Working away for years and putting money into low-return investment funds is a tried-and-tested method for having enough money for retirement. However, it doesn’t always translate into anything much beyond that.
That’s where risk-taking enters the picture. Taking risks is often one of the best ways to enhance personal finances and improve them beyond recognition. But how can you make it work?
Think About What You Want
The first step is to think about what you want. Strangely, saving for the short term for things like a house or a car often involves less risk. Often, it is just a matter of putting money aside for a while until it eventually accumulates to the point where you can use it.
Long-term goals, like retirement savings and business ventures, require substantially more risk. You have to hold investments in vehicles for longer, and whether they will pay off is less certain.
The key here is to ask yourself whether taking these risks will help you get closer to your financial goals. Sometimes it will, but other times, stepping out into the unknown just isn’t worth it. You don’t want to be in a situation where you are taking a lot of risk but don’t want a lifestyle that requires it.
Consider Your Risk Tolerance
You also want to think about your risk tolerance, or how much risk you are willing to bear to get what you want.
Higher risk tolerance is a good ally because it means you don’t mind as much if asset prices fluctuate and you temporarily lose money. However, if your risk tolerance is lower, you may not want to consider this option as it could leave you out of pocket.
Sometimes, exploring comprehensive loan options to meet your unique needs. These can give you more perspective on the amount of risk you want to take and what that looks like in practice.
You can also think about whether you are okay sleeping at night, even if you risk setbacks. Getting shuteye isn’t always possible if you are using highly leveraged funds in your portfolio that can lose value rapidly.
Analyze Your Financial Position
You also want to analyze your financial position. Having at least six months of living expenses saved is helpful, especially if you are planning on taking risks. You want to make sure you have something to fall back on if things go wrong (which they invariably will).
You also want to look at your existing debt levels and ask whether they might be getting in the way of financial risk-taking. You don’t want to fritter away your capital if you already have high and increasing debts taking over your financial life.
Even cash flow is worth considering. Do you still have money coming in to avoid potential hazards?
Evaluate The Reward
Whenever you consider risks, you always want to think about the potential reward. Is it really worth putting your money on the line for the returns you think you will get?
Higher rewards usually mean taking more risk (unless you have an underlying understanding of how the market works). That means that you need to expect higher losses.
Think About Timing
You also want to think carefully about the timing and market conditions. Getting into risky investing during the wrong era in history (i.e. 2008) can set you up for years of losses and no gains.
Younger individuals have more time to get over market issues and do well in stocks and shares. However, if you’re on the older end of the spectrum, you may have less room to run, and this could affect you profoundly.
If you are closer to retirement, you’ll want to prioritize stability. Making sure that you have regular income coming in is often much more important than taking risks for the sake of higher returns. You don’t want to get into a situation where you are struggling to finance everything.
Research Thoroughly
Before taking a risk, make sure you understand the game you’re playing. Researching everything in advance is critical so you know what the potential returns are.
Start by researching the market, looking at investments, and seeking business opportunities. Try to find ways to build a robust business plan with plenty of contingencies built in.
Consider also the economic climate and location. You want financing options to be available that might be able to cover you in the event of a loss or when something goes wrong, and you want to recover from it.