We talk a lot about risk when it comes to finances, and much of the time, risk tolerance is associated with investing. However, the amount of risk you can handle also plays a role in your other financial decisions and aspects of your life. Before you make decisions about what’s next, think about how much risk you can handle in your life.
Do You Have an Emergency Fund?
An emergency fund can help you handle a higher degree of financial risk. If you have a rainy day fund stored up, whether it’s in a savings account or you keep it in a taxable investment account (like I do), an emergency fund can help you bridge the gap when you end up with unexpected costs.
Another great reason to have an emergency fund is the fact that it offers you the chance to take other risks in your life. An emergency fund can help if you are hoping to quit your day job and freelance, or rely on your side business, or if you want to start and build a business. You can have something to live on while you work on your dreams, but you might not be able to handle the risk and uncertainty of quitting your traditional job without that emergency fund.
What’s Your Family Situation?
When I was younger, unmarried, and childless, I was able to take more risks with my finances and in other ways. During my marriage, I made a lot of “safer” decisions based on the fact that I was the primary breadwinner. We couldn’t do without my income, so I was careful in my choices.
Even though I’m no longer married, I still have to be careful about how I handle my money and my other life choices because I’m raising my son. I still need to make sure that I have the income available to raise my son. On top of that, I need to be careful about some of my activities so that he feels comfortable about the stability in his life.
Where Do You Live?
I have changed some things up recently, even with my son in tow. We moved to Idaho, where there is a much lower cost of living. Because of this decision, I am able to work a little less. My son is also able to participate in more activities. This has been good for both of us, and it gives us breathing room. My emergency fund will last longer if there is something unexpected and I have more time to spend with my son.
Do You Have Insurance Coverage?
Finally, one way to improve your ability to handle risk is to make sure you have appropriate insurance coverage. When I broke my wrist and required surgery, my health insurance coverage prevented my financial situation from becoming untenable. Home insurance, car insurance, and other insurance can be a good way to protect your assets from the unexpected. As you plan to reduce your risks, make sure you plan ahead with insurance and other tools.