How to assess your financial risk and create a plan

Planning is the key to success in most endeavours, including finances. Before developing a financial plan, you must first assess your financial risk, or the possibility that you'll lose money on a business venture or an investment. 

Assessing financial risk

A risk assessment considers your age, life stage, financial goals, attitudes, and capacity to absorb a loss or a sudden financial gain. 

The first part of the assessment relates to your capacity to absorb a loss. These questions include:

  • Does your income cover your expenses?
  • How likely is it that you will lose your job?
  • Do you have emergency savings and a contingency plan?

The second part relates to your risk tolerance. Each investor also has a different financial risk tolerance based on their life stage, goals, and overall comfort with uncertainty. A financial risk assessment tool can help you determine your risk tolerance attitudes. You may feel that you can tolerate more risk with some investments while wanting less risk for others, such as your child's education fund. 

Determine your goals

The next part of the process is to consider what is most important to you financially and to set goals based on those values. Goals will give you a direction for your finances. 

  • Establish short-term goals or goals that you would like to achieve within the next year. For example, a short-term goal might be to pay off debts or to build emergency savings.
  • Establish intermediate goals. Intermediate goals are those you'd like to achieve within 1 to 10 years. An example is to save for your child's education. 
  • Establish long-term goals. Long-term goals are achievable over a term longer than 10 years. An example of a long-term goal is saving for retirement.

Now, check your investments.

Once you've assessed your risk and determined your goals, you are ready to determine whether your savings and investments align with your risk assessment and goals.

For example, suppose one of your goals is to develop emergency savings. You'll want to save enough each month to build the emergency savings fund by the end of the year. Then, you'll also want to ensure your emergency savings in an account that you can easily access and protect from volatility.

Other questions you might want to ask are

  • Based on your expected return on your investment, are you saving enough each month to reach your goals?
  • Should you have different investment strategies for your intermediate and long-term goals? If so, what strategies make sense? 
  • If the risk assessment tool shows that you want to be protected from losses more than you want higher returns, do your investments match this desire?

A financial adviser can help you align your investments with your goals and risk tolerance.

Create or tweak your budget

The most important part of your financial plan is your budget. To create a budget, take the following steps:

  1. List your income and then your expenses,
  2. Group expenses into necessities and desires.
  3. If you spend more than you make and rely on credit, look at items you can cut.
  4. Remember to budget a percentage of your income for savings.

If you already have a budget, you should revisit it annually to ensure your spending is still in line with your financial goals. Ideally, you'll also want to increase the amount you save with each pay raise, too.

The Canadian government has an online budget planner to make budgeting easier. Several brands of budgeting software are also widely available on the Internet or for mobile phone apps. Some are free, and some are fee-based. Some are designed to help you achieve specific goals, such as savings or paying off debt. Investopedia has ranked several budgeting software tools, but many others are available.

Key Points

  • Financial risk is the possibility that you may lose money.
  • Individuals have different abilities to tolerate risk.
  • When assessing your financial risk, consider whether you can absorb some losses, such as a short-term job loss or a downturn in the stock market. Also, consider your personality and whether you can tolerate uncertainty.
  • Choose and evaluate your investments based on your risk assessment and goals.
  • Remember that the centrepiece of any financial plan is a budget. Tools exist to help you create and manage your budget.

People Corporation's Financial Resource Centre provides tools to help plan members assess risk and stay financially healthy. The portal can help you establish an emergency fund, reduce debt, reduce financial stress, minimize financial risk, and determine if your investments are on track. If you haven't already signed up, contact us today.  Let us help you achieve your goals.


Salina Shariff is a Senior Manager, Group Retirement Solutions at People Corporation.

For more information, take a virtual tour and contact with your questions.


Canadian Government: Budget Planner

Deloitte: Financial Risk Assessment

Investopedia: Best Budgeting Software

Investopedia: Financial Risk

Missouri State University: Creating a Personal Financial Plan

University of Missouri: Investment Risk Assessment

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