Very few people take the time to determine where they are most financially vulnerable. Given the troubling times we live in, this is more important than ever. Don't wait much longer to evaluate your own situation. You may find you are in a very good place and if you discover weaknesses, you can take measures to strengthen them.
There's much to be gained from asking the question: Where am I most vulnerable? Only by doing so, do we learn where to put our efforts. This means that our time and money will be going where they'll do the most good and where we’ll get the greatest “bang for our buck.”
How to do this? One way is to hire a financial planner to review your finances. They're trained to evaluate risk.
Another way is to do it yourself. By asking yourself three questions you can identify the major risks. Once you've discovered the risks you can begin to search out and evaluate potential solutions.
Three Risky Situations
Risk #1: What happens if I lose my income? Many of us think about what would happen if we lost our job. No matter how safe your job appears, it's always wise to have some idea of what would happen if you were suddenly unemployed.
Depending on your situation you might also want to ask what would happen if your pension quit sending the monthly check. Or maybe the investment checks suddenly stopped coming. Or your rental house is empty. Or you don't get your usual Christmas bonus. Or any number of situations!
Take a few moments and decide what you would do if the money stopped. Also think about how likely that is to happen. Those two questions will give you a pretty good idea as to how vulnerable you are to lost income.
Risk #2: What happens if I lose my assets (stuff!)? Could you handle your home burning? Or your IRA being wiped out? Any other large asset suddenly losing its value? It does happen. Some assets are safer and more predicable than others. You're wise to evaluate and know how much trouble you'd face if something that you depended on suddenly disappeared.
Risk #3: What surprise events could cause problems? Suppose you had a car accident and were laid up for months or years. What would happen to your finances if you were you in a hospital bed? The most common financial surprises are medical, but other things can happen, such as a sudden change in the economy, as we are experiencing now, or even events in a foreign country.
Admittedly, it's hard to predict the unexpected, but the mere exercise of looking at these three risks is helpful. You'll be looking beyond the normal boundaries. And that's always good.
Some situations combine all three risks. I know of people who lost their job when the company went under. They also lost their pension. And, to cap it all off, most of their 401k was invested in (the now worthless) stock of their former employer. If you are so invested, consider diversifying.
You may find that you have a number of vulnerabilities. If so, you'll need to prioritize them. On the other hand, you might be the person who can honestly say that you've covered all the risks. And that's great! But, it doesn't mean that you shouldn't repeat the exercise every so often.
The saddest stories I've heard are typically from people who thought that they had their finances in order but found out that there was a vulnerability somewhere that they weren't aware of. Look at your defense to see where you're most susceptible to an attack. The grief you save could be your own!
Gary Foreman is the editor of The Dollar Stretcher.com website and newsletters.