Bumpy Ride: The Road to Financial Freedom [Analysis]

Did you ever go on a bumpy ride? How does it feel like? A painful journey right. What if the same thing happens in our financial journey as well? It is no different. But the pain is due to a different reason what we call as financial risks.

Wealth creation happens with a cycle of events involving the creation of quality & sustainable assets (via earning, saving, investing) along with reducing liabilities, over a period.

This is a cycle and to be precise, it’s a journey from the reduction of liabilities towards the creation of assets. But along the way, there is a chance that we might encounter pitfalls, in the form of risks.

The journey towards wealth creation starts with understanding the risks. They have the potential to negate the achieved progress and bring us back to square one.

What is a Risk?

“Risk is the possibility of something bad happening”, Wikipedia says. In financial terms, any event that would create an imbalance in the process of asset creation and sustenance can be termed as Risk. Risks come from the uncertainty of the future. Higher the uncertainty greater is the risk.

For example, a fire accident in a manufacturing plant is a major risk that can hamper the financial progress of the shareholder. Similarly, health issues for a person would create a massive hole in ones savings. This takes us back towards liabilities that would prolong our asset creation process, in turn, our objective of being financially independent.

Risks and Types

The accidental death of a person, especially an earning member, can push the whole family towards debts and into financial troubles. Injuries or health issues can wipe out the assets painstakingly built over a period.

Loss of employment, Having excessive debt, loss in investments, damage of property/assets, etc. are some other types of risks that can hamper the wealth making process. Further increase in expenditure due to the increased cost of living can also come under the list.

These are just a few scenarios but there could be many other types of risks lurking around us which can destroy the existing assets or can also convert assets into liabilities as well.

Risks can convert Assets into liabilities

The COVID’19 pandemic has made many peoples’ lives upside down. The economic slowdown, loss of jobs, lack of opportunities, reduced growth, etc have made the disaster intense.

The costs incurred from the impact of the virus, are pushing people especially the middle class and lower strata into huge debts.

There is a higher chance that people sell their assets at lower prices, to meet the current needs. To be prepared for such unforeseen risks would make our lives easier when the actual problem comes up.

Ways to avoid(or) manage Financial Risks?

“Prevention is better than Cure”. It is always better to be prepared for the worst so that when it happens we will have strength, to face the consequences.

Being prepared also allows us to recover quickly from the setbacks, especially the financial ones.

The solution is to create insurance for every risk based on the type. When we travel on a two wheeler we wear a helmet and on a four wheeler we wear seatbelt. So based on the travel plan we need an insurance accordingly.

For example, if it is a health issue, opting for health insurance. If it is accidents opting for term insurance. In case of job loss, having an emergency fund for a few months. In the case of investing in stocks, proper research, and knowledge about the investment company, its stakeholders, growth potential, etc.

Thus insurance not only acts as a cushion for unexpected risks but the confidence of having them boosts our morale. It brings the much-required peace in our financial environment and we can work without fear of financial setbacks.

Thus creating insurance against risks, based on the type of risk, would make the journey from Liabilities towards Assets much easier. So, are you ready to be on the road to financial freedom?

Get Set Go…