Welcome (back) to our Six Stones series. Our financial adviser, Jordan, is sharing as many tips, ideas and advice for people going through a divorce as a humble blog will allow. He’s staying away from specific financial advice – it’s all general advice over here, be sure to get personal financial advice before doing anything – but we hope you find some useful information in here as you navigate through/out of your divorce.

Now, I hope you’ve been able to find the time – an hour or so, in my experience – to put together your first Risk Management Plan.

Your plan likely includes quite a few different risks.

If you’ve used our Planning tool, you’ll have noticed that we tried to categorise the main ones into the different parts of life – Personal, Financial, Employment, Family, Safety, etc.

These risks are all – to a varying degree – important. And specific to your life.

But I’m a financial adviser and this series is about Cash Confidence, so I’m going to spend some time addressing the big two financial risk we work with.

For the others, I strongly suggest working through the risks and what they mean for you – and working out how you can best deal with them.

The steps are the same:

–           Identify

–           Categorise

–           Decide

–           Next

But because we’re talking Cash Confidence, we’re going to focus on the financial side of things.

The first big financial risk– investment risk – is a big topic and is covered in more depth in Part 4 of the series, Grow.

The second – personal risk – is also a big topic, which we’ll cover off in as much detail as we can for the rest of this book.

Investment Risk 101

When I hear people talking about ‘low-risk’ or ‘risk-free’, it’s generally in reference to their investments.

They don’t want to lose money.

Fair enough.

But all investments have some element of risk:

–           Shares – the one people are most frightened of – will change in value every day.

–           Property – the one people are most confident in – will also bounce around in value, and also introduce other risks like tenancy, repair and building risk[1].

–           Bonds – the ‘safe’ option for many people – can also fluctuate in value and the whole time you’re accepting the (hopefully miniscule) risk that the issuer won’t pay you.

–           Cash – the ‘safe harbour’ – is exposed to inflation risk, counter-party risk and interest-rate risk[2].

And this is before we swim to the exotic end of the pool and get to know the more sophisticated (read: expensive) options down there with the sharks.

Given that all investments have some risk, the question you’ll need to address whenever you’re making an investment is a simple one:

“What type of risk am I willing to accept to achieve what I want to achieve?”

As I said, it’s a big topic which is why we’re leaving the detail for Part 4 in this series.

Personal Risk

Of all the risks you might have listed in your Risk Management Plan, there would have been a few where ‘Accept’ or ‘Transfer’ were the only real options for how to deal with the fallout. Risks like:

–           Death.

–           Disability.

–           Illness.

–           Injury.

These risks are an inherent part of life, sadly, and beyond taking reasonable precautions and measures for our health, there’s really not much we can do to Avoid or Mitigate them. And Exploiting them takes a special kind of human.

Which leaves us with the choice between Accepting these risks and their financial impact or Transferring those financial impacts to another party.

We’re going to spend some time in the next few chapters talking about these issues in more detail.

Specifically:

–           What impact can these events have on people’s finances?

–           What’s the likelihood of these events occurring?

–           What can be done to transfer the financial impact?

–           What do you need to be aware of?

–           How do you calculate the actual financial impact?

Another Note…

Now, before we continue, I’d like to acknowledge that of course these are uncomfortable, awful topics to bring up and discuss.

Dealing with matters of mortality, disability, capacity or health is confronting at the best of times. But I urge you to push past those feelings for now.

And I do so having seen too many people left bruised by the financial consequences of not-really-unexpected events.

And having seen the other side, where families receive funds to help take care of the financial worries in such a horrible time.

Having these conversations, examining these issues now is much, much better than doing it ‘later’.

Especially when ‘later’ can often involve a hospital bed and a long list of regrets.

Or, worse, a funeral home.

[1] Quick jargon alert – these risks are: the risk of not being able to find a tenant for a prolonged period / the risk of having to do costly repairs / the risk of the building having serious structural issues. 

[2] More jargon – respectively: the risk that increases in prices will exceed the interest you’re receiving, reducing the value of your money / the risk of the place where you’re saving the money goes broke, or pinches all your money / the risk that interest rates will move up or down.