The biggest risk to your financial goals is the risk of not being able to meet them
When people think of risk with regards to their finances, they immediately think about losing money. But is that how you should be approaching planning for your future?
When it comes to our money, the risks we face can be clubbed together to be called “financial risks”. “Financial risk,” is the possibility that things might not go as planned with your money and that as a result, you might not be able to meet the goals you have set out.
Financial risk isn’t simply about losing money; it can refer to all sorts of uncertainty that comes with making money decisions, for example, when people don’t save enough, when inflation fluctuates, from slow-growing money or when choosing where to invest.
None of us likes to gamble with our savings, but the truth is that there’s no such thing as a ‘no-risk’ investment.
At the heart of investing there is a simple trade-off: the more risk you take, the more you can get back or lose (and the lower the risk you take, the less you’re likely to get back or lose).
But while you’re always taking on some risk when you invest, the amount varies between different types of investment.
Money you place in secure deposits such as savings accounts risks losing value in real terms (buying power) over time.
This is because the interest rate paid won’t always keep up with rising prices (inflation).
Stock market investments are generally expected to beat inflation and interest rates over time, but you run the risk that prices might be low at the time you need to sell.
This could result in a poor return or, if prices are lower than when you bought, losing money.
You can’t solve for every risk that you will face and this article is not about providing solutions for the risks either, it’s about making you aware of some of the major ones so you can take them into consideration when creating your financial plan. Let’s break these main ones down further:
- Not Saving or Investing Enough
A big risk is not saving or investing as much as you should. This can happen when you’re not sure how to manage your money or when you have other bills to pay that you have to prioritise more than saving. But not saving enough can make it hard to feel financially secure, and can increase the chances of not having enough money in the future.
- Dealing with Inflation
Inflation is when the cost of things goes up over time. If your money isn’t growing as fast as prices are rising, then it is losing its value in the real world. So when investing or saving your money, you need to think about whether what you might get back is greater than inflation.
- Money Not Growing Fast Enough
Even if your money is growing, it might not be growing fast enough to reach your goals. This is especially true for investments. The way you invest your money can affect how much it grows, so it’s essential to choose wisely and ask for support from money experts like coaches and financial advisors.
- Investment Risks and Market Changes
Investing involves risks, such as the fact the stock market goes up and down. Different types of risks, such as market changes, interest rate shifts, currency change and loan issues, can affect your investments. It’s like a balance between trying to make money and making sure you’re okay with the particular risks that each investment carries. The investment risks for each fund your money is invested in is usually mentioned on the fund factsheet or Key Investor Document (KIDs).
- Job and Income Worries
Sometimes, jobs and incomes can be uncertain. If you suddenly lose your job or your income drops, it can mess up your money plans. Having a backup plan, like an emergency fund or finding other ways to make money, can help reduce this risk.
- Health and Living a Long Time
Health problems or living a long time can bring their own money challenges. Unexpected medical bills or needing care for a long time can cost a lot. Planning for these possibilities is a smart part of managing your money.
As you see, looking at risk through the narrow prism of losing money may not always be the best way. So, when thinking about your long term future and goals, it is important to think more widely about the other risks you might face as well.
Photo by Andre Taissin on Unsplash
