As a financial coach, I always tell people that success in personal finance boils down to two things: building wealth and managing risk. You really can't have one without the other. But, what is managing risk? It's not just insurance, although insurance certainly plays a part. It's having a conservation mindset in the midst of increasing net worth. But, don't be scared. It's something at which you can become skilled. And, it's worth it. Learn to manage risk, starting with the small things. Consider risk in every decision you make. Then, you'll get great at considering risk in everything you do.

A casino roulette wheel.

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Have goals and a plan

Jim had been working diligently for many years. He'd even worked his way to a six-figure income. But when he went over his personal net worth statement with his financial coach, there wasn't much to write home about. How could that be? When they dug into the details, though, it quickly became evident. The money was disappearing down several "rabbit holes." And none that increased Jim's wealth. His coach suggested establishing goals and a plan. That way, Jim could become better focused on better outcomes. Not just wondering if things would turn out OK.

That advice is good for everyone. Have goals and a plan. If you follow that plan, you'll see better results. You'll also manage your risk. The risk here is to float through life and then find out that nothing has turned out the way you wanted. Don't take that risk. You won't like the outcome.

Understand the importance of an emergency fund

Not having an emergency fund can be another significant risk. But, it seems a lot of people don't give an emergency fund the respect it deserves. Most experts agree that an emergency fund should consist of three to six months of living expenses. However, a CNBC article from earlier this year showed that 55 million people in the U.S. have absolutely zero saved for an emergency.

With no money set aside for unexpected events, most people turn to credit cards to finance their "emergencies." But, if you must use a credit card because you don't have any savings, it may mean that you don't have much room in your budget for the credit card payments when they come due. And, that could mean some hefty interest payments included in the repayment. Ask Pat. The HVAC system in his home went out right in the midst of the summer heat. And, with no emergency fund, Pat felt even more heat. By the time he'd paid off the credit card he'd had to use to pay for the new A/C unit, he'd spent almost $6,000 for a repair that could've cost him $4,000. If he'd been able to pay with cash, Pat could've taken the discount the repair company offered. And, he could've avoided the credit card interest he'd owed by not paying in full when that bill came due.

Make having an emergency fund one of your non-negotiable items. Even if you have to start small, keep working steadily until the fund is fully established. And, if you must use it, work to build it back up again. Along the way, you'll probably find that "emergencies" happen less often.

Have the right kinds of insurance (also, evaluate your risk tolerance)

Insurance is essential, especially for the big things and when it's required. But, what about when it isn't mandatory? Is coverage still a good thing? Here's a helpful rule of thumb. If a potential expense without insurance is not affordable, find a way to avoid the possible cost. You might decide to forego the activity. But, if you can't do that or don't want to, then insurance may be the way to go. You shift the risk by paying the insurance premiums.

Here's a way to decide whether an item is worth having insured. Compare the cost of the item to how long it would take to purchase it using the premiums. For instance, if the thing you want to insure has a value of $5,000 and the premiums are $500 per year, it would take ten years to pay for the item using the premium amount. So, that might be worth covering.

On the other hand, if the premiums were $1,000 per year, and it would take just five years to pay for the item with the premiums, you might decide to self-insure. But, that's if you have an emergency fund that could handle the expense. So, the self-insuring question is answered by taking a look at what you have to pay for premiums and how much you must save to pay the loss out-of-pocket. Having money saved can give some options.

Don't set it and forget it

Risk can be anything that keeps you from reaching your goals and dreams. So, more than anything, don't "set it and forget it" on your investments. This includes retirement savings. I don't know how many people I've talked to tell me that they save money every paycheck in their company's 401(k) plan. But, when I dig deeper and ask what they're invested in, how it's doing, and how much they have saved, most times I get a blank stare in return. That blank stare indicates a considerable risk.

Not monitoring your investments, especially your retirement savings, can mean an unpleasant surprise. This could be especially true when you start to look at how much you're going to have to spend when you do retire. It might even mean you can't retire when you want. Or, you might need a part-time job to make ends meet. Not the best outcome when you could've modified things earlier had you known what was going on in your retirement fund. So, pay attention to your retirement savings. Get help managing it if you need to. Your financial freedom could depend on it. And that's probably not a risk you want to take.

Managing risk is much more than insurance. It's an essential pillar of a successful personal finance model. So, get just as good at managing your risk as building your wealth. Your future self will be quite fond of you for it.

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