2846: [Part 1] Why Is Taking Financial Risk Important? by Vicki Cook and Amy Blacklock of Women Who Money

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[00:00:40] [SPEAKER_00]: This is Optimal Finance Daily. Why Is Taking Financial Risk Important?

[00:00:45] [SPEAKER_00]: Part 1 by Vicki Cook and Amy Blacklock of WomenWhoMoney.com

[00:00:50] [SPEAKER_00]: And I'm your host and personal finance enthusiast, Diania Merriam.

[00:00:55] [SPEAKER_00]: This is the show where I read to you from some of the best personal finance blogs on the planet.

[00:01:01] [SPEAKER_00]: And today is a bit of a longer post, so I'm splitting it up into two,

[00:01:05] [SPEAKER_00]: reading the first part today and the second half tomorrow.

[00:01:09] [SPEAKER_00]: So with that, let's dive right into Part 1 and start optimizing your life.

[00:01:19] [SPEAKER_00]: Why Is Taking Financial Risk Important?

[00:01:22] [SPEAKER_00]: Part 1 by Vicki Cook and Amy Blacklock of WomenWhoMoney.com

[00:01:28] [SPEAKER_00]: No matter where you are on your financial journey, controlling your finances is one

[00:01:33] [SPEAKER_00]: of the most important things you can do for your future. While it's challenging to break

[00:01:38] [SPEAKER_00]: the cycle of living paycheck to paycheck or find money to invest when you're supporting kids

[00:01:44] [SPEAKER_00]: or helping aging parents, building your own financial house must be a priority.

[00:01:50] [SPEAKER_00]: Unfortunately, you can't just save money to build long-term wealth.

[00:01:56] [SPEAKER_00]: It may seem like the safest way to get ahead is to keep increasing deposits to your savings

[00:02:02] [SPEAKER_00]: account. But your money won't be making much money, especially if it's at a traditional bank.

[00:02:08] [SPEAKER_00]: You're also risking your money's future buying power to inflation,

[00:02:12] [SPEAKER_00]: even if you have a high-interest online savings account.

[00:02:16] [SPEAKER_00]: That's why it's essential to consider taking more financial risk to achieve a greater return.

[00:02:23] [SPEAKER_00]: If you understand your risk tolerance and already have a diversified portfolio aligning

[00:02:29] [SPEAKER_00]: with your financial goals, you probably don't need this article. But if you consider yourself

[00:02:35] [SPEAKER_00]: risk averse, conservative with your finances, or anxious about investing and losing money,

[00:02:42] [SPEAKER_00]: we urge you to keep listening. Your future self will thank you when your net worth grows

[00:02:48] [SPEAKER_00]: along with your confidence. What is financial risk? According to the U.S. Securities and

[00:02:56] [SPEAKER_00]: Exchange Commission's Investor.gov website, risk is the degree of uncertainty and or a potential

[00:03:04] [SPEAKER_00]: financial loss inherent in an investment decision. All investments involve some degree of risk,

[00:03:11] [SPEAKER_00]: even though it's appearing safe. It may make sense to you that investing in just one asset class,

[00:03:18] [SPEAKER_00]: buying shares in an individual company, or only buying investment properties, is risky.

[00:03:24] [SPEAKER_00]: Putting all of your financial eggs in one basket isn't a wise thing to do.

[00:03:30] [SPEAKER_00]: But the Financial Industry Regulatory Authority, FINRA, explains that merely choosing to put your

[00:03:38] [SPEAKER_00]: money in conservative products like certificates of deposit or CDs and high yield money market

[00:03:45] [SPEAKER_00]: accounts is also risky as they may not earn enough to keep up with the rate of inflation,

[00:03:51] [SPEAKER_00]: currently around 2%. If you're earning 2.1% interest on a CD and the rate of inflation

[00:03:58] [SPEAKER_00]: is 2%, your money isn't growing much. And if your money is sitting in a safe savings account at a

[00:04:05] [SPEAKER_00]: traditional bank or worse under your mattress, it's earning little to no interest. While a

[00:04:12] [SPEAKER_00]: savings account or CD seems like a low risk money move, losing buying power over time

[00:04:18] [SPEAKER_00]: is still risky. You'll be able to buy less in the future thanks to inflation.

[00:04:24] [SPEAKER_00]: And your money still isn't making you more money. And that is the goal of investing.

[00:04:31] [SPEAKER_00]: Preparing to take more financial risk

[00:04:34] [SPEAKER_00]: If you've been complacent about your financial future or worry your current saving and investing

[00:04:39] [SPEAKER_00]: strategies aren't going to help you meet your financial goals, there are plenty of things

[00:04:44] [SPEAKER_00]: you can do to adjust your course. But before you decide to put your money at risk for a higher

[00:04:51] [SPEAKER_00]: return, you need to evaluate a few things. Number one, current and future available dollars.

[00:04:59] [SPEAKER_00]: Do you currently have $100, $10,000 or $500,000 to invest? How much can you continue to invest

[00:05:07] [SPEAKER_00]: each paycheck per month or year? Number two, current and future financial goals.

[00:05:15] [SPEAKER_00]: Are you saving for a car, a house, an investment property,

[00:05:19] [SPEAKER_00]: retirement or a child's education? Number three, timeframe for each goal.

[00:05:26] [SPEAKER_00]: One year, three years, 10 years or 40. Number four, financial product knowledge.

[00:05:34] [SPEAKER_00]: How much do you currently know or are you willing to learn about savings and investment

[00:05:39] [SPEAKER_00]: products? Do you want to be a DIY investor, use a robo advisor or hire a traditional financial

[00:05:46] [SPEAKER_00]: advisor? And number five, personality and mindset. Are you by nature a risk taker?

[00:05:54] [SPEAKER_00]: Or are extra safety precautions more your thing? Do you hold an abundance or scarcity mindset?

[00:06:02] [SPEAKER_00]: Your age, net worth and ability to earn future income are significant factors in

[00:06:07] [SPEAKER_00]: determining your appropriate investment risk level, now and in the future.

[00:06:13] [SPEAKER_00]: A 25 year old you will invest differently than a 40 year old or 65 year old you.

[00:06:20] [SPEAKER_00]: Determining when risk is appropriate and when it's not.

[00:06:24] [SPEAKER_00]: Before putting money into an investment, you want to consider your ability,

[00:06:28] [SPEAKER_00]: financially and emotionally, to recover from a financial loss.

[00:06:33] [SPEAKER_00]: In addition to the level of risk and potential return any investment product carries,

[00:06:38] [SPEAKER_00]: you'll also want to consider any upfront or ongoing fees it requires.

[00:06:43] [SPEAKER_00]: Plus, you need to know how quickly you can access your money if you need to cash in on your

[00:06:48] [SPEAKER_00]: investment. General recommendations are not to risk emergency funds or savings for short-term

[00:06:55] [SPEAKER_00]: goals less than three years because not only does investing reduce your ability to access your

[00:07:01] [SPEAKER_00]: money fast, but it also means you could end up with less money than when you started,

[00:07:06] [SPEAKER_00]: sometimes a lot less. There of course are exceptions.

[00:07:11] [SPEAKER_00]: Under the right circumstances taking on some risk when investing for a specific short-term goal

[00:07:16] [SPEAKER_00]: or even investing some of your emergency funds could be right for you.

[00:07:21] [SPEAKER_00]: To determine if taking on more risk is appropriate.

[00:07:24] [SPEAKER_00]: Number one, assess your financial health. If you aren't tracking expenses or using a budget,

[00:07:32] [SPEAKER_00]: you may be missing out on growing the gap between your income and how much you spend.

[00:07:37] [SPEAKER_00]: Making small changes in your spending can give you extra money to pay down debt,

[00:07:42] [SPEAKER_00]: grow an emergency fund or begin investing. Are you ready to make significant changes?

[00:07:49] [SPEAKER_00]: Consider your housing, transportation and food costs.

[00:07:53] [SPEAKER_00]: Making changes in these three areas may help you find hundreds of dollars or more each month to

[00:07:59] [SPEAKER_00]: invest for your retirement years. If you can't risk losing any of your money,

[00:08:04] [SPEAKER_00]: you should reconsider your plan to invest. If you have a 401k with a company match,

[00:08:10] [SPEAKER_00]: make contributing to get the match a priority. You don't want to lose out on free money.

[00:08:16] [SPEAKER_00]: Then continue to build savings and reduce your debt load before increasing your contributions.

[00:08:23] [SPEAKER_00]: Finally, if you have loved ones who depend on your income, ensure you've taken steps to provide for

[00:08:29] [SPEAKER_00]: them too. While you hope nothing terrible will happen, consider protections such as life or

[00:08:35] [SPEAKER_00]: disability insurance as you look at your overall financial wellness. It may cost a lot less

[00:08:41] [SPEAKER_00]: than you think for a product like term life insurance, but the peace of mind it will give

[00:08:46] [SPEAKER_00]: you is priceless, especially if you want to start investing in some higher risk assets.

[00:08:52] [SPEAKER_00]: Number two, hear that on tomorrow's episode. You just listened to part one of the post titled

[00:09:03] [SPEAKER_00]: Why Is Taking Financial Risk Important by Vicki Cook and Amy Blacklock of womenwhomoney.com

[00:09:10] [SPEAKER_00]: and I'll be right back with my commentary. Buy low, sell high. Buy low, sell high. It's a simple

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[00:10:14] [SPEAKER_00]: The key to building wealth is to invest in assets and let your money grow through the

[00:10:19] [SPEAKER_00]: power of compound interest. While cash in a bank account provides security such as an emergency

[00:10:25] [SPEAKER_00]: fund, it is in an investment account where your financial freedom truly lies.

[00:10:31] [SPEAKER_00]: Saving is an important part of managing money but investing is essential to achieving

[00:10:37] [SPEAKER_00]: financial goals and eventually breaking free from the cycle of trading time for money.

[00:10:43] [SPEAKER_00]: Many people view investing as risky but this largely depends on the approach.

[00:10:49] [SPEAKER_00]: Trying to beat the market through stock picking or trading options can be risky.

[00:10:55] [SPEAKER_00]: However, matching the market with low fee total market index funds over a long period

[00:11:01] [SPEAKER_00]: significantly reduces risk. In fact, this strategy is far less risky than not investing at all

[00:11:09] [SPEAKER_00]: and relying solely on your income especially considering the impact of inflation on your

[00:11:15] [SPEAKER_00]: savings. To become more comfortable with investing and to change your perception of its risks,

[00:11:22] [SPEAKER_00]: I highly recommend reading The Simple Path to Wealth by J.L. Collins.

[00:11:27] [SPEAKER_00]: This book offers valuable insights and can help you develop a sound investment strategy.

[00:11:33] [SPEAKER_00]: But we're only halfway through the article for now. I'll finish the rest for you tomorrow

[00:11:38] [SPEAKER_00]: so with that stay tuned and I'll see you tomorrow where your optimal life awaits.