One day in the fall of 2015 I got on my bike to go to class at Boston University, where I was working my way through their financial planning curriculum. Biking in and around Boston was and remains a harrowing experience, with narrow streets, complicated intersections, and the city’s own breed of constantly hurried and aggressive drivers; still, the route to the university’s campus was fairly straightforward, and clearly-marked bike lanes meant that for most of the way I was at least notionally separated from traffic. Four years of experience in the city had also taught me to keep my wits about me at all times.
On that day, however, painted lines and self-awareness weren’t enough to get me all the way to campus unscathed. As I was approaching the top of a small hill on one busy street, a driver in a car coming from the other direction saw his chance to turn left onto a side street – and veered straight into me. The impact knocked me from my bike and I sprawled face-first onto the pavement. Luckily the speed was slow enough that no bones were broken, and the helmet I was wearing probably saved my life, but I still needed 18 stitches in my face and months of chiropractic work on my neck and back to recover. I was lucky, to be sure, that my injuries were all at or near surface-level. More enduring was the lesson I learned that, no matter how “safe” you think your environment is and no matter how prepared and alert you think you are, you can’t control for everyone and everything else that can come along. That other guy, with other things on his mind and his own places to get to, is always a heartbeat away.
The topic of the class that I was riding to on that day, by the way, was risk management.
Risk can be broadly defined as the likelihood of any uncertain outcome, though we tend to only think about it in negative terms. For example, if you suddenly inherited a million dollars from a long-lost uncle, you probably wouldn’t spend much time thinking about what led to this unlikely occurrence and how to minimize its chances of happening again; however, if you got a flat tire from hitting a pothole on the way to deposit the check, you might consider taking a different route to the bank next time or avoiding the trip altogether by using their mobile deposit app. This is how risk management works: We use both foresight and experience to identify certain outcomes, evaluate their likelihood of occurring and how our lives could be affected by that occurrence, and determine the pluses and minuses of taking various alternative actions.
There are a few general techniques for dealing with risk in our lives:
- Avoiding risk is steering clear of the risky activity altogether. Think of deleting your Twitter account if there is a chance that an errant post will get you fired from a job or damage your reputation.
- Controlling risk is taking measures to make the activity less risky. Maybe instead of deleting your Twitter account you decide to make it private or to only post under a pseudonym.
- Transferring risk is letting someone else assume financial responsibility for a risk, usually by paying them a specific amount to take it on. This is where insurance comes into play.
- Retaining risk is consciously taking on some amount of risk, usually in a controlled way. An insurance deductible is an example of risk retention. With a high-deductible health insurance plan, in exchange for a less expensive monthly payment, you retain more risk because of the higher amount you must pay before any coverage kicks in.
Insurance may be what most people imagine when they think of risk management, but risk control and avoidance are much more common in our everyday lives. Often the process is subconscious. Getting into a car may be the riskiest thing a lot of people do every day, but it is unlikely that many of them do a full risk accounting in between fastening their seat belt and hitting the ignition. Biological factors such as age and gender can also influence our tolerance for risk and therefore our behavior when it comes to taking part in risky activities. And because our own experiences and worldviews are central to how we view risk in our lives, everyone has their own perception of the types and amount of risk they are willing to accept. As a result, most people have their own personal toolkit of risk management techniques that they may not even be aware of despite using them every day.
What makes risk management so important is that nobody can completely eliminate risk. It will be a part of our lives for as long as there is uncertainty in the world, which is not going away as far as I can tell. As a financial planner, I help people to recognize the different types of financial risks in their lives and assist them to find solutions to bring those risks to a level that is acceptable and appropriate for them.
People who are self-employed or freelancers face their own set of particular challenges when it comes to managing risk. Certain benefits that are offered to the vast majority of employees within the corporate structure, such as health insurance and paid sick time, are unavailable to people who work for themselves. With this series, I will give an overview of the direct and indirect financial risks that these workers face, and some general techniques for managing those risks. Not every solution is right for everyone, and I encourage you to ask around your own network of colleagues, or consult with a professional, for tips, techniques, and a plan that will work for you.
The next installment of this series will be on health insurance, a very important topic to anybody who is self-employed. I hope you’ll stay tuned.