8 Unconventional Ways Millennials Are Saving for Down Payments

How the Younger Generation Puts Away Money for a Home

It’s no secret that baby boomers (and to a lesser degree, their Gen X children) find much of the attitudes and behavior of millennials to be baffling. But for all that boomers can find to criticize about the younger generation, criticizing their saving habits isn’t on the menu.

In many ways, millennials are showing the older folks just how savings should be done by reinventing the idea of “saving” for improved relevance in the contemporary world. With that in mind, here are eight unconventional ways that millennials are socking away money for a down payment on their first home.

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1 – Netflix and Chill (Staying In to Save Money)

Rather than spending exorbitant amounts of money on date nights out — restaurant, plus drinks, plus entertainment — millennials are finding ways to stay in, cook their own meals, and turn to streaming entertainment for a more affordable way of chilling out.

2 – Automatic Saving

Because they grew up with technology, Millennials are far more comfortable with automated services than their older counterparts. This comfort with automation has led many millennials to practice “hands-off” money management, setting up their accounts to automatically sock away money in savings without them having to think about it.

3 – Cohabitating

Millennials are also far more likely to cohabitate than their older counterparts were during their twenties and even into their thirties. Millennials save money by splitting the cost of housing and utilities, sharing these costs with their romantic partners and other roommates.

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4 – Leveraging Their Education to Earn More at an Early Age

This may not seem like a saving strategy in the traditional sense, but millennials have a greater level of education than any generation to come before them. This level of education, while costly in and of itself, has put them in a position to earn more at a young age than any generation before.

5 – Ditching the Plastic

Millennials are also eschewing credit cards and other high-interest rates to a greater degree than their older counterparts. No credit card debt means greater savings potential, and a savings in terms of all the fees associated with managing debt.

6 – Using Retirement Savings

Millennials are also doing something that many people in the older generations would find unthinkable. Either they are not saving for retirement at all, choosing to save for a down payment instead, or leveraging their retirement savings as a home down payment.

7 – Freelancing a Second or Third Job

Because of their higher educational levels and ease with technology, many millennials are finding ways to take on freelance work, or even second and third jobs that allow them to complete work for additional pay during their flexible “downtime.” If you think you worked hard as a young one, you should check out the side hustle these guys have going on!

8 – The Other Kind of Staying Home

Lastly, many millennials are choosing to stay home — as in home at their parent’s houses — well into their twenties. This can be a great way to save money while giving them the opportunity to help their parents and even their boomer grandparents out with day-to-day chores and errands, in trade.

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Millennials Are Saving to Buy Homes

Regardless of what you may have heard about millennials choosing not to buy homes due to the challenges of saving money while carrying student loan debt, many millennials are indeed coming up with creative ways to sock away funds for a down payment.

They may be buying their first homes later in life when compared with their Gen-X parents or boomer grandparents, but that’s understandable. After all, they have much more schooling to get through before they enter the job market — and eventually, the housing market.

Carson is a real estate agent based out of Phoenix, Arizona. Carson loves data and market research, and how readily available it is in today’s world. He is passionate about interpreting these insights to help his clients find and buy their perfect home. Carson got into the real estate industry because he loves the feeling of handing over the keys to a new home to happy clients. In his free time, he works on his backyard bonsai garden and spends time with his wife, Julia.

Source: homes.com

How to Save Money on Toilet Paper – 8 Clever Tips & Tricks

Every personal or family budget distinguishes essential expenses from discretionary expenses. Toilet paper, a basic household product most of us use every day, definitely falls into the first category.

Unlike other paper products, such as paper towels (for which washable cloth napkins serve as reliable, eco-friendly stand-ins), toilet paper doesn’t have a convenient reusable replacement.

Yet it’s still possible to save money on toilet paper with or without taking the drastic and — for many Americans — unfamiliar leap into the wide world of bidet toilet attachments.

But you don’t have to go all the way to the bidet-and-washcloth method to reduce toilet paper usage and costs significantly. Once you get into a newly frugal toilet paper routine, you might not even notice the difference.

How to Save Money on Toilet Paper

These simple tips for saving money on toilet paper include economical alternatives, smarter buying strategies, and ideas to stretch your TP farther without sacrificing cleanliness.

1. Make Every Square Count

How much toilet paper do you really need to use each time you go? Less than you’ve been using, probably.

The trick is finding the optimal balance of surface area (the more, the better) and wipe integrity (essentially, a stronger wipe).

According to a physicist retained by Dollar Shave Club to settle the question once and for all, the ideal toilet paper configuration is a hybrid “folded wad” that’s stronger than your standard neat fold but has more surface area than a messy wad.

It’s the most efficient option on a wipe effectiveness basis — that is, if you’re trying to minimize your toilet paper usage while achieving an acceptable threshold of cleanliness.

2. Pay Attention to Total Sheet Count and Square Feet Per Pack

Every pack of toilet paper should include this information somewhere on the outer wrapping. But you might need to do some simple math to calculate total “ply square footage,” or the total volume of single-ply toilet paper in the pack.

If you’re using double-ply toilet paper, your total ply square footage is the square footage used times two. For triple-ply toilet paper, it’s the square footage times three.

That’s the best measure of how much toilet paper you’re really getting and what you’re paying for it in per-unit terms.

3. Avoid Ultra-Soft (Deluxe) Toilet Paper and Flushable Wipes

It seems logical: If you buy a higher-ply TP with a softer finish, you use less toilet paper overall, right?

That might be true in the sense that you use fewer squares of softer, higher-ply paper.

But premium toilet paper from brands like Charmin and Cottonelle carries a premium price tag, so chances are you’ll end up paying more in the final accounting, even if the product is a bit easier on your behind.

From a cost-effectiveness perspective, you’re better off with a thin two-ply double roll or triple roll from a less expensive brand like Angel Soft or the store brand.

These options have trade-offs of their own, namely that they’re not as soft, but they’re more reasonably priced than premium two-ply players like Charmin.

Even if you’re willing to pay a bit more upfront for premium toilet paper, it’s likely that you haven’t factored in a potential hidden cost: the risk of clogs.

Drainage systems in older homes and apartment buildings simply aren’t built for today’s super-soft, super-fluffy toilet paper. DIY de-clogging with a plunger or auger is messy and time-consuming, and serious or chronic clogs may require a pricey professional consultation.

Likewise, flushable wipes aren’t really flushable. In an emergency, sure — flush what you need to. But making a habit of flushing baby wipes pretty much guarantees a plumber’s visit in your future. Instead, dispose of wipes in a mini trash can next to the toilet.

But whatever you do, don’t give in to the temptation to get the one-ply stuff, store-brand or otherwise. It doesn’t go as far, is less absorbent, and is way more irritating over time, especially with frequent use.

And definitely don’t buy the bulk commercial toilet papers you tend to see in public bathrooms.

4. Don’t Buy Toilet Paper at the Grocery Store

Whatever type of toilet paper you prefer, only buy it at the grocery store as an absolute last resort.

You’ll pay more per roll and per square foot, even for store-brand paper, and you’ll run out sooner because you’ll likely have to buy in smaller quantities.

If you can afford to wait a day or two, it’s much better to purchase a generic bulk pack on Amazon. You can buy in higher quantities and likely at a lower cost per roll or sheet.

5. Sign Up for a Toilet Paper Subscription

A toilet paper subscription is one recurring subscription you know you’re going to get your money’s worth out of. And it could save you big time compared to one-off toilet paper purchases.

Most toilet paper vendors offer subscription discounts, regardless of delivery frequency — 5% for No. 2 and Target, $10 off your first subscription order with Who Gives a Crap, and up to 15% when you use Amazon Subscribe & Save (depending on the number of products you subscribe to).

6. Buy in Bulk at a Warehouse Store or Walmart

If you choose not to go with a toilet paper subscription or need to supplement your supply in between recurring deliveries, buy in bulk.

Your first choice should be a warehouse store like Costco or Sam’s Club, where you’ll find the lowest cost per square foot with the store brands (Kirkland Signature at Costco, Member’s Mark at Sam’s Club).

Your second choice should be a big-box superstore like Walmart or Target.

7. Look for and Use Toilet Paper Coupons

Toilet paper coupons abound. You can get them directly from manufacturers like Charmin or Scott, find them in supermarket and big-box circulars, or access them through coupon apps like Ibotta and Rakuten.

No matter how you find them, get in the habit of using them. Even 5% or 10% off something you buy as often as toilet paper adds up over a year, to say nothing of a lifetime.

8. Skip the Dispenser

Most people’s homes already have toilet paper dispensers.

But if you’re moving into an unfurnished house or apartment without a wall-mounted or freestanding place for TP, don’t bother. Put the savings toward another roll or two of toilet paper instead.

Final Word

These money-saving tips could reduce the number of rolls of toilet paper your family members use in any given month without sacrificing hygiene or comfort. That alone should be encouragement enough to try them.

But reducing your toilet paper spending could have environmental benefits as well, particularly if you switch to an eco-friendly alternative like bamboo.

And its impact is easier to see in your everyday life than other sustainable shifts, like reallocating your retirement savings or taxable investments into socially responsible instruments.

Source: moneycrashers.com

3 Questions to Ask Before Prepaying Your Mortgage

Couple with house keys
Rido / Shutterstock.com

At first glance, paying off your mortgage early sounds like a surefire way to save beaucoup bucks in interest and put more money in your pocket.

But some financial experts warn that while prepaying your mortgage might sound appealing, it’s not always the best choice.

So, how do you know if making extra mortgage payments is right for you? Here are three questions to ask yourself before committing to an early mortgage payoff.

What is the state of my retirement savings?

Are your retirement savings where you want them to be? If not, prepaying your mortgage might not be a smart move, according to Money Talks News founder Stacy Johnson.

Several years ago, a reader named Retha asked Stacy whether she should pay down her mortgage or save more for retirement. Stacy gave the following advice to Retha — and everyone else:

“Job one for people in Retha’s position should be to put aside as much as possible in tax-advantaged retirement accounts. Priority two should be saving as much as possible outside of retirement accounts. Only after building a comfortable cushion should you use spare cash to pay down a mortgage.”

What are my other debts?

If you’re facing burdensome credit card or medical debt — or some other significant debt – you need to prioritize paying down those obligations.

We’ve got some tips for getting rid of those debts in “8 Surefire Ways to Get Rid of Debt ASAP.” One of the most important decisions you’ll need to make is the order in which you plan to tackle your debts. As we have written:

“Although some swear the best way to pay off debt is the debt snowball method — which suggests that you pay the debts with the lowest balances first to build momentum — it makes more financial sense to clear those debts with the higher interest rates first. The ultimate goal is to pay off debt, however, so the choice is yours.”

Is the money better spent elsewhere?

Ask yourself whether you can spend the money elsewhere and get a bigger bang for your buck. As Stacy writes in “Ask Stacy: What’s the Fastest Way to Pay Off My Mortgage?“:

“If you’re paying 4 percent on a debt and earning 5 percent on savings, you’ll be better off adding extra money to your savings rather than paying down a debt, because you’re making more on your savings than you’re paying on your borrowings.”

Stacy offers more thoughts on this topic in “Should I Use Savings to Pay Off My Mortgage?”

Now, none of this is to say that prepaying your mortgage is not the right choice for you. If you weigh the factors above and do it right, it can really pay off. That’s true even if you’re simply rounding up your monthly mortgage payment by $20 or $50 a month — a tip included in “7 Painless Ways to Pay Off Your Mortgage Years Earlier.”

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

Source: moneytalksnews.com

Should you pay down debt or save for retirement? – Lexington Law

rebuilding credit

While establishing a comprehensive, workable budget is undeniably one of the most important factors in maintaining a healthy financial life, it can also be one of the most difficult. For those who are struggling with personal debt, building a budget can be particularly challenging. When the money coming in has to stretch like a contortionist to cover expenses, it can be hard to determine where to focus — and where to trim.

Sometimes, the battle of the budget can come down to a choice between dealing with the present — and thinking about the future. When your income is running out of stretch, do you pay off your existing debt, or do you start saving for retirement? At the end of the day, the solution to that particular dilemma depends on the type of debt you have and how far you are from retiring.

If you have high-interest debt, pay it down

When considering how to allocate your budget, it’s important to understand the different kinds of debt you may have. Consumer debt can be categorized into two basic types: low-interest debt and high-interest debt, each with its own impact on your credit (and your budget).

In general, low-interest debt consists of long-term or secured loans that carry a single-digit interest rate, such as a mortgage or auto loan. Though no debt is the only real form of good debt, low-interest debt can be useful to carry. For instance, purchasing a home with a low-interest mortgage can actually save you money on housing costs if you do your homework and buy a house well within your price range.

High-interest debt, on the other hand, typically has a hefty double-digit interest rate and shorter loan terms, such as that of a credit card or payday loan. High-interest debt is the most expensive kind of debt to carry from month to month and should always be priority number one when building a budget.

To illustrate why you should focus on high-interest debt above everything else, consider a credit card carrying the average 19% APR and a $10,000 balance. If the balance goes unpaid, that high-interest credit card debt will cost $1,900 a year in interest payments alone. Now, compare that to the stock market’s average annual return of 7%, and it becomes clear that you’ll see significantly more bang for your buck by putting any extra funds into your high-interest debt instead of an investment account.

If you are having trouble paying off your high-interest debt, there may be some steps you can take to make it more manageable. For example, transferring your credit card balances from high-interest cards to ones offering an introductory 0% APR can eliminate interest payments for 12 months or more. While many of the best balance transfer cards won’t charge you an annual fee, they may charge a balance transfer fee, so do your research. You’ll also want to make sure you have a plan to pay off the new card before your introductory period ends.

Most balance transfer offers will require you to have at least fair credit, so if your credit score needs some work, you may not qualify. In this case, refinancing your high-interest debt with a personal loan that has a lower interest rate may be your best bet. Make sure to compare all of the top bad credit loans to find the best interest rate and loan terms.

If you’re nearing retirement, start to save

The closer you get to retirement age, the more important it becomes to ensure you have adequate retirement savings — and the more pressure you may feel to invest every spare penny into your retirement fund. No matter your age, however, paying off your high-interest debt should always remain the priority, as it will always provide the best rate of return (as well as likely provide a credit score boost).

Indeed, no matter how tempting it becomes, you should avoid reallocating money you’ve dedicated to paying off high-interest debt to save for retirement. Instead, the focus should be on re-evaluating your budget to find any additional savings you can. To be successful, you will need to make a strong distinction between want and need — and, perhaps, make some tough lifestyle choices.

Though simply eliminating your daily coffee drink won’t magically provide a solid retirement fund, saving a few bucks by homebrewing while also eliminating a pricey cable bill in favor of an inexpensive streaming service — or, better yet, free library rentals — can add up to big savings over the course of the year. The ideal strategy will involve overhauling every aspect of your lifestyle, combining both large and small cuts to develop a lean budget structured around your long-term goals.

Of course, while you should never allocate debt money to your retirement savings, the reverse is also true. It is almost always a horrible idea to remove money from your retirement account before you hit retirement age — for any reason. Withdrawing early means you will be stuck paying hefty fees for withdrawing money early and, depending on the type of account, you may also have to pay significant taxes.

Aim for both goals by improving income

As you take the necessary steps to pay off debt and save for retirement, you may have already stretched the budget so thin it’s practically transparent. In this case, it is time to consider ways to improve your overall income. Increasing the amount you have coming in not only provides extra savings to put toward your retirement, but may also speed up your journey to becoming debt-free.

The easiest solution may be to look for ways to increase your income through your current job; think about taking on additional shifts or overtime hours to earn some extra cash. Depending on your position — and the time you’ve been with the company — consider asking for a pay raise or promotion, as well.

If you do not have options to make more money at your day job, it may be time to find a second job. Look for opportunities that provide flexible schedules that will accommodate your regular job; many work-from-home positions, for example, can easily fit into most work schedules. Doing neighborhood odd jobs, such as babysitting and dog walking, may also provide a solid income boost without interfering with your existing job.

For some, the need to pay off debt and improve retirement savings can be more than just a source of stress — but a hidden opportunity to begin a new career adventure. Instead of being weighed down by yet more work, use the desire to better your budget as a reason to explore the profit potential of a passion or hobby. Starting a small online store, part-time consulting service, or other small business can be a great way to improve your income and your overall happiness.

While it may sound intimidating, starting a side business can be as simple as putting together a professional looking website and doing a little marketing legwork to spread the word. And no, building a website isn’t as scary — or expensive — as it seems, either. A number of the top website builders now offer simple drag-and-drop interfaces perfect for putting together a professional-looking web page in minutes (without breaking the bank).

Learn how you can start repairing your credit here, and carry on the conversation on our social media platforms. Like and follow us on Facebook and leave us a tweet on Twitter.

Source: lexingtonlaw.com

7 Credit Card Debt Mistakes to Avoid

Frustrated woman with credit card on laptop
fizkes / Shutterstock.com

This story originally appeared on The Penny Hoarder.

There’s really only one way to get out of credit card debt: by paying off the balance. But there are plenty of pitfalls along the way to make the payoff more costly than it needs to be.

If you’re among the consumers who paid off $108 billion in credit card debt in 2020, good on you! However, that still leaves $820 billion left to go, so it’s in your best interest to do everything you can to put a dent in debt that costs you double-digit interest rates every month.

Picking a method for paying down the balance should be your first step — there are plenty of options, including avalanche, snowball and lasso — but there are mistakes you should avoid to ensure you get the maximum value out of whatever method you choose.

We’re here to help you avoid the most common — and costly — errors people make when getting out of debt. Let it help you make the best money decisions during your climb.

1. Forgoing a Budget

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You know how if you don’t make plans for a day off, you end up wasting it on a Netflix binge instead of doing something productive?

Well, the same goes for paying off debt. If you’re simply going about it without a plan, there’s a good chance all your good intentions — and extra payments — will end up getting spent elsewhere.

How do you prevent the money from disappearing? By creating a budget.

Stop whining — it’s no different than planning a vacation itinerary. Instead of blowing your money on new shoes, you’ll create an attack plan and pay off debt faster with a clear direction.

By reviewing a monthly budget, you can see where you might be overspending in certain areas and commit to applying that money to your credit card debt instead.

Even if you’ve never lived with one before, we can help you create a budget that fits your lifestyle and your money goals.

2. Never Applying for a Personal Loan With a Lower Interest Rate

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Don’t make the mistake of assuming that replacing credit card debt with a personal loan is just trading one debt for another. Interest rates can make a big difference.

How much of a difference? Let’s say you have $5,000 in credit card debt and you commit to paying $400 every month.

If your credit card interest rate is 17%, it will take you 14 months to pay off the debt, and you’ll pay $542 in interest.

Alternatively, if you take out a low-interest loan at 4%, it will take you one less month to pay off the loan, and you’ll pay $116 in interest — a savings of $426.

3. Ignoring Balance Transfer Offers

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If you’re paying off credit cards and you know you’re within striking distance of wiping them out, you could be throwing away money on interest by not researching short-term options.

By opening a balance transfer credit card, you could save yourself a bundle on interest. Balance transfer credit cards generally come with lower introductory interest rates for a set amount of time (plus any transfer fees).

The rates then rise to a higher annual percentage rate after the promotional period ends.

If you’re prepared to pay off your credit cards within the promotional period, it would be a big financial faux pas not to put in the extra effort to research balance transfer offers.

And consolidating your credit card balances could not only save you money with a lower interest rate but also keep you on a more livable payment schedule, thus avoiding those pesky late payment fees.

4. Focusing Only on Saving Instead of Making Money

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If you’ve reduced your expenses, but you’re still coming up short on extra credit card payments, remember the other half of the financial equation: money coming in.

Getting a side hustle to bank extra money for payments can accelerate your payoff schedule in a meaningful way. Consider this: If you make $50 extra each week, you could pay an extra $600 toward the credit card balance after just three months.

One of the keys to making the side gig work for you is to create a specific goal for the money you want to earn or the time you want to spend working. By developing an exit plan for your side gig, you won’t end up burning out and spending all the extra cash on ways to make up for being overworked.

5. Refusing to Ask for Help

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If you feel like you’ve tried everything — or nothing, because you’re too overwhelmed — it’s time to swallow your pride and ask a professional for help.

A credit counselor can review your financial situation and make recommendations to improve it. Depending on your situation, they might help you organize your credit accounts, obtain a credit report, develop a budget or even help you set up a plan to pay off your debt.

If your credit card debt is more temporary but urgent — think: you got laid off and your water heater just died — you can also ask your credit card issuer for a break via a credit card hardship program.

The little-advertised assistance option could suspend your minimum payments or reduce your interest rate temporarily. But you won’t get the help unless you ask for it.

6. Forgetting the Residual Interest

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Let’s say you’ve been paying down your credit card balance for a few months (or years). You get the statement in the mail that says your current balance is $1,000 and you’re ready to pay it off.

You go online to make the payment in full, but you schedule it for 10 days later because you’re waiting for payday.

When you get next month’s statement, you’ll see that you were charged interest on that $1,000 for the 10 days between the account closing date and your payment (and probably a couple extra days for the time it took for the statement to arrive in the mail). That’s called residual interest (or trailing interest).

It might only be a few dollars, but if you don’t pay the residual interest — which could easily happen if you think that the balance is paid in full so you ignore the next statement — that amount will continue to accrue interest.

And not paying it will result in late fees and a hit to your credit score.

Instead, call your credit card company for the full payoff amount as of the date the issuer will receive the payment, then monitor your credit card statement for at least a couple of months after to make sure the residual interest has been paid off, too.

7. Losing Sight of Your Future

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Paying off your credit card bill is important. But so is your future.

If you’re putting every last dime toward credit card payments, you could be setting yourself up for a big financial hardship down the road.

In the short term, that could be due to an unexpected expense and no emergency fund to cover the cost.

In the long term, you could be losing out on retirement savings by not investing early and letting compound interest do its thing to grow your nest egg.

And once you make that last payment — oh, joy! — you’ll understandably want to celebrate.

But you’ll also want to think about life after debt, including sticking with the good strategies you used to get out of debt rather than falling back into bad habits that got you into debt in the first place.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

Source: moneytalksnews.com

What Is Your Investment Risk Tolerance – Definition & Questionnaire

The consequences of “financial risk” became apparent to many investors during the two-year period from 2007 to 2009. The stock market (as measured by the S&P 500) plummeted from 1562.47 on October 10, 2007, to 752.44 on November 20, 2009. As a consequence, many people lost more than one-half of their retirement savings.

The coronavirus pandemic was like a replay of those times as the S&P 500 dove from 3,380.16 to 2,304.92 in just a single month between February 21, 2020, and March 20, 2020.

These drops in the stock market made many investors realize the amount of risk they were taking with their investments. People saw their portfolios lose tens of thousands of dollars in days. Those who held strong waited months or years for their balances to return to their previous highs. Those who sold out of their investments likely locked in their losses.

Understanding risk, your risk tolerance, and how to reduce risk in your portfolio are essential parts of investing.

What Is Risk?

Even though all human endeavors have a measure of risk, human beings have a hard time understanding and quantifying “risk,” or what some call “uncertainty.” Many of us understand that risk is the possibility of loss.

Risk is all around us at all times, even if we don’t actively acknowledge it. There is no certainty that you will live beyond the day, drive to the grocery store without an accident, or have a job at the end of the month.

Most people are risk-averse. Essentially, we prefer to accept the status quo, rather than dealing with the unknown consequences of new endeavors or experiences.

This is particularly true in financial matters, and it is evident in the correlation of price and perceived risk: Investments considered to be higher risk must pay higher returns in order to get people to buy them.

Investment risk is generally measured by the asset’s price variability or volatility over a period of time. In other words, a common stock that ranges from $10 to $20 per share over a six-month period would be considered to be a higher risk than a stock that varied from $10 to $12 during the same period.

Practically speaking, the owner of the more volatile stock is likely to worry more about their investment than the owner of the one that sees less price fluctuation.

Risk Tolerance Is Personal

How we perceive risk varies from person to person and generally depends upon an individual’s temperament, experience, knowledge, goals, and how long they will be exposed to the risk. Risk itself is generally categorized by its potential impact and the probability of the event occurring.

Many people purchase a $1 lottery ticket with a payoff of $1 million, even though their loss is virtually certain (10,000,000 to 1) because the $1 loss doesn’t significantly impact their living standard or way of life. However, few people would spend their month’s salary on lottery tickets since the probability of winning would not significantly increase.

At the same time, many people are willing to invest unlimited amounts of their savings into U.S. Treasury notes since the likelihood of their repayment is considered certain (1 to 1).

When humans exceed their risk tolerance, they show physical signs of discomfort or anxiety. To a psychologist, anxiety is those unpleasant feelings of dread over something that may or may not happen.

Anxiety differs from actual fear — a reaction when we encounter a real danger and our body instantaneously prepares an immediate fight or flee response. To a lesser degree, anxiety triggers similar physical reactions in our bodies, even though the danger may be imagined or exaggerated.

Being anxious over any extended period is physically debilitating, reduces concentration, and impairs judgment. For these reasons, it is important to identify your personal risk tolerance as it applies to different investments, since exceeding that tolerance is most likely to end with disappointing — or even harmful — results. Reputable investment advisors frequently tell their clients, “If an investment keeps you from sleeping at night, sell it.”

There are several questions you can ask yourself to help gain an understanding of your personal risk tolerance. Remember that there is no “right” level of tolerance or any necessity that you should be comfortable with any degree of risk.

People who appear to take an extraordinary risk financially or personally have most likely reduced the risk — unbeknownst to observers — with training, knowledge, or preparation.

For example, a stunt car driver expecting to be in a high-speed chase will use specially engineered autos, arrange for safety personnel to be readily available in the event of a mishap, and spend hours in practice, driving the course over and over at gradually increasing speeds, until he is certain he can execute the maneuver safely.

Why Determining Your Risk Tolerance is Important

Everyone’s risk tolerance is different. Knowing your own risk tolerance is an important part of successful investing.

As mentioned before, higher-risk investments generally need to offer higher potential rewards. This is why savings accounts pay lower interest rates than bonds, and stocks tend to offer higher returns than bonds.

If you have a low risk tolerance and feel anxious when you think about the money you could lose by investing in assets like stocks, you’ll likely be better off with less risky investments.

When investing, making frequent trades tends to correlate with worse results. According to CNBC, even 85% of professional money managers fail to beat the market index over the long term. If you don’t have a high risk tolerance, you might be tempted to sell out of your riskier investments when they drop. If you do this, you’ll be missing out on most of the returns those investments offer.

If you choose less risky investments, they’re less likely to experience large losses during a downturn. That means you won’t feel as anxious and be better able to hold those investments until they regain their value.

Questions to Ask Yourself Regarding Risk Tolerance

These questions can help you determine your personal level of risk tolerance.

What Is Your Default Level of Risk Tolerance?

Everyone has a sort of “default level” of risk tolerance. Some people love skydiving while others couldn’t be paid to jump out of a plane, no matter how many parachutes they have. Some people don’t mind taking risks if the reward is there while others are naturally cautious.

Try to think about yourself and your personality objectively. There’s nothing wrong with being risk-averse or being a risk-taker. Try to imagine making an investment and losing some or all of your money. How would you feel if you lost $100? $1,000? $10,000?

If losing even small amounts makes you nervous, you’re more likely to be a conservative investor. If you can think about losing large amounts without batting an eye, you’re a good candidate for being an aggressive investor who uses higher-risk strategies.

What Is Your Investing Timeline?

Your time horizon — when you’ll need the money from your investments — plays a big role in how well you can tolerate risk.

If you’re young and want to retire in 40 years, it’s not a big deal if you make a risky investment and wind up losing money in the short term, as long as you make money from your investments in the long run.

On the other hand, if you’re hoping to retire next year and your investments lose half their value, it doesn’t matter how they’ll perform over the next five or 10 years because your plans to retire next year will be ruined.

The more time you have before you need to take money out of your investments, the more risk you can tolerate in the short term.

Why Are You Investing?

Your financial goals can also impact the amount of risk you’re willing to accept.

If you’re investing for retirement, you don’t want to choose an all-or-nothing investment because failure means you won’t be able to retire.

If you’re investing for something that’s less important or that has a more flexible timeline, such as going on a dream vacation, you might be more willing to take a risk because failure won’t be as damaging.

Pro tip: If you’re investing in a 401(k), IRA, or another retirement account, make sure you sign up for a free Blooom portfolio analysis. Once you connect your accounts, they’ll assess your portfolio to make sure you’re in line with your risk tolerance.

How Much Can You Afford to Lose vs. What You Would Gain?

Think about your financial situation and the consequences of your investment, whether it turns out positively or negatively.

If you’re a multimillionaire, throwing $10,000 at a high-risk investment isn’t a huge deal because you probably won’t feel a $10,000 loss. If you only have $15,000 to your name, putting $10,000 into a single investment is a big deal because losing that money could devastate you financially.

You also have to think about the potential payoff from a successful investment. A multimillionaire may be less interested in investments that could produce just hundreds or thousands of dollars if they go well. If you’re less well-off, an investment with those kinds of returns is more appealing and more worth taking a risk.

The most important thing to remember is that all investing is subject to risk. You shouldn’t invest money you can’t afford to lose. That means you should have a solid emergency fund before you get started.

How Can You Change Your Risk Tolerance Level?

The perception of risk is different for each person. Just as the stunt driver prepares for a dangerous scene in a movie or an oil worker selects a place to drill an exploratory well, you can manage your discomfort with different investment vehicles.

Learning as much as possible about an investment is the most practical risk management method.

Investors such as Warren Buffett commit millions of dollars to a single company, often when other investors are selling, because he and his staff do extensive research on the business, its management, products, competitors, and the economy. They develop “what-if” scenarios with extensive plans on how to react if conditions change.

As an investor grows more knowledgeable, they become more comfortable that they understand the real risks and have adequate measures in place to protect themselves against loss.

Diversification is another popular risk management technique. Instead of avoiding risk entirely, diversification reduces it by reducing the impact of a single failed investment. Owning a single stock magnifies the opportunity for gain and loss; owning 10 stocks in different industries dilutes the effect of one’s stock movement upon the investment portfolio.

Mutual funds and exchange-traded funds (ETFs) are a great way to accomplish this. They let you buy shares in one security — the fund — which holds shares in hundreds or thousands of companies. There are also mutual funds that focus on bonds and some that hold multiple asset classes, letting you build a diverse portfolio while buying shares in a single fund.

If you cannot reach your investment goals by limiting your investment to only “safe” assets, you can limit the potential of loss while exposing your portfolio to higher gains by balancing your investments between safe and higher-risk investment types. For example, you might keep 50% of your portfolio in stocks and 50% in bonds.

This potentially provides a higher return than a portfolio invested solely in bonds, but it protects against losses that might result in a 100% equity portfolio. The proportion of safe to higher risk assets depends upon your risk tolerance and investing time horizon.

One of the popular features that make robo-advisors like Betterment or SoFi Invest a popular way to invest is that they automatically rebalance your portfolio based on your desired asset allocation.

Final Word

Accumulating significant assets takes equal measures of the following:

  • Discipline. Diverting current income from the pleasures of today to saving for tomorrow is not easy. Nevertheless, it is essential if you want to reach your future objective.
  • Knowledge. Expending the effort to understand different assets and how they are likely to perform in changing economic environments is necessary if you are to select those investments that will deliver the highest return with the lowest risk.
  • Patience. While “good things come to those who wait” is a popular advertising slogan, it is especially applicable to investing. The benefit of compounding interest accrues to those who can wait the longest before invading the principal (spending any of the accumulated assets).
  • Confidence. Being able to manage your risk tolerance effectively — understanding which investments are worthwhile and which to avoid — is required in a complex investment environment. Self-knowledge allows you to understand why some investments make you anxious and how to proceed to differentiate between perceived and real risk.

Before you make investment decisions, you need to consider your reasons for investing as well as your risk tolerance. If you go into an investment with a plan and an understanding of the potential outcomes, it will be easier for you to follow that plan and profit from a successful investment.

Source: moneycrashers.com