For those in their 20s, thinking about financial risk and insurance is painfully boring. After all, what’s the big deal about risk? You’re young and healthy, what can go wrong? Well, the answer to that is – a lot.
Are you at risk?
First question: Do you encounter risks of financial loss every day? Yes. Do you drive an automobile, have a pet, own or rent a place to live, or interact with people? If so, then yes. Things could happen that end up costing you a lot of money. Financial risks can include automobile accidents, computer theft, getting sued by a third party, getting sick and more. How likely is the risk? Many common risks of loss seem unlikely – until something happens. Like it or not, you take risks every day that could end up costing you plenty.
What can we do about this risk?
The first step is to understand the types of risks you encounter. Even then, there are only four things you can do about risk.
Accept it: Assume all the cost yourself. While this may surprise you, this is a perfectly legitimate response if the amount at risk is small or the likelihood of something happening is extremely remote.
Transfer it: This usually takes the form of purchasing an insurance policy. An insurance policy is trading the cost of a small known loss (the premium and deductible) for the risk of a large unknown loss (such as an automobile accident).
Avoid it: Do things like quit smoking, stop driving or simply get rid of the factors that could cause financial loss. This sounds good, but is very difficult to do. Most of us simply can’t – or won’t – disrupt our lives in this way.
Reduce it: Take steps to make sure that the risk is less likely to occur. For example, put locks on your doors, install an alarm system, lose weight and exercise. All of these things are steps you can take to reduce the chance of a loss event occurring.
The key is to recognize the risk and identify how likely it is or how large of an impact it could have. Only then can you make an educated decision about what you are going to do about the risks you face. That said, often the decision is to purchase insurance.