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Possible Risks In 2011 To Your Finances

28 December 2010 2 Comments

I recently outlined my 2011 financial strategy.  The focus of this strategy was to accumulate capital, to deploy at attractive investments and opportunities as the economic environment continues to deteriorate in the coming years (a view I definitely hold).

It’s important to also look at the possible risks in 2011 that might hamper your efforts to reach your financial goals in 2011.  If you haven’t yet determined those goals, well, you should back up a step and determine them.  Then, move on to the risks that you need to prepare for.

There are two major risks that I see in 2011 for almost everyone and probably most of the people reading this blog right now.  They are loss of income (partially or completely) and higher costs of necessities.  Let’s look at both.

With a continuing deterioration of the economy, there is still a very high risk of losing one’s income.  This could be a partial loss of income or a complete loss of income.

A partial loss of income could be a decrease in your pay, a loss of hours that you work, or maybe your second income stream dries up.  It could be anything.

A complete loss of income is basically losing your job, or if you’re an entrepreneur / business owner, your business goes under.  Still two very possible scenarios even though the experts tell us the recession officially ended a couple years ago (idiots).

So how do you plan for these risks?  Well, controlling your expenses and increasing your cash reserves is #1.  This helps you survive if your income dries up.  However, this isn’t the full answer, because the original question surrounded the idea of mitigating these risks in the context of hitting financial goals, not just surviving.

So, how might we mitigate the risk of income loss in the context of saving more money and putting more money away?  Well, your situation is unique, but if you’re an employee, you need to do a thorough examination of your employment.  How secure is your job?  Maybe you need to talk to your boss and get a feel for your job security and the security of the company.  If job loss is a real possibility, maybe you can do some advance work to look for a new job even before you lose it.  Again, plan ahead and be ready in case it happens.  If your income drops, talk to friends or colleagues and see if there are ways to pick up additional work to fill the gap.

The other risk that I think is very, very real is higher costs.  Higher costs of what?  Well, everything, but more importantly, the things you need.  Food, energy, etc.  Price inflation in food and energy is very real and already happening.  The other day, I just filled up my car with gas that was $3 a gallon for the first time in a couple years.  How will you cope if gas hits $4 per gallon or higher?  How do you cope with higher food costs while you feed your family?

It might mean you cut back in other areas.  It might mean you drive less.  There are things you can do to make these increases in your costs not hit you so hard.  Brainstorm and be creative.

If you want to get real creative, and you have a stock portfolio, make sure you have some exposure to energy companies that will do well if the price of oil increases.  This isn’t too difficult.  You could even just run with an ETF such as Oil Service HOLDRs (OIH).  This way you’ll make some money if oil goes up, while your gas costs go higher as well.

In the next post, we’ll look at reasons for possible volatility in 2011.  You won’t want to miss that.


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