Types of financial risks | Insurance | Financial Literacy | Khan Academy

So let's talk about what I would consider a little bit of a downer topic, and then that's a financial risk. I'll just tell you about the things that I worry about.

First and foremost, what happens if I lose my job? Maybe it's a bad economy, and I have trouble getting a job, or I have trouble getting a job that's at the same level of income. What will I and my family then do to support ourselves? How will we pay our mortgage? How will we pay down other things that we need? How will we pay for food, etc.?

In general, that type of risk, I think the best way to mitigate it if it happens is to have a nest egg. Start saving money so that you can have several months to live off of it ideally. This way, you have time to find a job, and you have a little bit of a cushion if you need to downsize. It allows you to transition there.

Another thing that I worry about is, well, what if something happens—not losing my job, but what if I get injured in some way? What if I fall sick, or what if someone I care about falls sick and they need help with their medical bills? That could be a very, very significant expense.

Now, things like illness, or if I were to somehow get disabled, so I can't work, there are sometimes insurances for that, especially things like disability insurance. But once again, probably the best option is you might be able to get some insurance, but also to have a nest egg to save some money so that in case something were to happen where the income gets interrupted—either for yourself, your partner, or others—you have a cushion to support you in that.

But there are many, many other types of risk. As I said, this is going to be a downer conversation. There's the risk of death, and I know what some of you all are thinking. I thought this a little bit when I was young—well, once I die, you know, why would I worry about finances at that point?

Well, there might be people who are dependent on you that you care about, and you want to still be in a good situation. For example, once I had kids, I completely understood the point of life insurance. So, once again, saving money is usually a good solution for many, many, many, many things.

On top of that, you know, I just recently extended my life insurance policy so that if anything were to happen to me, obviously our income would go away. My wife might need more help in being able to raise the family, so I have a life insurance policy to help in that situation. If I were to pass, the insurance company would pay my family money to help them out.

I will say that even savings and investments come with some financial risk. You can lose money on your savings or, especially, on your investments. If the stock market can go down, you might have a lot of your savings. In fact, most people do have a lot of their wealth in their house, and housing prices can sometimes go down. So that is a real risk.

Even with savings, if there's a lot of inflation and your money's just sitting in the bank, getting less interest than the amount of inflation—then there's an actual ability to buy things with that money. It could be going down, so there's even a risk there.

So, generally speaking, I don't want you to get too anxious or paranoid about financial risk, but it's healthy to be aware of all of the risks that might be out there. I didn't list all of them, and the general mechanisms you're going to have to make sure that you have some cushion in life are ideally saving money. You might also be able to get insurance for certain things.

There are other types of risk. I mean, the more I think about it, unfortunately, it's easy to think of other worries. There's liability—if you got into a car accident and you're in the wrong, and someone sues you, you could owe a lot of money to them. Once again, there are insurances for that liability, but if it goes above and beyond the insurance cap or if you didn't have insurance, people could go bankrupt over a liability.

Or, owing someone, you could have property damage. Let's say your house gets struck by lightning or burns down, and you didn't have insurance on it. Well, that can really hurt you financially.

So once again, think about the risks. Don't have too many sleepless nights about them; I try not to. But the best thing is to just think about where you can be insured, and it's reasonable to think about where you can save money.

Also, be very careful so that some of these risks don't happen to you. Take precautions so that hopefully you don't have liability, or take precaution so that someone can't steal your identity or steal your credit card and take money from you. That's another financial risk.

That one is, well, there is some identity theft insurance and things like that, but the best thing to do is just to be careful.

So be careful out there, save your money, and you might want to think about insurance where appropriate.