Managing Risk

When you hear the word risk, you may think of things like rock climbing or riding roller coasters. But risk is a part of everyday life, too.

Risk is the chance for harm or loss. Sometimes risk leads to positive consequences—like discovering you love rollercoasters or are really good at rock climbing. Other times, risk has negative consequences.

There are ways to lower or avoid risk in every area of your life. This is called risk management. When it comes to avoiding financial risks, it’s important to save for emergencies, carry insurance, and follow a budget.

Save for Emergencies

An emergency fund is money set aside for an emergency, like car repairs or medical bills. Ideally, you’ll set aside money every month in an emergency fund. Even small amounts add up over time. For example, if your household saves $50 every month, in one year you’ll accumulate $600. That money could help you avoid putting an emergency expense on a credit card that charges interest, which is a fee for borrowing money.

There is no set amount of money you need in an emergency fund. Start with what you can afford and build from there. When you’re young, you don’t really need to worry about your own emergency fund. Talk to a parent or guardian about your household emergency fund if you have questions.

Get Insurance

Insurance is a way to protect against unexpected loss, like when something valuable gets damaged or destroyed. The main types of insurance are auto, home, life, and health. There are other types of insurance, too. Some professional athletes even buy special insurance for specific body parts, like their legs or throwing arm.

With insurance you pay a monthly fee called a premium. If something goes wrong, like a car accident or a house fire, your insurance company will likely pay some or all towards repairs or replacement. Every policy is different so exact coverage depends on your policy details.

First, you’ll need to file an insurance claim to let the company know about your loss. Then a professional insurance adjuster visits to look at the damage and report back to the company. You may be required to pay a percentage or flat rate amount, called a deductible, before your insurance kicks in.

The cost of insurance depends on how much insurance you’re buying, how long you’re buying it for, and other factors. For instance, insuring a house and everything in it is more expensive than buying insurance for a small car.

Follow a Budget

A budget is a plan for how you’ll spend your money. When you create and follow a budget, you know how much money is available to spend and save. You’re also aware of when important bills are due and can make a plan to pay for those.

If you live without a budget, you may lose track of where you’re spending your money. It’s harder to save money when you don’t know how much you have to work with. Budgeting helps you avoid things like late or missed payments, fees, and charges.

You can’t avoid risk altogether, but there are things you can do to avoid unwanted risk and have more peace of mind for your financial future.