By: John Martin
Whether you realize it or not, risk tolerance has a huge factor in every financial decision you make. This is because every choice you make has some level of risk. Which is made up of risk appetite, tolerance, and capacity. Risk appetite is how much risk you need to take. Ri
sk tolerance itself is how much risk you prefer to take. Lastly, risk capacity is how much risk you can afford.
All of those factors contribute to your economic choices. From buying a candy bar isn’t risky as it is inexpensive and $1 is easy to earn back so the risk capacity is high. To purchasing stock, Which is is more risking as risk capacity varies depending on if you can afford losing some money in the stock market, risk appetite is normally low as people don’t “need” stock. Both of these purchases are very very different. As getting a candy bar is far less expensive than buying stock. But, both are made due to your economic risk, no matter how high or low the risk is.
Also if your risk is low, you would want a account where you don’t risk losing money or making purchases you can’t afford. So you would want savings account along with a debit card, as a debit card limits you to just the money you have and it stops you from making purchases you can’t afford. Whereas most people have a moderate level of economic risk and use a checkings account with a credit card because their risk tolerance it a bit higher and their risk capacity is higher due to the fact they have a stable job that they can afford to pay back a purchase over time, if they don’t have money for the full purchase at the time or want to pay thousands of dollars at the moment for a new car. No matter what you go and purchase next, take a quick second and think about the risk there is in making the purchase.
https://www.investor.gov/research-before-you-invest/research/assessing-your-risk-tolerance
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