In a year-long project intended to educate consumers about the comprehensive nature of financial planning, CFP Board released a primer on helping clients minimize personal risks.
“So many people think financial planning equals investment advice, when in fact CFP professionals take a far broader view of an individual's financial situation,” says CFP’s Consumer Advocate Eleanor Blayney, the creator and face behind the “12 for 12 Approach for Financial Confidence” campaign.
The May message highlights the fact that unforeseen, costly emergencies and expenses are a given in every life. Blayney chose to focus on risk in May because the universal radio signal for distress is “Mayday! Mayday!”
"It's just as important to protect our finances – or indeed anything we value – from loss, as it is to grow our wealth," Blayney says in a release. "Without taking steps to minimize risks to our financial security, all the wealth we spend so much time planning for and building can be quickly eliminated by one of life's unexpected but inevitable disasters."
She urges that consumers take the following three steps:
Avoid Unnecessary Risks
Avoiding risk is generally the simplest and cheapest approach to protecting wealth, but it can also be impractical, inconvenient, and even ill-advised. For example, staying out of equities to avoid the risk of a drop in the stock market may mean missing long-term benefits from the overall trend of stock market gains. It's critical to assess risk and reward in the short and long term.
Take steps to reduce the probability and impact of financial loss, such as diversifying a 401(k) or investment portfolio. Lower the financial costs of a loss by creating an emergency fund for unexpected expenses or job loss. The costs and long-term consequences of drawing money from a reserve account are considerably less than resorting to credit cards or simply letting expenses go unpaid.
Insurance spreads risk out to a third party for a lower price than you would pay if an unexpected event occurred and you were solely responsible. Getting insurance coverage is a necessary part of building financial security for anyone who provides support or cares for another individual; must work for a living; or has a home, a car or valuable property.
When it comes to insurance, Blayney lays out five cardinal rules for the prudent use of insurance:
Insure only what you cannot afford to lose:
Consider your personal circumstances and determine what assets and services would be financially devastating to lose. From life and disability income insurance to long-term care and health insurance, purchase insurance that will ensure your most vital needs are maintained.
Use insurance for financial, not emotional, loss:
While the loss of a beloved personal item would be devastating, the reality is that it may not result in a significant financial loss and insurance may not be necessary. Insurance for children should be considered in certain cases, but may not be suitable for most.
Focus on acquiring insurance that offers the best protection from loss, rather than extraneous benefits:
Insurance is first and foremost to protect assets, not grow them.
Keep insurance costs down through the other risk management strategies:
Proactive life adjustments such as installing a home security system (a form of risk mitigation) or quitting smoking (risk avoidance) can significantly reduce your insurance premiums.
Consider self-insurance in combination with commercial insurance:
Raising policy deductibles or extending the time before one can make a claim on a disability or long-term care policy may lower overall insurance costs.