khan.
Want to join the conversation?
- What is financial risk?(2 votes)
- Financial Risk is a term that means "the chance that you could lose your money and end up in difficulties". Certain things have almost no financial risk: Like US Treasury Bonds. Governments all over the world are so eager to control their risk that they buy these. If you put your money in an insured account at a bank, that's very low risk. Low interest payments might not keep you up with inflation, but $10,000 dollars there won't shrink to a lower number.
Investments carry higher risk, because the stock and bond markets fluctuate. You might make a lot of money there, but you also risk losing it all.(2 votes)
- Hmm, this video made me curious about types of insurance I could get. I have insurance for my car, home, and healthcare since those are the three big ones that are almost universally required, but now I'm curious about other forms.
Has anyone here gotten insurance on things that aren't normally compulsory?(1 vote) - What's the difference between financial problems, financial troubles and financial risk?(1 vote)
- Financial risk is a situation when the amount of resources you have might be reduced because of conditions beyond your control.
Financial troubles are an emotional condition. You become emotionally troubled because you worry about your resources.
Financial problems are situations. You discover that the resources available to you are insufficient to meet your needs. You've got problems.(1 vote)
- Is 10 dollars an hour good for working at a gas station?(0 votes)
- No. It's not. You should be getting at least $15 per hour, no matter WHERE you work or no matter WHAT you do.(1 vote)
Video transcript
- So let's talk a little
bit about the different ways that you can manage risk. And it's generally gonna
fall into a few categories. You can obviously try to
avoid the risk altogether or reduce it. You could say, "All
right, that risk is there and I'm gonna retain the risk. And then how can I manage that?" Or you can actually transfer
that risk to someone else. And we're gonna talk about all of those. So let's just pick a
particular type of risk. Let's just say, one risk, one financial risk is your loss of income. What happens if you lose your job? Or if you run a business, what happens if the business goes under or it has lower income
for some period of time? Well, the first strategy is obviously to avoid that as much as possible or to reduce the probability
of that as much as possible. So if you're at a job, try
to perform well at your job so if they're firing folks
or if they're doing layoffs, you are a crucial employee
that they can't let go. That is a good way of avoiding or at least reducing your risk. You can't completely avoid your risk. Things happen in the economy. No matter how good you are at work, sometimes you can get
fired, you can get laid off. So always keep that in mind. But obviously, we all wanna
reduce that as much as possible. Now that risk is there. You're not gonna be able
to completely get it. So to some degree, you are going to retain some of that financial risk. And if you're taking
that financial risk on, as we've talked about in the other videos, one of the best ways to protect
yourself is by saving money. And I would say a combination: saving money and living below your means or having a very quick way of being able to live below your means if by chance you were to lose your income. Because if you do that,
you have more time. You could live off of your savings, especially if you don't
spend a lot to live, and you have time to
transition to something else. Now you can also transfer
the risk to others and that's usually through
some form of insurance. There is government unemployment benefits, but oftentimes that's
not going to be enough to cover your expenses. And there are other types
of unemployment insurance that you might be able to get that's a little bit less common for people to get unemployment insurance above and beyond that. So most folks are usually, when
it comes to loss of income, let's avoid it or minimize
the chances of that happening, but then also create a nest egg. There's other forms of risk that we've talked about like liability. What happens if someone sues you because you know there's a car
accident and you're at fault, or at least the judge
decides that you're at fault and then you owe them a
lot of money in a lawsuit? Well, once again, the best thing to do is to avoid or reduce. Now you can't avoid that risk completely unless you're willing to just not travel or not drive or anything like that. But you can reduce it by
driving safely, conscientiously, not texting while you're in the car so that you're very
unlikely to be at fault if there's any type of accident. You are a defensive driver. That's always should be
the first line of attack. But then on top of that, if you could retain some
of that risk, obviously, and the best way to manage
that is save money, et cetera, so that if something were happen, it's not gonna be the end of
the world for you financially. And what many folks do
for that type of risk, and sometimes by law, in fact, in many states you have to have liability insurance. And so then you are paying
an insurance company to transfer some or a lot
of that risk of liability, it's usually capped to some
amount, to an insurance company. And I recommend that as well, especially for things like liability. So once again, just
always have that in front. Okay, what are my risks? Where can I completely avoid them? Usually you can't completely avoid them, but you can at least
minimize them a little bit or reduce them. And then above and beyond that, since those risks are hopefully
just going to be reduced, but they're still there, how much do you take it on yourself? And to manage that, you probably
need to have some savings or how much do you transfer to others? And that's probably paying
someone to ensure that, "Hey, if that thing happened that insurance company's got
my back to a certain degree."