How to manage financial risk

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This guest post is written by Craig who writes for MoneyHelpForChristians.com. Craig is currently serving as a Missionary in Papau New Guinea and has a background in Biblical Studies and has been in ministry for over 10 years. He also has a free eBook available called “Money Wisdom From Proverbs”.

How to save thousands with two words

The ability to evaluate a situation and know if there is a possible negative consequence is a characteristic of all animals. In fact, for generations those instincts were necessary for survival. Too often, however, it seems as though our ability to evaluate the potential negative impact of financial decisions is disappearing.

The two words that can save you thousands are “what if?”

When it comes to making financial decisions often we are overly optimistic. Have you ever heard a conversation like this?

Other:“Hey Craig, I came up with a great idea today to make a lot of money.”

Craig: “Really, what is that?”

Other: “I’m going to go out and borrow money to buy 100 T.V.s for $80 each and then I can turn around and sell them for $125 each. It’s an easy $4,500.”

Craig: “But, what if …”

Often our financial plans are build on best case scenarios. If I put this money in the market for a year and it gains 10%, I will be so much better off. But what if the market goes down rather than up? You should consider the negative possibilities when buying insurance, investing, and starting a new business. These are all situations where realistic negative thinking pays off.

Most of us can quote some phrases like, “if it sounds too good to be true, it probably is.” Or, “The best laid plans of mice and men”.

4 things that hinder our ability to evaluate risk

So why do we still make fatal financial mistakes? Because there are things that dull our natural ‘what if’ processing abilities:

1. Pride and overconfidence: If only one out of every 100 people can make money doing a certain business venture, what makes you think you can make money doing it? Are you really better than the other 99% of the human population?

2. Greed blinds our natural survival instincts. Greed focuses only on the positive possibility while completely neglecting the potentially financially-fatal consequences.

3. Desperation. Every heard the phrase, “Desperate times call for desperate measures”? I know you have. When our situation becomes more hopeless, we increase the risk we are willing to take to succeed.

4. Something to prove. Some people feel as though they always need to prove something. Such people take exorbitant risks with the hope that they will make a name for themselves.

Be aware of the risk

The point of this post is not that you should never take a financial risk. But instead you should be aware of the risk, aware of the likelihood of the failure, and take appropriate action. If your plan to make money does not have any negative ‘what if’ possibilities, your plan is likely a fairytale. You should know before entering into any risky situation how financially fatal failure would be. Moreover, know the likelihood of your meeting with failure.

4 ways to properly manage financial risks

So how can you be sure you have properly considered all the ‘what if’ possibilities:

1. Find: Seek out a wise and honest person who you know will tell you the truth – even if the truth is difficult. Find the kind of friend discussed in Proverbs:

“Wounds from a friend can be trusted, but an enemy multiplies kisses.”(Proverbs 27:6 NIV)

2. Present: Be prepared and present your case. What you want to do. Why you think it is a good idea. What you see as the potential downsides. Why you think you can succeed at it.

3. Ask: say these words, “So do you think it is a good idea? Any suggestions or feedback?”

4. Listen: Now it’s time for the hardest part – be quiet and honestly listen. Don’t be defensive. Don’t criticize the person’s words. Accept their words and personally evaluate their response only when you are sure you have fully heard what they had to say.

“Plans fail for lack of counsel, but with many advisers they succeed.” (Proverbs 15:22 NIV)

Have you ever had any experiences where you didn’t consider the possible negative implications? What ideas do you have for avoiding making potentially financially fatal decisions?