Learn even more about this topic with the Encyclopedia of Personal Finance™
Are you a risk-taker? Have you climbed a cliff, dived for coral,
or jumped from a plane? Before you automatically respond "Yes, that's me!" or
"No, not on your life!" consider that we all face different kinds of risks in
our daily lives. Some people always play "Beat the Clock" when there is an event
to go to or a deadline to meet. But the same folks who willingly race the clock
may never go out on a limb in other arenas of their lives. Do you write checks
before you have deposited the funds to cover them? Have you ever promised more
than you can realistically deliver? Have you driven well above the speed limit?
Given a speech in public without preparation?
You get the idea. Even if you have a high tolerance for risk in
one area of your life, you may be quite conservative in other areas.
Now, think about how you feel about financial risk. Do you get
edgy when someone owes you money? Do you get nervous when you may be late in
paying a bill? How do you feel when your financial institution makes an error on
your statement? Do you even notice?
Risk tolerance begins with a self-assessment. In quantifying
financial risk tolerance, you may think of it as the amount of
money you can afford to lose without jeopardizing your lifestyle. This should
help you choose investments that you are comfortable with. Once you have
reviewed your risk tolerance in the arena of personal finance, you can
prioritize your financial goals, taking into account the level of risk you are
comfortable with. For example, before investing in securities, most people
decide to do the following:
? Set aside a
certain amount of short-term savings, equal to two, three, six months or more of
their living expenses
? Pay off outstanding credit card debts
? Establish adequate insurance coverage
? Fully invest in an individual retirement account (IRA) and/or any
employer retirement plan if available
Next, we will look at risks associated with personal