4. Emotional Barriers to Saving and Investing
a. Taking financial risks
Most of the time it is important to make decisions based on the level of risk tolerance we already have. However, sometimes it may be beneficial to take risks with which we are not necessarily comfortable.
We all have a certain level of risk with which we are comfortable, we call that our risk tolerance. There are many factors that go into risk tolerance such as age, gender, income, financial goals, etc. For instance, a 65 year old widow may be less tolerant of the value of her investments going down than a 25 year old because she may need to be able to access her money sooner than the 25 year old will. The 25 year old may be able to weather changes in the market for a longer period of time. To get a better idea of your investment risk tolerance, use this tool from our investment partner, Vanguard Investments:
Let's say, for instance, that you inherit $100,000. You may have been told your entire life by your relatives that you should pay off your house as soon as you can, and low and behold you have $100,000 left on your mortgage loan. Yet, you may find yourself in a situation where you could invest that money and in 10 years make $25,000 on it through interest.
When you look at this scenario, it makes sense to take the risk of investing your money instead of doing the thing your parents told you to do (paying off your house). In 10 years, not only can you pay off your house, but you believe you will have money to spare. In situations where taking a calculated risk may be beneficial, it’s important to do your research to make an informed decision. This is where a financial professional can be very helpful.
There are many reasons that people may not feel comfortable or capable of saving and investing. We call these reasons emotional barriers. The following emotional barriers are some of the most common – if you recognize yourself in any of these you are certainly not alone!