Finance Tip Friday #20: Understanding Your Risk Tolerance

Risk Money Investment Efforts  - mohamed_hassan / Pixabay

What is your risk tolerance? Are you deathly afraid of losing money or does the idea of losing money not scare you? Figuring out your risk tolerance is CRITICALLY important when you venture down the path of nurse practitioner freedom. It will guide your decisions in terms of investing, saving, debt paydown, and starting your own practice.

Investing: There is ALWAYS a risk when you invest money. Nothing is 100% safe. There is always a chance that you could lose money. It is just part of the game. If you have a low risk tolerance, then you will be investing in fairly secure assets such as bonds and real estate. If you have a high-risk tolerance, then you can invest in riskier assets such as Bitcoin, small cap stocks, and business ventures. Remember, the higher the risk with an investment, the bigger the reward! Taking a risk usually pays off BIG TIME. Not taking a risk means your money will grow very slowly, if at all.

Saving: If you have a low risk tolerance, then you will likely hoard money away in the bank. If you have a high-risk tolerance, then you will likely avoid saving money and put it to work for you instead.

Debt paydown: People with low-risk tolerances typically will feel better paying off their debts (even if they are low interest) than investing their money. Individuals with high-risk tolerances have no problems taking on more and more GOOD DEBT to turn around and invest in hopes that it will grow further. Personally, I have no problem taking on GOOD DEBT such as mortgages on rental real estate.

Starting your own practice: Starting your own business is probably one of the riskiest things you can do. You NEVER KNOW if your business will succeed or not. But the good news is that staring a niche practice is typically a safe bet. If you are very risk averse, then starting a business will increase your anxiety significantly. If you have a high-risk tolerance, then you won’t really care and be willing to take the chance in starting a business. Remember, more risk more reward and starting a business has a VERY HIGH upside!

So, what is your risk tolerance? Low? High? Somewhere in between? I consider myself to have a moderate risk tolerance. I am okay with losing SOME money, but I also want to ensure I maintain my net worth position, so I avoid super volatile and risky investments such as Bitcoin for example.

Identify your risk tolerance early on so you can understand what it is you need to do from an investment standpoint. It is very important! Check out this calculator HERE to find out what your risk tolerance is!

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