Live Debt Free

Pay off debt. Save. Give. Live your mission.

Understanding Risk Tolerance and Your Finances

by // Leave a Comment

How do you feel when you hear the word “risk” used about your finances?

Do you see a chance for excellent returns?

Are you able to picture the “adrenaline rush” of investing?

Do you ever worry that you won’t have anything left?

Do you consider the risk only a necessary step in the investment process?

An investor’s risk tolerance is the amount of risk they are prepared to take. But it might be challenging to determine your level of risk appetite. The risk may also offer opportunity, thrill, or the chance to make significant gains—a “you need to be in it to win it” mentality.

But how can a private investor assess their level of risk tolerance? What benefits may investors derive from grasping this idea regarding portfolio diversification?

Risk tolerance: What is it?

The amount of risk an investor is willing to take is called their risk tolerance. Nevertheless, figuring out your degree of risk tolerance may be difficult. A “you have to be in it to win it” approach may be associated with the risk and the opportunity, thrill, or potential for substantial rewards. 

But taking a risk means that you are willing to lose money, that you can handle market changes, and that you can’t predict the future.

In reality, behavioral experts assert that “loss aversion,” or that fear of losing something may influence decisions more than the expectation of profits, might affect how you see risk. As risk tolerance is based on how comfortable you are with uncertainty, and you might only know how willing you are to take risks once you face a possible loss.

Is it risk tolerance or risk capacity?

While sharing a name, your risk capacity and risk tolerance often operate independently.

Your unique financial condition determines your risk capacity, or the number of potential losses you can accept.

Contrary to risk tolerance, which may not alter throughout your life, risk capacity is more malleable and adapts to your financial and personal goals and the timeframe for reaching them.

Given your income requirements, you might be less likely to conveniently ride out a bear market if you have a mortgage, your own business, children close to graduating from college, or aging parents who depend on you financially. But, again, this contrasts with someone who is single and has no significant financial commitments.

A financial shock such as a job loss, an accident with high medical costs, or even a windfall may also impact your investing choices by changing the level of risk you can bear.

What are your financial goals?

Your investing goals must also be considered when determining how much risk may be accepted. For example, how much risk do you wish to take with the money you invest for your retirement or your children’s college tuition?

On the other hand, if you are utilizing natural risk capital or available cash to try to make more money, greater risk could be accepted.

Interestingly, some people are fine with trading higher-risk securities with their retirement assets. Make sure you understand what you are doing if you only use this to protect your transactions from tax exposure, such as when you trade futures in an IRA.

If you are an experienced futures trader, only use a small amount of your IRA money, and don’t depend on one deal to decide whether you can retire, this could be a good plan.

You might reconsider engaging in this much risk, though, if you are using your whole IRA to trade futures, have little to no net wealth, and are only seeking to minimize tax exposure for that deal you consider a “sure thing.”

Futures already enjoy a more favorable capital gains treatment than other types of income; the lesser of the two capital gains rates will be applied to 60% of your earnings in the future.

Given this, why would someone with a low net worth need to put their retirement funds at such risk? In other words, you should only sometimes do something simply because you can.

https://www.businessinsider.com/personal-finance/risk-tolerance-vs-risk-capacity

What is your investment experience?

Your degree of investment experience must also be considered when figuring out your risk tolerance. Are you a novice trader or investor? Do you already have some experience in this field but want to expand into something else, like selling options? Trading and investing are no different from other new endeavors because it is wise to start cautiously.

Before making a significant financial commitment, gain some experience. Always aim for the “protection of capital” and keep in mind the classic saying. Only if the worst-case outcome will allow you to survive to fight one more day does it make sense to take on the right amount of risk for your circumstances.

How do you make your risk tolerance into a financial plan?

Plenty of online questionnaires can give you a starting point for risk tolerance and how to turn that into an investment strategy. Since you want your suggested portfolio’s asset allocation mix to represent your risk tolerance most closely, being honest is undoubtedly the best action in this situation.

The next stage is to familiarize yourself with the standard performance information for your portfolio once you have determined where you lie on the risk spectrum. Again, the less likely you will respond emotionally when things are complex, the more you will know about what to anticipate.

Savvy investors take both risk and reward into account. Stocks and other investments with higher projected returns (and more volatility) tend to be riskier than more conservative portfolios made primarily of bonds and cash, which have lower volatility.

However, owing to constantly shifting market circumstances, even the most cautious portfolio might suffer short-term losses. This is why having a diverse portfolio with a wide range of investment possibilities is crucial.

Consider investing $10,000 in one of the three fictitious asset-allocation strategies shown below at the start of 1970. And through the end of 2016, you recalibrated your portfolio annually to ensure the appropriate mix of stocks, bonds, and cash was still present.

As a result, the riskiest portfolio would have increased to $892,028, the most intermediate portfolio to $676,126, and the most conservative investment to $389,519. 

Final thoughts

What is your risk tolerance? It seems like a simple question, but numerous factors must be considered. For example, your experience, age, net value, risk capital, and the specific investment or transaction being evaluated will all affect the response.

After giving this some thought, you can use this information to develop a well-rounded and diversified trading and investment program.

Image credit: [Wutzkoh]

Where Can You Find Extra Money for the Holidays

by //

The holiday season is a time for joy and giving. This can be difficult for people living on a budget or living paycheck to paycheck. So, what are some ways you can save extra money for the holidays? 

With a little effort and extra work, you can find extra money to help you get through the holiday season. From bartering for the things you need, picking up things for free, or even working a new job in your free time, having the best holiday is possible with some planning. 

Frugal Grocery Shopping

Looking for items on sale or using coupons when grocery shopping may not seem like significant savings, but it can add up over time.

Clipping coupons and having a plan before you go to the grocery store can help you reduce your weekly food budget. Plan your meals and utilize the week’s current sales to stretch your grocery budget and keep more money in your pocket.   

Reduce and Reuse

We tend to throw away a lot of items. If you are trying to save money, consider what you are throwing away and see if there are any items you can reuse. For example, it may seem frugal to reuse sandwich bags, but the cost savings, compared to buying new ones, may be worth the extra effort. 

And Recycle

Saving your aluminum cans rather than throwing them away can net you a significant amount of money if you turn them into a scrap metal recycling facility yourself. This will not only put a few extra dollars in your pocket for the holiday season, but if you do not have a recycling program, it can also help the environment. That is a win-win situation. 

Buy and Sell Used Goods

It would help if you also considered buying used when you are looking to purchase something. There are numerous online sites to buy, sell, and trade used goods.

Places like eBay, Mercari, and even Facebook will allow you to buy used goods, giving you significant savings over new items.  

You can also use them to sell off any items you are not using. For example, old clothes, sporting equipment, and even furniture can be sold, providing you with extra holiday money.

This will also allow you to declutter your home before the holidays. 

The Work at Home Woman has more great saving tips.

Reduce Your Spending

Saving for the holidays will allow you to look at your spending habits and reduce any frivolous or unneeded spending.

You can cancel any unused subscriptions or reduce or quit any expensive habits you may have that are putting a drain on your bank account. You can use this opportunity not only as a money-saving venture but also to improve yourself for the future. 

Free Events

Saving money doesn’t mean staying at home and not enjoying yourself. Find free events in your area to attend to give yourself a night out without spending all the money you have saved during the week.

Many places have free concerts, outdoor movies, and nature walks. You can also visit your local library and attend parades, art shows, or even sporting events, all for free. 

Check your local listings to see what events are available in your area and spend some time enjoying the effort you put into saving for the holidays.  

Hobbies

Your hobbies during your downtime can also help you save money. For example, gardening activities will be enjoyable and help reduce your monthly grocery bill. On the other hand, camping and birdwatching may not save you significantly but can replace activities that would cost money, such as shopping or other events. 

Learning a new skill, such as embroidery or painting, can also save you money or even become a source of income when you can produce goods and services from these hobbies in the future.

Cooking at Home

Eating takeout or sitting down at a restaurant can take up a significant portion of someone’s budget. However, reducing the times you order takeout and cook meals at home can add up to significant savings. 

Planning and preparing extra food when cooking meals to take for lunch instead of purchasing food each day can save you a considerable amount of money and put you on the right track to saving the money you will need for the holidays.

Extra Income

If you do not have any money saved for the holidays, the best way to prepare is to earn extra income. There are many services you can provide during your free time to provide you with the extra money you need for the holiday season. In addition, taking an additional part-time job will provide you with the income you need to prepare for the holiday. 

Delivering groceries, driving Uber or Lyft, or delivering takeout are all services you can do during your free time to increase your income before the holidays. They are easy to set up and start, and do not have set hours, so you can adjust them to fit your schedule. 

Conclusion

By looking at your habits, you can reduce your spending to save for the holidays. Reducing things you need and reusing products can keep money in your pocket. Taking lunch to work and reducing your takeout orders will also keep your budget in check. Lastly, finding and attending free events in your town will ensure you can still have a social life while maintaining your budget. 

The best way to increase your holiday savings is to earn more income. Working additional jobs such as Uber and Lyft and delivering food or groceries are easy to start up and provide flexible hours to work when you have free time. They can add a significant amount to your income and build your savings so you and your family can enjoy a happy holiday season. 

Image Credit: [LawrenceSawyer]

How to Make your Paycheck Last When You Are Paid Once a Month

by //

The main financial challenge for many people who are paid once a month is making their paycheck last the entire month and covering their expenses.

This can be tough, especially if you have debt or other financial obligations. However, there are some things that you can do to make your paycheck last the entire month. 

  • Make a budget
  • Save up an emergency fund 
  • Automate your savings 
  • Cut back on discretionary spending 

Making your paycheck last the entire month can be challenging, but it is possible if you are strategic.

Make a budget

The first step in creating a budget is knowing your income and expenses. To do this, track your spending for one month so that you have an accurate picture of where your money is going. Then, include everything from rent or mortgage payments to smaller items like coffee or impulse purchases. Once you have this information, you can begin creating your budget.

Tip: go through your past month’s bank statement to get an honest picture of what you spend your money on.

Once you know your income and expenses, you can start allocating your income to different spending categories. There is no one-size-fits-all solution here. The categories and percentages will vary based on your circumstances. However, some common categories include housing, transportation, food, entertainment, and savings. 

Once you have created your budget, it is essential to stick to it as closely as possible. Try setting up automatic transfers to ensure you always meet your financial goals.

And if you find yourself dipping into other categories more often than you would like, take a closer look at where your money is going and adjust accordingly.

Save up an emergency fund 

One of the main reasons why you need an emergency fund is to avoid going into debt. Unexpected expenses can be a financial strain, and if you do not have the money to cover them, you may be tempted to put them on a credit card.

This can lead to credit card debt, which can be difficult and expensive to pay off. By having an emergency fund, you can cover unexpected expenses without going into debt.

https://njaes.rutgers.edu/sshw/message/message.php?p=Finance&m=263

Another reason you need an emergency fund is that it can help weather financial storms. If you lose your job or experience a decreased income, your emergency fund can help you make ends meet until you get back on your feet. An emergency fund gives you peace of mind knowing that you have a cushion in tough times. 

Ideally, you should save up enough money to cover six months of living expenses. This may seem like a lot, but it is essential to have a cushion for unforeseen circumstances. If you cannot save that much money immediately, do not worry! Instead, start with what you can and gradually increase your savings over time. 

Automate your savings 

When it comes to personal finance, one of the best pieces of advice is to “pay yourself first.” This means that before you spend any money on bills, food, or fun, you should put money into savings. The idea is that by making saving automatic, it becomes a priority, and you’re less likely to spend the money elsewhere. 

Another reason why automating your savings is a good idea is because it can help you avoid costly overdraft fees. Overdraft fees happen when you try to spend more money than you have in your account and typically cost around $35 each time they occur.

If you have an automated savings plan in place, you can transfer funds from your savings account to cover any unexpected expenses and avoid paying overdraft fees. 

Now that we have gone over why automating your savings is a good idea, let us discuss how to do it. If you have a steady paycheck coming in from an employer, the easiest way to automate your savings is to set up a direct deposit from your checking account into your savings account. This can usually be done through your employer’s payroll system. 

If you do not have a steady income or want more control over how much money goes into savings each month, you can manually set up recurring transfers from your checking account. Most banks allow customers to set up recurring transfers online or through their mobile app.

All you need is the name and routing number of the bank to which you want the money transferred. Once the transfers are set up, they will happen automatically, typically once per week or once per month. 

Cut back on discretionary spending 

If you find that you are struggling to make ends meet each month, cutting back on discretionary spending can be a helpful way to make your paycheck last longer. Discretionary spending includes things like eating out, shopping, and entertainment. By cutting back on these expenses, you can free up more money each month to put towards other financial goals like paying off debt or building up your savings account. 

The first step to cutting back on your spending is to track where your money is going. This means keeping a budget and understanding where your money is spent each month. Once you understand where your money is going, it will be easier to identify areas where you can cut back.

There are often cheaper alternatives to the things we want or need. For example, instead of going out to eat every week, try cooking at home more often.

Instead of seeing a movie in the theater every weekend, wait for it to come out on DVD or streaming service. There are usually cheaper ways to do the things we enjoy; we need to take the time to find them.

Conclusion

Making a budget is one of the most critical steps to improving financial health. A budget helps you to track your income and expenses, so you can see where your money is going. It also allows you to set spending priorities and make informed decisions about the best use of your resources.

One of the key components of a successful budget is an emergency fund. You set aside money for unexpected expenses, such as medical bills or car repairs. An emergency fund gives you peace of mind knowing that you have a cushion to fall back on if something goes wrong.

Another essential element of a budget is automating your savings. This means setting up automatic transfers from your checking account into a savings or investment account. This will help you to save money consistently, even when you do not feel like it.

Finally, cutting back on discretionary spending can free up funds for more important financial goals. Take a close look at your spending habits and see where you can cut back, such as eating out less or buying fewer clothes. Small changes in your spending habits can make a big difference in your financial picture.

Image Credit: [Getty Images Pro]