Strategy: Build and maintain an emergency savings fund.
Explanation (linked to the 5-sector circular flow model):
In the household sector of the 5-sector circular flow model (Households → Firms → Government → Financial Sector → Overseas Sector), households reduce financial risk by directing part of their income to the financial sector (banks, credit unions, investment funds, stocks and or bonds) in the form of savings.
This strategy reduces risk because:
It increases household financial security against unexpected shocks (job loss, medical costs) by increasing liquidity in the individual household.
It strengthens the flow of funds into the financial sector, which then recirculates savings as loans and investments across the economy.
It allows households to rely less on high-interest borrowing during emergencies, reducing long-term financial strain.
In short:
Using the financial sector to build an emergency fund is a core household risk-reduction strategy within the 5-sector circular flow model.
Note the hidden challenges here are twofold for a given household.
First, they must have excess income to contribute to the financial sector. This is achieved by reducing expenses or increasing income. This takes both personal discipline and effort.
Secondly, they must understand the risks and accessibility / liquidity and volatility of a given investment relative to the returns. This step my require further education or the advice of an expert.
