How to Manage Economic Risk

How to Manage Economic Risk
••• Piles of One Hundred Dollar Bills with two red dice. image by Andy Dean from <a href=''></a>

Economic risk is the prospect that your assets can fall in value, leaving you unable to maintain your lifestyle. These risks include losing your job, a prolonged illness, losing money on your investments or the loss of property to theft or accident. By exercising due diligence, keeping an eye on your investments and paying attention to changes in government policy and business practices, as well as your own spending habits, you can minimize your exposure to economic risk.

Keep up with the news. Current events can have both short- and long-term effects on your investments. An unexpected negative event can cause the stock market to go down in the short term, causing your investments to lose value. If the Federal Reserve changes interest rates, that can help or hurt your investments, depending on where your money is invested.

Research your investments. Learn about the company or government entity (if you're buying bonds) in which you'll be investing. Read newspaper, magazine and Internet articles about it, as well as company news releases about personnel changes, new product lines, financial statements and other news.

Stay out of debt. Ideally, the only debt you want to carry is student loans or a mortgage. If you have an auto loan, you're carrying debt on an asset that quickly depreciates in value. Credit card balances can leave you buried in debt for years. Though you'll undoubtedly have to go into debt at some point in your life, try to pay it off as soon as possible.

Establish an emergency fund with enough money to pay at least six months' worth of expenses should you find yourself out of work. If you could save up to 12 months' worth of expenses, even better. This fund can also be used as an alternative to going into debt for medical emergencies, unexpected auto repairs or buying a home appliance to replace one that breaks down. You should replace the money spent from the emergency fund as soon as possible.

Establish a monthly household budget and track your expenses. This can show where your money is being spent so that you can adjust your spending habits and manage your money better.

Make sure that you have the proper insurance coverage. While life insurance isn't a priority for a single person with no dependents, you should be covered if you have a family for whom to provide. Similar to life insurance, disability insurance will provide you with income should you become disabled and unable to work.

Auto insurance is mandatory for people with a vehicle, but shop around to get the best deal. If you borrow to buy a new car, you'll be required to carry full coverage, but if you have an older car that is worth less, you might want to consider reducing your coverage levels to save money on your premium.

When insuring your home, consider an umbrella policy, which gives you personal liability coverage should an accident befall a guest or employee at your home. For health insurance, cost is only one factor to consider. You'll also want to take into account what services will be covered, what your co-pays (if any) will cost and the freedom to choose your providers.