Let us now break down risk into 5 types that everyone of us face, even if you are a citizen of a third world country.

1. Inflation Risk

We all know what Zimbabwe is famous for.

Rising prices for consumer goods will eventually reduce the purchasing power of dollars.

There are some items that you need to buy now, like a good vacation during prime time of life like 20s and 30s, instead of waiting until 70 years old.

Because the cost of going for a vacation to the same place will definitely increase 40 years later, not to mention the fact that you may get rammed over by a car the next day so that your relatives can go for holidays at exotic locations after inheriting what you have left.

But for the purchasing of personal computers, one should only buy it later, as and when it is necessary. This is simply because the same $2000 one year later can buy a computer with double the processor speed, memory and hard drive space, etc.

2. Income Risk

If you know that you are someone who is not good in interpersonal skills and work capabilities is also not that outstanding either. Then you do face a higher risk of losing your job and earned income.

Or that realize the fact that age is catching up and you know that you are not really indispensable to the whole company, then one also need to prepare for that day of being fired and/or retrenched which is another better sounding word for fired.

3. Liquidity Risk

Liquidity risk is simply the loss in value when converting assets into cash within a short notice.

Real estate and properties have a higher liquidity risk than stocks and fixed deposits. If a house is worth $1 million and need to be sold and converted into cash within the next few days, there is a good chance that you won’t be able to find someone who can buy your house for $1 million in the next few days.

But if you sell it at a price of $10, you know that you can quickly find a buyer but there is significantly lost in value. That is liquidity risk.

4. Interest Rate Risk

As an ordinary person, without the wealth of Buffet, one does need to burrow when buying cars and save in certificates of deposits for a rainy day.

Changing interest rates will affect your interest for good or worse.

For example, placing cash in fixed deposits when interest rate is low reduces return. But burrowing money at low interest rate means that you are paying less interest on your debt.

5. Personal Risk

This is what an individual does and his habits that can affect their financial standing now and in future.

It is hard for a hard core gambler and smoker to change their costly habits. This basically results in much more additional spending on gambling, cigarettes and increased premiums on insurance polices.

When it comes to investing in stocks, most people are greedy when others are also greedy and fearful and others are also fearful, instead of the other way round.

Only a select few, who master this particular personal risk and is the other way round like Warren Buffet, become very rich while the masses lose money in the stock market.

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