Risk tolerance is a question everyone involved with personal finance has to ask themselves at some point or another.
While I dream and scheme of level 8‘s, I will probably only ever pull off 7‘s. My wife has nightmares about 4‘s.
Call it the Bilbo Baggins problem. You can play it nice and safe and probably end up with a tidy little hobbit Hole in Bag End with all the creature comforts you could want, but without taking chances you will never be celebrated in song long after you’ve gone.
I actually appreciate my wife’s role in all this financial hoopla.
She is a natural brake. Greedy hedonists with delusions of grandeur like myself need these people to make sure we do not sink all of our money into a vending machine scam destined to fail. But, my wife is also wrong. A person does not need $11,000 in a non interest bearing checking account to ‘make sure they don’t bounce checks’.
The sweet spot lies somewhere in between.
Granted that even having the option of taking risks involves some degree of expendable capital. So barring the unexpected windfall, your lump of money is probably here because you invested it soundly. Congratulations, but at some point you need to take the next step.
Money grows over time but the real jumps up are realized by risking it in the first place.
My first money making/saving strategy came in the form of not spending my metal change. I would come home everyday and put it in a jar. Periodically I would roll the change and put it is a shoe box. This felt good. Years later, I would play telephone and credit card companies off of each other, getting free money/services in the process. Eventually I owned a home and used a HELOC to invest in a business venture with a friend. My point is income/investment strategies evolve over time to become bigger and more complex.
Are you willing to keep going? Are you willing to put your money to work for you?
Next for me is the idea of leveraging debt to buy real estate above and beyond my normal reach. This is so tempting. I have run the numbers and I feel confident I know what I am doing. However, at these levels am I risking too much?
I have let my wife, She Who Must Be Obeyed, talk me out of several big plans, but I constantly feel that pull to take the risk. Nothing ventured, nothing gained right?
The best marital mix is a supportive yet questioning partner who by default trusts you, but needs some convincing.
I wish there was a pill you could take that would eliminate all the anxiety involved with rolling the dice and overcoming low risk tolerance.
Louis Pasteur‘s take was the slightly different, “Chance favors the prepared mind.” This I feel is the other side of the same coin and happens to appeal strongly to my Prepper nature.
Luck is the idol of the idle. – Proverb
Luck is the residue of design. – Branch Rickey
I think we consider too much the good luck of the early bird and not enough the bad luck of the early worm. – F.D. Roosevelt
At the end of the day my prevailing wisdom says; gather all the facts, weigh the consequences against the potential gain, and then pull the dang trigger.
Time will tell, I will keep you posted. I even have a great name for the next related post, ‘Let Fly The Dice‘
Thanks to DadsDollarsDebts for the inclusion once again in his weekly Hump Day roundup!
Do FIRE peeps tend towards high or low risk tolerance?