Why Do People Fail Financially? Understanding Risk
Failure Managing and Understanding Risk
Understanding risk… generally, everyone has some understanding of the meaning of the word ‘risk.’ As children, we are taught that something is risky, or we are told not to take risks. But what exactly is ‘a risk’? We all do things knowing that there is a risk. We go to sleep at night, and somehow we are able to deal with the risk of not knowing if we will wake up the following morning.
Ask anyone who’s been in custody— you know that to be a fact. Fortunately for me, no one was killed while in reception, although many were severely beaten. In Jamestown, I never witnessed any deaths. But a riot broke out just before I arrived and someone lost his life. Upon my return to Jamestown, after serving 28 months in fire camp, a young man of 19 lost his life over a gambling debt. The word on the yard was a DP (a prison term for inmates issued a disciplinary action) gone bad. The bottom line: being in custody is not a safe experience.
But before I get too far off course here, managing risk is a key component to rebuilding your wealth. If you don’t manage your risks, you can start accumulating wealth, feeling good that things are going well. And BAM! Some surprise comes along and wipes out your bank account. Maybe it was an unknown like child support, the IRS, a car accident, or illness.
There are many methods for managing risk. Risk management is a very complicated subject. There are literally thousands of books on the subject. But for your recovery, we will keep it short and sweet and to the point. On the other hand, that doesn’t mean you should quickly read this section. This is a section to read slowly and consider each of these methods for dealing with risk.
Now that you are understanding risk, there are four basic methods to deal with risk. First, you have to realize that there is a risk. Sometimes ignorance is bliss, but once you have identified the risk (child support, IRS, being physically at- tacked), you have basically 4 strategies.
- You can accept the risk, eg. You decide to go surfing in shark-infested waters. There’s a risk of a shark attack. Other risks include a surfboard accident with another surfer, a wave crushing you, or accidentally drowning. But people surf in conditions like this all the time and accept the risks all the time.
- The second method is just to avoid the risk, eg. Just don’t do it. Just do not go surfing. Of course, if you’re in custody, you may not have that luxury anyhow.
- The third method is to reduce the risk, eg. If we talk about driving a car, you would want to reduce the risk of getting hurt in an accident by wearing a seat belt. If you are surfing, you can practice safe surfing skills, go with a buddy and watch each other’s back, and only surf on days where the waves or currents are calmer. In custody, every day is a risk. But you can reduce your exposure by doing your best to stay on your own, without the need to ask anyone for anything. Try not to get caught up in the politics and wherever possible roll with the Christian groups. In custody, this is a day to day challenge, but I can share from my own experience that you should stay away from anything to do with gambling and drugs (including tobacco). Keep an inventory of Ramen Soup for needed transactions and donations, and make sure you have a shadow when talking to an officer.
- The fourth method is the transfer the risk to a third party using the wise use of insurance, eg. If you are concerned about the financial loss if you get eaten by a shark or accidentally drown, you can buy a life insurance policy or accidental death policy, which would create wealth for your family in the event of your death. By the way, there are companies that will insure inmates, but the policies are very expensive. If you know you’re going to prison and shit can happen, it may be worth it— especially if you are out on bail awaiting trial. You must carefully analyze the cost-benefit. The other thing to note and we will get into this in detail a little bit later on in the book is that you only want to insure things that you cannot afford to lose. Just note that thought, and we will be getting back to that later in our discussion of “The E Fund.”
I think you have to say to yourself that there’s a risk in almost everything we do. You walk to the store; there’s a risk you can fall and hurt yourself. You spend good money on some expensive electronic device; there’s a risk that it will break or get lost or stolen. But there’s also a risk when you commit a crime. There’s even a risk when you buy an investment. What do we do? What do we insure? Do we accept all the risks? Every person has a different risk tolerance. Financially, the general rule of thumb is that you want to avoid risk, use a risk-reduction strategy to reduce the risk, or insure the things you cannot afford to lose. Things you cannot afford to lose are things that, if they go wrong, will blow your financial plans.