Psychologists like to talk about the concept of “normalcy bias.” It’s the idea that people naturally tend to believe that the status quo will continue, even if there is no rational reason for doing so.
You see this all the time. Before the coronavirus hit properly, nobody expected that it would make much of a difference in the world. Now, look where we are.
The same happened before the financial crisis. Some commentators warned that the banking system was going to collapse. But everybody ignored them.
When it comes to financial risks, it is always vital to be honest with yourself. What are the biggest risks you face?
Your Own Desire To Consume
Okay, let’s start with the big one: your own desire to consume as much as possible. Most people are caught in a kind of trap of consumption and work. They spend the majority of their time at the office, only to plow their money into items that they don’t really need.
Thus, consumption is actually the biggest threat to your wealth. The idea that you must consume, must take holidays, and must drive an expensive car can lead to poverty in the long-run.
Your Risky Investments
Where possible, you should minimize the riskiness of your investments. Sure – a small percentage of wild bets will pay off big. But the majority won’t get anywhere.
Risky equities, for instance, usually represent companies with high debts, low sales, and unproven business models.
Your Lack Of Insurance
Imagine somebody who works all their life and puts money into a property to build wealth. Pretty standard.
Now imagine that subsidence of the surrounding land destroys the house and its foundations. Well, this situation isn’t a problem in the long-term if they have the right building insurance. They simply go to their insurer, tell them about the damage, get an inspection and then receive a payout to fix it. Simple.
Now imagine that a person doesn’t have any insurance. In that situation, they have to pay for repairs for themselves. No insurance company will cover the cost.
Many people who are confused about the insurance they need go to agencies, like Melbourne Insurance Brokers. This way, they can get the correct amount of coverage for their situation, without worrying about underpaying or overpaying on their premiums.
Unfortunately, no job is ever 100 percent safe. The economy and technology chops and changes all the time, creating new jobs and destroying old ones. This process is actually good in the long-term because it means that society better satisfies the needs of individuals. But it can be problematic in the short-term, particularly for affected individuals.
Fortunately, you can diversify against income risk by insurance and through investments.
Insurance is a good way to guarantee continued income if you lose your job. You just pay a premium and then, if your employer makes you redundant for reasons outside of your control, you get a payout.
Investments are another tool you can use. Income from property and dividends can provide the money you need to sustain yourself while you’re looking for new work.