Financial Risks in Everyday LifeBy: Benjamin Gran
With all the bad economic news America has witnessed during the past few years, people are more familiar than ever before with the concept of financial risk. Stock prices can go down as well as up. Housing prices can plunge as well as surge. It's all too possible to lose a job and not be able to find a new one anytime soon.
But in addition to these prominent financial risks that are always in the news, many people are facing various "hidden risks" to their personal finances, without necessarily thinking of them as "risks."
1. Divorce. When you get married, you join your financial life to that of your partner. There are many financial benefits to being married, but getting divorced shows just how costly and complex it can be to separate from your spouse.
Ending a marriage can be a huge financial hit. The average cost of a contested divorce (with divorce lawyers) ranges from $15,000 to $25,000, and matrimonial law is a $28 billion a year industry. In addition to the financial costs, divorce can be emotionally painful and stressful, leading to lost days at work and lost productivity. Disagreement about money is a leading cause of divorce, and married couples are often jointly held responsible for debts - so even after getting a divorce, if an ex-spouse ran up credit card debt with reckless spending, that can put a lasting hit on your credit score as well.
How can you avoid the financial risk of divorce? The best way is to start before you get married by getting a prenuptial agreement to define how each of your assets will be protected or shared in case of a legal separation. Even if you don't need a prenup, make sure to talk extensively about finances and financial goals with your partner before you get married. And if you do find yourself needing to get divorced, it is often possible to avoid high costs by doing a non-contested filing (depending on your state's specific divorce laws).
2. Going uninsured or underinsured. Over 50 million Americans do not have health insurance. When people lose their jobs, they often lose their insurance - and some employers have stopped offering health insurance because they can't afford to pay the costs in a sluggish economy.
Many people who find themselves uninsured choose not to buy individual coverage because it's too expensive, or they buy just a bare-bones health insurance policy. This can be disastrous when illness or injury strikes. Medical bills are the cause of 60% of bankruptcies in America.
Even if you already have good health insurance, you might be underinsured in case of a debilitating accident, injury or disease - and many costs such as nursing home care or home health aides are not covered by health insurance. Disability insurance and long-term care coverage can help provide additional protection for you and your family. Ask about it at work, or buy an individual policy if you're not covered.
3. Staying too long at one job. In today's job market, most people are grateful just to have a job. But aside from losing a job, one of the biggest risks is staying at a job too long and stagnating in your career.
If you're not learning new skills, moving up the career ladder, and becoming more valuable to your employer, you might be at risk for income stagnation. The biggest pay raises over time tend to go to the people who have plenty of options and who are enterprising, energetic and adaptable. "Job security" and "company loyalty" are increasingly hard to find - and in some ways, these once-comforting concepts can be a curse if they keep you stuck in the same place at the same salary for too long.
4. Staying in a neighborhood that goes downhill. Many people work all their lives to pay for a house that gradually loses value because the neighborhood is no longer a desirable place to live.
Pay attention to your neighbors - are they keeping up their property? Is the crime rate rising or falling? Is it taking too long for people to sell their houses? Are foreclosure signs cropping up? This risk is complex and hard to spot, but it's important to be aware of it. Sometimes it's better to sell your house and move on, rather than hold on to a house in a neighborhood that's moving in the wrong direction.
5. Living too long (longevity risk). People often focus on buying life insurance in case they die young, but they don't plan for the possibility that they're going to live to age 90 or longer.
Americans are living longer than ever before. The goal of a financial plan should be to have your money outlast you. This is why most financial advisers recommend that people keep investing in stocks (as a small portion of their total investments) even into the retirement years. Another option to avoid "longevity risk" in retirement is to purchase annuities, investment vehicles that give you a guaranteed monthly income for life.
Financial Risks in Everyday LifeBy: Benjamin Gran