When you can’t avoid risk, make a plan based on what you can accept
MANHATTAN, Kan. – Much of life is fraught with risk, from natural disasters to vehicle accidents and global pandemics.
Most risk also carries with it an impact on financial health, which is something that gets Elizabeth Kiss’ attention.
“I deal with money and how people manage their money,” said Kiss, a family resource management specialist and associate professor in Kansas State University’s College of Health and Human Sciences. “Uncertainty about the possibility of a financial loss and uncertainty about the size of a financial loss is the definition of risk.”
When educating consumers about risk management, Kiss said there are basically four ways to think about it. Each involves taking stock of one’s financial comfort level:
• Avoid the risk. In some cases, you may decide not to own items or participate in activities that could expose you to financial loss. For example, deciding not to install a swimming pool or not to participate in extreme sports are examples of avoiding potential risks.
• Retain the risk. Because it isn’t possible to completely avoid all risks, in some cases you may decide to cover any financial loss yourself. For example, if you have an older vehicle and decide not to maintain collision insurance, you retain the risk because you will have to pay to have the vehicle fixed if you are in an accident.
• Reduce the risk. Taking steps to control or reduce the size or frequency of a financial loss is a way to reduce risk. For example, by locking the doors of your house, you reduce the risk of theft in your home.
• Transfer the risk. When you pay someone else to cover a financial loss you are transferring or sharing the risk. A common example is buying insurance to cover losses.
“We often think of insurance as buying us peace of mind, but these other risk management strategies also can help us,” Kiss said. “If we can avoid some level of risk, or if we can control a loss, retain some risk, control it and then transfer it, this can increase your peace of mind overall.”
During the COVID-19 pandemic, health risks – and their potential financial impact – have come into greater focus.
“When we think about our health, we often think about access to health care; being able to pay the deductibles and co-payments; being able to pay for medications; or ongoing treatment,” Kiss said. “Those are important things to consider and our finances do impact the decisions we make.
“Another way to broaden our view of health, though, is to look at the actions that we take on a daily basis that would help us manage the risk of needing to use health care. For example, during cold and flu season, that means washing our hands more often, avoiding touching our eyes, nose, and mouth, and disinfecting and cleaning surfaces frequently.”
The bottom line, Kiss said, is that with many of life’s risks, it’s important to assess where you stand financially and what level of risk you’re willing to accept. Married couples often have different levels of comfort with financial risk yet need to decide together about how much homeowner’s or car insurance to carry, for example.
“If you have a healthy emergency fund, that might influence some of your choices,” Kiss said. “But I think we all need to remember how long it might have taken to get that healthy emergency fund, and that it can all be wiped out in one emergency. Yes, you have it for that emergency and then you start again from scratch.
“Nobody wants to contemplate these things, but we have to sometimes face these hard decisions. My philosophy is having at least some cash set aside for an emergency is good. Depending on your situation that might be a relatively small amount or it might be more. Every dollar that you have in your emergency fund is a dollar that you don’t have to borrow from friends or family members or put on a credit card when something unexpected happens.”
Kiss and her colleagues in the College of Health and Human Sciences and K-State Research and Extension meet regularly to discuss emerging financial issues. To learn more about managing your money, visit their website on family finances.
FOR PRINT PUBLICATIONS: Links used in this story
K-State Research and Extension family finances, www.k-state.edu/family-finances
K State Research and Extension is a short name for the Kansas State University Agricultural Experiment Station and Cooperative Extension Service, a program designed to generate and distribute useful knowledge for the well being of Kansans. Supported by county, state, federal and private funds, the program has county extension offices, experiment fields, area extension offices and regional research centers statewide. Its headquarters is on the K State campus in Manhattan. For more information, visit www.ksre.ksu.edu. K-State Research and Extension is an equal opportunity provider and employer.
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