How to Evaluate Your Financial Risks

December 31st, 2009 | Budget, Cash Flow, Debt, Financial Security, Income Streams, Long Term, Money, Personal Finance, retirement

money found Whether we realize it or not, many of us face financial risks every single day. From the high powered investor, to the minimum wage earner, every one of us has the potential to lose everything we own. How can you evaluate your financial risks and find ways to secure your future? Let’s take a look!

First, it is important to figure out exactly how much you spend in a single month. Get a notebook and write down everything you spend over the space of one month. Include everything from the smallest item to the largest, and don’t forget to include your monthly bills as well. At the end of the month, total up everything you spent and compare it to how much you make.

If you are overspending or cutting it close, you are definitely at risk for financial ruin. If you have more than enough left over at the end of the month, your risks are quite a bit less, but they may still be there. One of the best ways to tell how close you are to the brink is to experience what it is like when your paycheck is a few days late. Do you panic? Do your bill collectors panic? If the answer is yes, you may be cutting things a little too close.

Not many of us realize how much we depend on our paychecks every month. We may think we’re doing ok, and we have plenty of stuff to make us comfortable. Few of us put aside anything and before we know it, we’re living paycheck to paycheck. Add in credit cards and you’ve got a recipe for disaster.

Now, let’s look at the other end of the spectrum. Let’s say you’re financially well off, you’ve got plenty of investments bringing in some pretty decent returns. You’ve come to rely on those returns and you’ve always got the back up of your 401k, right? Now, let’s say the market takes a nosedive, ala Black Monday or the dot com fallout. How well off would you be then?

No matter if you make $800 a month or $8000, diversity and multiple streams of income are the best answer to shoring up your defenses against financial ruin. Let’s face it, most of us would not turn down more income every month, especially if we didn’t have to work hard to get it.

By reducing your reliance on your paycheck, or your standard investments, you are increasing your chances of being able to withstand a finance shattering event, such as a market crash or the loss of a job. The more ways you have to make money, the less likely you are to fall into financial ruin.

One of the secrets that millionaires have is leveraging debt to create a new stream of income. For example, let’s say you take out a loan to use to buy an investment property that you rent out. This is now an income producing property and you’ve got more money coming in. As you pay off that loan, the profits keep rolling in, and you’re less reliant on your standard means of income. That is one powerful way to avoid financial ruin.

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Originally posted 2008-11-26 08:18:20. Republished by Blog Post Promoter

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