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When Joe at Retire By 40 published his great post “Is Your Risk Tolerance Too High?“, it got me thinking about how my risk tolerance has affected my decisions in life.
On a scale from 0 to 10 (0 – lowest and 10 – highest), my risk tolerance level as changed from 3 when I was single to 2 after I got married.
Now that I have kids, that level has gone down to 1 or even lower.
I like planning, and I thrive on stability.
I derive a great sense of satisfaction from knowing that my plans will pan out as I expected or even better than what I predicted.
But as all of us know, life is not so simple.
We can make all the plans we want, but there are always unknown factors, whether internal or external, that might steer the execution of our plan in a totally different direction.
Sometimes what we map out in our minds will take us off the beaten path, which could turn out to be a miracle or a debacle.
Finances seem to be all about numbers, charts, maps, and analysis.
But at the end of the day, we’re all humans.
There’s a reason why economics is not a hard science.
Economic predictions depend, in part, on human behavior.
We can have all the economic principles and theories nicely lined up to pave the way for a certain outcome.
But a change in human preference or interaction at any time in the process will make those theories go down the drain (i.e. buying a brand-new $50,000 while in credit card debt).
Today I will share with you the seven ways in which a low level of risk tolerance has impacted my decision making in various aspects of my life.
1. Savings
One reason why I save so aggressively is because I fear the unknown in the future. What if I lose my job? What if we need to replace the roof? What if we have a medical problem that will wipe out our bank account?
Those questions creep into my mind almost every day. I can’t predict the future and what emergencies might come our way. But there’s one thing I can do every day: preparing financially for those emergencies.
When it comes to saving money, I have a high level of self-control. That sense of self-discipline comes from my fear that I won’t have enough money to live on and to weather a financial storm in the future. I want to be on the safe side today, tomorrow, and ten years from now.
Savings give me the cushion that I need to not live in anxiety every day.
Pro: More financial security.
Con: Forgoing gratification at the present.
Related: How To Overcome Paranoia To Save Money
2. Mortgage
The question of whether we should pay off our mortgage early is controversial in the personal finance community.
While Mr. 1500 insists that he wants to leverage his cash on high-yield investment, Mr. Mustard Seed Money points out that he and his family have greatly improved their life quality after paying off their mortgage.
For me, the answer all comes down to a person’s risk tolerance level. If you’re willing to invest your money in the stock market for the long run in order to take advantage of the higher interest rate, you will be fine with a large mortgage debt.
However, if you’re like me who’s constantly worried about what the future entails, you will want to make sure that you will still have a roof over your head by paying off your mortgage early in case of another global financial crisis or job loss.
I could earn a better return to my cash investment by investing in the stock market. But I also don’t like to constantly worry about what would happen to us if both Mr. FAF and I lost our jobs and couldn’t find employment immediately. We have savings, but they won’t last forever.
The thought of being homeless terrifies me, especialy because we were once homeless for 2 days before. I found that experience terrifying, embarrassing, and emotionally draining.
Mr. FAF and I can deal with it, but we don’t want our children to not know where they will sleep at night. What if we can’t find a job? What if we lose our house and run out of money to pay rent or for hotel/motel?
Maybe I worry too much. But I have seen it happen to other families, so I don’t think we should be any different.
There was a period when I thought a break-in would not happen to me. And when it did not once but three times, I knew that life is short, and that anything can happen even when I think it’s least likely.
Pro: More housing security.
Con: Lost opportunity to invest in other sources (i.e. stock market).
Related: We Just Put $15,000 Towards Our Mortgage Principal. And This Is What Happened.
3. Income
Mr. FAF and I both have a full-time job. We have talked about whether either of us wants to become a stay-at-home parent.
I know it’s different for many families, but Mr. FAF wants to be able to bring home the bacon. Mr. FAF prefers that I also work full-time since it gives us more financial security.
Since I’m only 31, I want to continue working to develop my career. I like the idea of having the option to walk away from a job.
But before doing that, I need to know what I’m good at in life and how I can further explore my full potential both through my work (i.e. job) and hobbies (i.e. blogging).
In the future, I would also like to diversify our streams of both active and passive income.
Active income would come from our day jobs and consulting gigs while our passive income would come from sources such as rental properties and blogging. I want to be in a position where one or two failed sources of income won’t cripple our finances.
Pro: Opportunity to generate more income.
Con: Less time spent with family and on fun activities.
Related: The Pros & Cons Of Our Dual-income Family
4. College
In college, as much as I wanted to venture out and take as many courses that sounded interesting to me, I had to stay focused on my major and try to keep my GPA up.
On the one hand, I was taking courses I knew I was relatively good at and that wouldn’t destroy my GPA. On the other hand, whenever I got a grade I wasn’t happy with in a certain course, I would not take a more advanced course to further my knowledge in the field.
Although my overall GPA from college was not bad, it left me wondering what if I were more courageous and took the courses I thought would be difficult but might open the doors to more career opportunities.
I still struggle with that question even to this day. There is comfort in knowing that I am doing something I’m good at. But the question of what else am I capable of doesn’t stop bothering me every once in a while.
Pro: Stay in the comfort zone.
Con: Feeling like I missed out on opportunity.
Related: What If Everything I Ever Wanted Became A Reality
5. Friends
Theoretically, we should try to get to know and make friends with as many people as we can. Everyone has qualities or traits we can all learn from.
However, the reality is that our time is limited. We have all different responsibilities in life (i.e. work, family) that we want and need to fulfill.
I am happy to talk to and make friends with everyone as long as they’re willing to be friends with me. But I’ve realized over the years that I tend to stick with the friends who are most similar to me in terms of personality and outlook on life.
We don’t have to be the exact same people, but when we find a common ground on various topics, such as family, careers, and relationships, the relationship tends to flow smoothly and sustainable.
Pro: Meaningful friendships that can last a lifetime.
Con: Lost opportunity to get to know people with different perspectives at a deeper level.
Related: Lending Money To Friends Can Ruin A Friendship. This Is My Story.
6. Dating
When I was in high school, some of my classmates were in a relationship. What puzzled me was that they still did exceptionally well in school while having long-hour phone calls, online chats, and romantic dates with their boyfriend or girlfriend.
I just didn’t understand how they could find the time to date and excel in school at the same time. For me, I had to choose between spending an hour talking to a boy on the phone or using that time to do homework. I think my classmates were just efficient and could finish all the schoolwork without much effort. I just couldn’t.
While having a boyfriend is nice and all, they can leave me any time. In other words, romantic relationships, to me at the time, were short-lived and weren’t a good investment.
I witnessed many of my friends struggle to do well in school after a break-up. Some told me they thought they just couldn’t stay focused enough to go to college.
Boyfriends can come and go. But good grades and knowledge will stay with me forever.
I carried on that mindset until much later in life when my close friends and family told me I just had to learn to balance my relationships and career. I thought I could establish my career and then try to find a husband later. But it’s not always the case.
Even after I find the right man, I will still need to work. And even after I seem to have established my career, I will still need to work hard at it.
Life is not a control board where I can turn on and off the switches any time I want. And it took me years to realize that.
Pro: Less time spent on less meaningful relationships.
Con: Less opportunity to figure out through experience what to expect from a lifelong partner.
Related: How To Find A Frugal Husband
Conclusion
I realized that being risk-average, sometimes to an extreme, has made me miss out on so many opportunities in life.
I am happy with everything that I have. But sometimes I wonder what my life would be like if I had been more adventurous and explored what life has to offer.
I’m not sure if it would be better or worse than the life that I currently have. I wish there would be a scenario prediction software where you can enter the basic information for the key variants and see the potential outcome of such input.
With finances, there are a myriad of calculators that can spit out a predicted total amount when you enter some key numbers such as the principal or interest rate. But there are so many aspects of our lives that I feel are not so simple.
One thing that I try to keep in mind, however, is that I am responsible for the decision that I make and the outcome it leads to.
And for the most part, I believe that having level of risk tolerance has helped me stay out of consumer debt, be more financially responsible, and stay focused on what is important in my life.
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On the mortgage issue there are many variables that play into risk tolerance such as your age, whether you have in-demand job skills — and who/how many rely on you for income.
There was no way we were relocating and getting a house with a mortgage. Not at our age, with no great skills — and the money to buy with cash. Did we “lose” on investment gains? Yes. Do we care? No. And that’s just with two of us. When another’s life depends on your financial solvency it changes the picture.
Interested way to look at risk tolerance.
It’s another battle scar for those who grew up poor. I had to fight this mentality myself. We are still careful but we’re probably a 4.3 out of 10 compare to 1.5 out of 10 before.
I’ve had this conversation with my friend Valerie today where she’s very afraid of investing anything. She just sits on cash. No one is going to force anyone to invest, that comes with a lot of liabilities and plus, everyone should work on their blend of investing,
I’ve been picking stocks for 2 years on my own with my own filters. I have done well (beating the market) since I started so I continue being aggressive with the market and doing my own kind of research on how to value a company. It’s actually really fun in my crazy head because you know no matter how much or how careful, it’s still ultimately gambling. Anything goes! Just make sure the bare bottom is covered.
For once in my life, I don’t always feel poor.
Thanks for the mention!
I’m getting more conservative as I get older. That’s natural.
You just have to recognize that some risks are worth taking. 🙂
This is a really good write up! I am extremely risk-adverse when it comes to many things…like anything else, you have to weigh the pros and cons, right? That’s how we ended up on an expat assignment in China, which was AMAZING…and moved five times in six years. We follow where opportunity leads, despite any fears or qualms. The house question has come up in our conversations lately as well. Do we buy a house all cash or retain a higher amount of savings to invest? Did you know that there has been a recession in EVERY Republican presidency since Teddy Roosevelt left office in 1909?