A Personal Finance Guide

Personal Finance and Money Management 24 – How to Handle Economic Risks?

Economic risks play an important role to determine consumer spending. If consumers feel secure about their job they are willing to spend and help to increase economic expansion. If not, we may have a recession soon. In this article, we will discuss how to handle consumer economic risks.

1. Consumer economic risks include

a) Loss of job or income (destruction of earning power, loss of market for your service)

b) Unexpected large expenses (destruction of property, illness/death, personal liability because of negligence).

c) Loss of value of capital (drop in market value, inflation)

2. How to handle these risks

A. Assume risks

a) If you are rich enough, you can assume your own risks.

b) Accumulate your net worth when economy is good to prepare for whatever risks.

c) Good financial planning of your investment and save for unforeseen needs.

B. Sharing Risks

a) Risks may be shared through private insurance or social income security programs such as the risks of loss or damage to personal property and personal liability are shared.

b) Buy insurance policies to protect against the risk of premature death and protect your dependents.

c) Employees also pay into employment insurance to protect them in case of unemployment.

d) Protect your yourself by buying disability insurance. In fact, the loss of your ability to earn a living because of temporary or permanent disability due to accident or illness is higher than loss due to illness. Study shows that anyone disabled for more than 3 months will probably still be disabled 5 years later.

Remember if you pay your disability premiums out of pre-tax income, you will be taxed on your disability income received. On the other hand, if you pay the premiums out of after-tax income, you do not pay income tax on your disability income.