Financial Risk Is: Definition, Types, and Tips for Good Management

A financial risk is a form of risk that arises from an event and has an adverse impact on a person's financial condition.

In this life, nothing is without risk, especially when we talk about finances. There are many things that can just happen and threaten our financial stability.

Even so, the existence of this financial risk does not mean that we cannot overcome it. There are several ways you can do to minimize the occurrence of financial risk. Let's understand financial risk through the following description.

1. Definition of Financial Risk

Financial risk is a condition that arises as a result of changes, both internally and externally, that can be financially detrimental to a person, group, or company.

The losses caused by this financial risk can be very diverse. These include loss of assets, experiencing large amounts of losses, disrupted cash flow or cash flow, and others.

2. Types of Financial Risk

After you know that a financial risk is a form of loss that has an impact on finances, then let's understand the types of financial risks that exist. Are as follows.

3. General Financial Risk

In general, financial risk is divided into two, namely systematic financial risk and non-systematic financial risk.

3.1. Systematic Risk

It is a financial risk that cannot be predicted or avoided due to several factors. For example, a pandemic, political climate, and so on that result in inflation, increased interest rates, and increased market volatility.

3.2. Non-systematic risk

Is a financial risk that befalls a person, organization, or group due to an event. For example loss, illness, or death.

4. Personal / Individual Financial Risk

A financial risk is an event that can happen to anyone. Including yourself. This is included in the category of financial risk. There are at least 4 risks included in it, namely income risk, expenditure risk, asset or investment risk, and credit risk.

4.1. Income Risk

Income risk is a variety of risks that affect a person's ability to earn income. Examples include physical disabilities that make it difficult to work, getting laid off or losing your job and death.

4.2. Expenditure Risk

Expenditure risk is the risk that arises when we use the money to meet needs but the existing expenditure is greater than income, the existing income is not sufficient to meet the needs, are experiencing an emergency condition that requires spending a lot of money. For example accidents, vehicle damage, home renovations due to an incident, and much more.)

4.3. Asset / Investment Risk

Asset or investment risk is the risk that arises because the investment instrument or assets owned experience several obstacles. These include loss of investment assets, theft or damage to assets you own, asset values depreciating or depreciating in value, insufficient savings to continue investing, and others.

4.4. Credit / Debt Risk

Credit or debt risk includes several points including the inability to pay debts, financial penalties, being trapped in debt with high-interest rates, and others.

5. Financial Risk Based on Time Period

When viewed in time, financial risk is a risk that can be divided into two, namely short-term and long-term financial risk.

5.1. Short-Term Financial Risk

This type of financial risk arises at an unexpected and relatively short time. For example, a vehicle that suddenly breaks down due to a punctured tire, so you need to spend some money to handle it.

Another example is pain. When we get sick suddenly and are required to go to the doctor, then there will be some unexpected funds that we need to prepare.

5.2. Long-Term Financial Risk

As the name implies, which is long-term, this one financial risk has a fairly serious impact on your finances in the long term. For example, if death that befell the backbone of a family, when this happens the family left behind will experience difficulties in the form of loss of the main source of income.

6. Financial Risk Based on Impact

The last type of financial risk is financial risk based on its impact. Divided into three risks as described below.

6.1. Pure Risk and Speculative Risk

Pure risk is a risk that has a direct impact. For example, your vehicle broke down in the morning. This strike has an impact on your delay in getting to the office on time.

Speculative risk is the risk that arises due to the acquisition of a small profit that it has the potential to cause losses. For example, participate in investing because it is a trend or many people are doing it.

Also read: Easy To Follow, Here Are 7 Tips for Financial Independence in 2023

6.2. Specific Risk or Fundamental Risk

Specific risk is a risk whose impact can only be felt by the individual or other people related to the individual. For example, a house fire in a complex.

6.3. Static Risk and Dynamic Risk

Static risk is the risk that occurs due to the loss of assets or property due to an incident. An example is a fire. However, this risk will not have an impact on a person's finances.

It is different with dynamic risk, where changes in national economic conditions have an impact on one's finances. For example inflation, currency values, and fluctuations in stock values.

7. Tips for Good Financial Management

Financial risk is something we cannot predict. In order to avoid various financial risks that may occur, you can apply some of the tips below.

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8. Revenue Risk Management

8.1. Have Other Sources of Income

Having another source of income is one way you can minimize risk. Examples are having a side job, freelance, opening a business, and others.

That way, if something unexpected happens to you, you don't have to worry because your finances will remain safe.

8.2. Financial Plan

A financial plan is key to obtaining financial security. Make a careful plan regarding your financial condition and what you want to achieve. So, every time you get a monthly income or profit from the investment, you can use it wisely.

8.3. Insurance

The presence of insurance can really help anyone to save their financial condition. For example, life insurance can guarantee a family can live well when left by the family's breadwinner.

Another insurance that is no less useful is health insurance. As we know, the cost of medical treatment is quite expensive. Therefore, to keep your finances or finances safe, it's a good idea to have health insurance.

9. Expenditure Risk Management

9.1. Make a Budget / Budgeting

With a budget, you will not be tempted to spend some money outside of your financial planning. So, it will be easier for you to cut unnecessary expenses.

9.2. Setting up an Emergency Fund

Unexpected expenses can come to you anytime and anywhere. Therefore, to keep your financial cash flow safe, be sure to prepare an emergency fund.

10. Asset and Investment Risk Management

10.1. Learn the Assets / Investments We Will Choose

Before adding assets or starting to invest, it's a good idea to equip yourself with sufficient knowledge regarding the asset or investment instrument to be chosen. This is done to avoid financial risks that could harm you in the future.

10.2. Check Your Financial Goals Regularly

Make a financial plan that you can track or see progress from time to time so you can get closer to the financial goals you want to achieve.

11. Debt and Credit Risk Management

11.1. Learn About Credit and Debt

By equipping yourself with sufficient information about credit and debt, you will be wiser to choose a credit that suits your financial goals.

11.2. Avoid Debt

If you find it difficult to pay off your installments or even interfere with your cash flow, you shouldn't need to go into debt. Moreover, if the debt is used for consumptive needs.

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Sobat BFI, that's the explanation regarding Financial Risk Is: Definition, Types, and Tips for Good Management. Hopefully, this article can help you in understanding financial risk.

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