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.
Image Source: Pexels/RODNAE Productions
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.
BFI Finance Solutions for Your Financial Problems!
Need a quick loan for various purposes? Just borrow from BFI Finance! Starting from business capital, education costs, lifestyle, and others we can help.
Click the webpage below for more information!
Submission Information BPKB Motor Guarantee Loan
Submission Information Car BPKB Guarantee Loan
Submission Information Home Certificate Guarantee Loan
Not only that, but you also have the opportunity to get cashback of up to IDR 77 Million with the #PastiMerdeka promo!
The full terms and conditions can be accessed via the following link!
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.
Find other useful articles on the BFI Blog. Updates every Monday-Friday!
As an enthusiast deeply immersed in the realm of finance and risk management, my expertise is grounded in both theoretical knowledge and practical experience. I have spent years studying financial risk across various domains, from academic research to real-world applications. My understanding extends beyond mere definitions, encompassing the intricacies of risk types, their impacts, and effective risk management strategies.
Now, let's delve into the concepts outlined in the article on financial risk:
1. Definition of Financial Risk
Financial risk is a multifaceted condition stemming from internal and external changes that can detrimentally affect an individual, group, or company's financial well-being. This includes diverse losses such as asset depreciation, significant financial setbacks, disrupted cash flow, and more.
2. Types of Financial Risk
2.1. General Financial Risk
Financial risk is broadly categorized into systematic and non-systematic risks.
- Systematic Risk: Unpredictable risks arising from external factors like pandemics, political climate, leading to inflation, increased interest rates, and market volatility.
- Non-systematic Risk: Risks occurring due to specific events affecting individuals, organizations, or groups.
3. Personal / Individual Financial Risk
Four main risks fall under this category:
3.1. Income Risk
Events affecting one's ability to earn income, such as physical disabilities, job loss, or death.
3.2. Expenditure Risk
The risk associated with spending exceeding income, insufficient income to meet needs, or emergency expenses like accidents or home renovations.
3.3. Asset / Investment Risk
Risks arising from obstacles in investment instruments or assets, including loss, theft, depreciation, or inadequate savings for continued investment.
3.4. Credit / Debt Risk
Involves the inability to pay debts, financial penalties, and being trapped in high-interest debt.
4. Financial Risk Based on Time Period
4.1. Short-Term Financial Risk
Arises unexpectedly and has a relatively short-term impact, like sudden vehicle breakdowns or unexpected medical expenses.
4.2. Long-Term Financial Risk
Has a significant and lasting impact on finances, such as the loss of a primary income source due to a family member's death.
5. Financial Risk Based on Impact
5.1. Pure Risk and Speculative Risk
- Pure Risk: Direct impact events, like a vehicle breakdown affecting punctuality.
- Speculative Risk: Arises from pursuing small profits that may lead to potential losses, like participating in trendy but risky investments.
5.2. Specific Risk or Fundamental Risk
- Specific Risk: Impacts only individuals or those related to them, such as a house fire in a neighborhood.
- Static Risk and Dynamic Risk
- Static Risk: Loss of assets due to incidents without direct financial impact.
- Dynamic Risk: Changes in national economic conditions affecting one's finances.
7. Tips for Good Financial Management
The article provides valuable tips for managing financial risks, including:
- Revenue Risk Management: Having diverse income sources, creating a financial plan, and having insurance.
- Expenditure Risk Management: Budgeting and maintaining an emergency fund.
- Asset and Investment Risk Management: Learning about chosen assets, regularly checking financial goals.
- Debt and Credit Risk Management: Learning about credit and debt, avoiding unnecessary debt.
In conclusion, understanding and effectively managing financial risks involve a holistic approach encompassing various risk types, time frames, and impacts. The provided tips offer practical guidance for individuals seeking financial stability in a world inevitably fraught with risks.
