Conversations about financial risk focus on investment and finding the right balance between risk and return. While these are important conversations for investors, there are other aspects to financial risk which can be just as significant. Your income and expenses, or in other words, your cash flow, are just as affected by risk as your investments, but in a different way. An investment loss will impact your future life whereas a cash flow loss impacts your ability to enjoy life here and now. The factors underlying cash flow risk are much more personal rather than being market-driven, however they are more within your direct control.
Most of us can get by from one week to the next based on our expected income and expenses, but life doesn’t always go according to plan. There are a number of risk factors that increase the possibility of major drop in income or a blowout in expenses.
Swapping the steady income of an employee for an uncertain income as a contractor or business owner increases your financial risk. However, along with the risk comes the potential to earn significantly more. Staying with a steady job is not necessarily risk-free though. Working for a business that is not in good shape increases the possibility of redundancy. Failure to learn new skills can lead to loss of employment or promotion opportunities. Poor diet and exercise and high stress levels can lead to long term illness and loss of income. Separation and divorce cause financial chaos. Failure to keep up with regular maintenance, whether it’s your teeth, your car or your home eventually catches you out with big, unexpected bills. Insurance and emergency funds are two ways of reducing risk, but so are choosing the right career, upskilling, and taking care of your wellbeing and your relationships.