Determining risk plays a huge role in money management. From selecting insurance, setting aside an emergency fund, to investing – you have to evaluate your personal financial risk. Usually, the more risk you take the more money you potential have, but then if your good luck runs out… risky choices can quickly ruin your finances.
Ultimately you have to derive a comfortable balance. Being too risky can cost you money, but so can being too safe. The key is in finding the right balance given your unique situation.
How do you do exactly that? There is no set answer that applies to every individual or family. The following tips will help you determine your specialized risk level.
1. What is your risk tolerance? This is more of a personality question, as part of this equation is also relieving stress. If worrying about your money drives you nuts, then you have not found a good balance.
2. Short Term Goals? Know your shorter term goals; these items will need to have a secure arrangement to ensure they can be achieved.
3. Long Term Goals? Saving for a long range goal like a far off retirement can often allow the opportunity to look to a riskier investment for a higher return.
4. How much money is too much to loose permanently? This will help you gauge a dollar figure for risk.
5. Come together. Ensure that everyone is on the same page for risk. The balance comes from secure vs. risky money management as well as agreement within the family unit.
6. How big and/or important are your goals? If you don’t have some risk in your investments, you may never reach your goals.
7. How risky is your life in general? Evaluate where you live and other factors that will influence money in your unique situation.
8. Income security. How stable is your career, job, and income?
There is no set answer to any of these questions. Still, by sitting down and talking together or evaluating your own situation you can define a specific level of risk that works best for your needs.
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