The Both/And of Risk: How to Avoid, Reduce, Retain AND Transfer Risk Wisely
In our last conversation, "Beyond Checklists: Building a Risk-Proof Financial Foundation the S3 Way," we took the crucial first step of identifying the unique risks that could threaten your financial well-being. Now, you’re likely facing the next, often more confusing, question: What do I do about them?
This is where many people get stuck in a frustrating financial contradiction. The conventional wisdom presents a stark, all-or-nothing choice: either you buy insurance for a risk, or you cross your fingers and self-insure, hoping for the best. This "either/or" dilemma forces you into a corner, suggesting you must either spend a fortune covering every possible problem or leave your financial foundation dangerously exposed.
At our firm, we believe in Contradiction-Free Living, which means rejecting these false choices. The most effective risk management isn’t about choosing one path; it’s about strategically integrating multiple tools. This is the heart of our Both/And approach. You don't have to choose between insurance and self-funding. Instead, you can build a comprehensive strategy that allows you to Avoid, Reduce, Retain, AND Transfer risk wisely.
The False Choice: Why 'Insure vs. Don't Insure' Is the Wrong Question
The financial world often pushes a simple, but flawed, narrative. On one side, you have agents who might suggest an insurance policy is the only responsible answer for every potential threat. On the other, you have minimalists who argue that insurance is a waste of money and that a large savings account is the only tool you need. Both viewpoints are incomplete.
Asking "Should I insure this or not?" is like a carpenter asking "Should I use a hammer or not?" for every task. A hammer is a fantastic tool for driving nails, but it’s the wrong choice for cutting a board or turning a screw. A skilled carpenter has a full toolbox and knows which tool to use for which job.
Your financial life deserves that same level of thoughtful craftsmanship. A Sound financial plan doesn't rely on a single solution. It uses a full range of risk management techniques to build a plan with constitutional confidence—one that is secure in its principles but flexible enough to handle life’s realities. Rushing to one extreme or the other is a sign of anxiety; a Trustworthy Tortoise Pace involves pausing to select the right tool for the job.
The S3 Risk Matrix: A Simple Tool for Sound Decisions
As a Chartered Financial Consultant (ChFC®), my education covered the four primary techniques for managing risk. But you don't need a professional designation to make smart decisions. Our job is to synthesize that complex knowledge into accessible, practical frameworks.
That’s why we created the S3 Risk Matrix. It’s a Simple tool that helps you apply Sound, time-tested principles to any risk you face. It works by plotting risks on two axes:
- Frequency: How often is this risk likely to occur?
- Severity: How financially devastating would it be if it occurred?
By answering these two questions, you can place any risk into one of four quadrants, each with a clear, primary strategy.
Quadrant 1: Low Frequency / Low Severity
- Strategy: Retain (or Accept)
- These are the minor, infrequent annoyances of life—like a cracked phone screen or a lost pair of expensive sunglasses. The cost of insuring against them would far outweigh the benefit. The wisest move here is to simply accept them as a cost of living, covered by your regular cash flow or a small emergency fund.
Quadrant 2: High Frequency / Low Severity
- Strategy: Reduce & Retain
- These are risks that happen often but aren’t financially catastrophic, like getting minor dings on your car in a crowded parking lot or your kids frequently outgrowing clothes. You can’t eliminate them, but you can take steps to reduce their frequency (park farther away, buy clothes on sale). The remaining financial impact is something you retain and plan for in your budget. This is a form of self-insurance strategy for predictable, minor costs.
Quadrant 3: Low Frequency / High Severity
- Strategy: Transfer
- This is the sweet spot for insurance. These are the catastrophic events that you hope never happen but would destroy your financial foundation if they did—a house fire, a major liability lawsuit, a long-term disability, or a premature death. The probability is low, but the severity is devastatingly high. Here, you wisely transfer the financial impact of that risk to an insurance company.
Quadrant 4: High Frequency / High Severity
- Strategy: Avoid
- These are activities so dangerous and so likely to cause immense harm that the only rational response is to avoid them. Texting while driving is a perfect example. No insurance policy can undo the potential tragedy, and no financial plan can withstand a risk that is both highly probable and highly destructive.
The Power of Keeping Risk: When Strategic Retention (Self-Insurance) Makes Sense
Our industry often overlooks the power of Quadrants 1 and 2. The S3 approach recognizes that consciously retaining certain risks is a sign of financial strength, not negligence.
When you have a Safe, foundation-first plan with a healthy emergency fund, you empower yourself to handle life's smaller bumps without paying an insurance company to manage them for you. Choosing a higher deductible on your auto or home insurance is a perfect example of strategic retention. You are consciously agreeing to self-insure for the smaller, more manageable claims in exchange for a lower premium, saving your insurance dollars for the truly catastrophic events where they matter most.
This isn’t about hoping for the best; it’s about building a financial structure robust enough to absorb minor shocks. This demonstrates true constitutional confidence.
Making Insurance Work for You: The Right Way to Transfer Catastrophic Risk
This brings us to Quadrant 3, where insurance becomes an indispensable tool. Notice we don't say "buy insurance for everything"; we advocate for using it surgically. The purpose of insurance in a Sound financial plan isn't to prevent you from ever having a bad day. Its purpose is to ensure that one bad day doesn’t wipe out a lifetime of good decisions.
By focusing your resources on transferring the risks that could truly crater your family's future—death, disability, liability—you use insurance for its highest and best purpose. This is the ultimate "Both/And" solution in action. You both build a strong personal financial foundation to retain small risks, and you transfer the unmanageable ones. This integrated strategy is the most efficient and effective way to protect your wealth and your family. It moves the conversation from a product sale to a strategic decision, which is the core of our advisory model.
By using a Simple framework like the S3 Risk Matrix, you can move past the confusing "either/or" debate and build a plan that is resilient, efficient, and aligned with your life. You get to decide which risks to avoid, which to reduce, which to retain, and which to transfer, creating a truly personalized and Sound financial defense.
Feeling clearer on the options? Let's talk for 15 minutes to apply the S3 Risk Matrix to one of your specific financial concerns.