Saving & Investing 101: What is Your Risk Tolerance?

I talk to many people who cannot even fathom moving a portion of their money into a high-yield savings account. They fear the thought of not walking into a brick-and-mortar bank to handle their transactions.

Other people I know put everything they had into cryptocurrencies back in 2021. They lost nearly all of their money in the next two years.

Why is there such a discrepancy between no, low, and high-risk investors? Well, it all comes down to everyone’s individual risk tolerance.

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What is risk tolerance? Risk tolerance is the amount of chance you can take while investing and still sleep tight at night.

It determines where you can move your money while still keeping your sanity—it’s your inner monologue.

Factors playing into your risk tolerance. Many factors affect your risk tolerance: age, background, career, relationships, responsibilities, financial education, etc.

You can overcome these factors to become the saver and investor you envision. However, it’s not easy to break your scarcity mindset and jump into the world of investing. Let’s look at some of these factors.

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1) Age. Age is the most significant factor playing into your risk tolerance. The closer you are to retirement, the fewer chances you want to take with your resources.

The media also plays into this scenario by scaring older people into annuities, reverse mortgages, and long-term health insurance.

These things are great, but often there are better ways to allocate your resources that may seem riskier. Those investments require more education, and Wall Street would rather take a portion of your strategies via commissions.

2) Background. What is your background with money? How did your parents view money—through scarcity or abundance? 

Overcoming your parent’s perception of money may be the most formidable challenge of your life. They may have lived through a World War, recession, or stock market crash. 

Mentally, they never recovered and hoarded every dollar—never believing in investing or giving. I’ll discuss more of your money beliefs in a separate article.

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3) Career. Your skill set plays into your risk tolerance. If you have a profession where you can always find a job (say, a nurse or information technology), you have more financial freedom to spare.

This will allow you to invest more freely without constant worry about your resources. If you live paycheck to paycheck, investing may seem as far away as Africa.

4) Relationships. Sometimes you want to invest, but people in your life place their fears upon you. This can be your spouse, mother, father, or friends.

It’s vital that you learn to invest, at least in small doses, by yourself because you’ll need to build confidence. 

Once you have read books and interacted in the stock market, you’ll recognize people’s fears for just that—fear. It’s called the “mirror effect,” and investing is where it comes out often.

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5) Responsibilities. Do you have a family? I do too. It’s tough to put money into a business, real estate, or the stock market when you have mouths to feed.

An excellent way to overcome this situation is with a side hustle like writing. Wake up in the middle of the night, write online, and start earning a little income.

This money can be your investing money, and you can watch it grow slowly. Ensure your spouse is on the same page before you enact this course of action.

6) Financial education. “There are no risky investments, only risky investors.” Robert Kiyosaki said this, and it’s great guidance.

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The more you know, the higher your risk tolerance. It’s easy for me to buy Treasury Bonds because I understand how their prices rise and fall. Most people do not know what Treasury Bonds are or why they are essential to the economy.

Matching your risk tolerance with your investments. It’s vital you understand your risk tolerance so you can match your investments accordingly.

Let’s say you make $5,000/month and spend $4,500 on running your household of five. You probably have a low-risk tolerance because you can’t risk losing money.

The first step to increasing your risk tolerance is building an emergency fund. After you grow a $10,000 emergency fund, you’ll have a higher appetite to grow your wealth.

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Now, let’s say you are single and earning $5,000/month. You spend $1,500/month while renting a room and owning your car outright.

You can save and invest $2,000/month into dividend-paying stocks and Fundrise (real estate investment trust). You also can save towards your house down payment.

Building your risk tolerance. Most people spend their entire lives with the same risk tolerance. Even worse, they pass their fears along to their children. 

If you can slowly climb the investment ladder, you’ll grow your knowledge and risk appetite. The ladder looks like this: High-Yield Savings, Series “I” Bonds, Treasury Bonds, Index Funds, Dividend Growth, and Income Investing.

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Of course, you can create your own ladder to follow. Either way, it is of utmost importance that you start climbing your ladder to become an investor. Why?

Why is investing important? You cannot work your way to financial success. At some point, you’ll need to make money while you sleep.

If you make $60,000 annually, how hard is it to get a $5,000 annual raise? You’ll get a decent yearly raise if you have a $60,000 dividend portfolio.

With inflation staying longer, there has never been a better time to ascertain your risk tolerance. You’ll need to jump in head first, starting with a high-yield savings account. 

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Conclusion. I understand that school didn’t prepare you for this new world order; however, let’s not blame anyone.

Let’s grow our net worth by learning about dividend-paying stocks, room rentals, small businesses, and rental properties.

I have no financial worries in my life. I don’t worry about my kids’ futures because they have me. It took me four hardcore years to build this unwavering financial mindset; you can do the same. Good Luck!

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