In recent years global economic uncertainty has been at an all-time high. The need for robust financial defenses is crucial for strengthening countries’ economies and future-proofing businesses. However, the need for strengthening financial defenses is just as relevant to you, the individual.
When you identify and fortify the weak spots in your financial strategy, you’ll overcome your financial woes and turn them into strengths. These five key strategies will help you address your financial plan’s vulnerabilities and achieve victory.
Conduct a Financial Risk Assessment
To address your current financial vulnerabilities, you first need to determine what they are. So your first step will be to conduct a financial risk assessment. Review your income stream/s, investment portfolios, assets, and savings. Look online for financial risk assessment tools.
Determine whether your income is enough for your expenses. A simple way to do this is to calculate your expenses-to-income ratio.
Add up all your monthly expenses. In the case of variable expenses, use an average figure. Then divide your total expenses by your income, and express this as a percentage. This is your expenses-to-income ratio, and the lower the number, the more stable your finances are.
Invest in Insurance Coverage
If you’re a business owner, you know you have to protect yourself from risks associated with fraud and money laundering. That’s why AML and KYC compliance practices are so important. But there are risks in your private life that you need to protect yourself from, too.
The best way to do that is to invest in insurance coverage. There are many different types of insurance coverage, designed to help you deal with the financial implications of unforeseen events. These include health, life, property, and automobile insurance.
Unfortunately, insurance coverage is also an area that can lead to financial instability. The common pitfalls are being either under or over-insured. Some insurance plans will meet your needs better than others. So, always read through policy documents carefully before signing up for an insurance plan.
This is especially true when taking out a health plan. By taking out a policy that offers benefits you don’t need, you’ll waste money on very high premiums. Conversely, if it doesn’t cover all your needs, you may spend more on co-payments, or even have to pay out-of-pocket for some procedures, in full.
Enhance Your Emergency Fund
Whether you’re an entrepreneur with a small startup business, a budding solopreneur, or just trying to buck up your finance game, you need to master your cash flow management. Part of this is establishing and maintaining a cash reserve or emergency fund.
Start with an affordable amount that you can regularly put away each month. Alternatively, give it a good head start with a bulk sum, and resist the urge to use these funds unless for emergency expenses.
As your income increases or debt decreases, you may have more money available to put into your emergency savings. Adapt your savings schedule accordingly.
Diversify Your Income Streams
Relying on a single income source can be risky, especially if you are single or the sole breadwinner in your household.
You may not be able to increase your earning potential beyond what your current position offers. You may also be at risk of retrenchment should your employer face financial difficulty. And if you are self-employed, the risk is even greater, as your continued income is tied to your business success.
If you lose that single source of income, you may struggle to meet your financial obligations and fall into a cycle of debt. That’s why it’s a good idea to diversify your income streams with a side business or through an investment that guarantees online passive income.
Regularly Evaluation and Adjust Your Financial Plan
Regularly review and evaluate your financial strategies. This will allow you to adjust your financial plan to better suit your needs, and minimize financial vulnerabilities as they develop.
Check that your savings accounts are still offering you healthy interest and that your investments align with your risk portfolio.
Research options for consolidating any debts you haven’t been able to pay off. Assess whether or not your retirement plan contributions will be sufficient for future financial well-being.
Just as is the case with the global economy, your personal circumstances can and do change. And therefore your financial status can change, in the blink of an eye. As a result, what served your needs a year ago might not do so today. Stay proactive and adaptable, and you will have a winning formula for overcoming financial adversity.
Final Thoughts on Strengthening Financial Defenses
By conducting a financial risk assessment, you will pinpoint the areas of your finances that need attention. This differs from person to person, but diversifying income streams, building a reserve for emergencies, and investing in the right type and amount of insurance are effective strategies for everyone.
Remember to review your financial plan regularly, particularly if you change jobs, get a raise, or incur more debt. These are the types of life events that require you to adapt your financial plan for stronger financial defenses.