In our society today, the word risk has a horrible connotation. Why? People associate risk with irresponsible behavior and high failure rates. In the financial world the term risk simply means uncertainty. If we can predict an event with accuracy on a regular basis, the event is considered low risk. Conversely, if we cannot, it is considered high risk.
Right now in my life I crave a certain amount of security. I would prefer to have a large amount of security. However, security can be just as damaging to your overall financial health as risk can.
If you save too much of your money without growing it, and you have a fear of the “risk” associated with higher yielding accounts or even the market, you may see a decrease in your buying power due to inflation.
True story, I swear, but when I worked with the bank I remember I had a client who distrusted banks and anything financial. Well, instead of putting her money into investments and higher yielding accounts, she put it in a drawer of a table. No joke, one day her house was hit by a tornado. Her money flew throughout the neighborhood, raining down on her joyous neighbors. Well, she thought she was doing something safe and secure, but she wound up losing a good amount of savings in the process.
I feel that If you never take any risk, you will never move forward. These “risks” you take could come in almost any form – asking for a raise, moving to a better neighborhood, starting a new company, investing in the market, selling your home. Because you do not know the outcome of any of these events, they all have inherent risk.
If you never ask for a raise, will your employer likely give you the value that you create?
No.
Why not? Your employer is most likely a smart businessperson. They will pay you the least amount possible to keep you happy and productive.
Nevertheless, if you walk into any of these major decisions lightly, and without thought of the possible various outcomes, the events can be disastrous. For example, take the person who decides to begin flipping homes – with no previous experience, and without considering current market conditions. I think the increase in foreclosures paints the picture of those who went into a speculative market uninformed.
What is the solution? Balance.
In order to move forward, to truly succeed, you have to take risks. Otherwise you wind up burying all of your savings in the yard and perhaps losing its location at worse, and at best, seeing a vast decrease in your buying power. However, you do need some security, some soft landing for the hard times. I really believe a good reserve fund will give you that security, as well as the capital and flexibility to take other financial risks without devastating yourself if the results are not as favorable as you hoped.
Well, Mr. Grump and I have arrived back from our buying trip, er… vacation. Arriving with a large load of things to throw up on eBay and some new ideas for our other ventures I am looking forward to this next month or so.
However, the restaurant didn’t schedule me for work until Saturday night, which means at most I will probably work three days next week. Well, I guess I needed a small kick in the pants to get to work on our other ventures and get out of the (relative) security of the restaurant. But really, I’m glad. I feel like I was beginning to rely on it too much for my weekly income. Time to get my butt in gear.
We’re currently waiting to find out what our payout for Squidoo is, it seems they’ve been having some server issues the past couple of days. But our affiliate earnings through our lenses are up to $23.00, and we earned $50.00 this weekend while we were away on a couple of our other websites. Pretty exciting! Now, only $327.00 to go for the rest of the week. I better start listing…
Reason #564734 why it is good to have a (large) reserve and not be in our position of trying to get out of debt:
It looks like our roommate will be moving out into his new home by the end of the month. Looks like that little bit of income will be gone now. Le sigh.
We had to decide to not go to New Orleans for our school’s homecoming this year, despite our strong desire to do so. I guess I am growing up now or something…
Also, between the fiance needing new glasses, both our cars needing their respective check-ups, and the dishwasher kicking the bucket, we are digging into our savings. Well, the good side is that we’re NOT using our cards.
That check from the Antique Booth will be AWESOME. Now, to move onto work…
We’re getting a new dishwasher today. I cannot tell you how exciting this is. We just bought our home a year ago, and within a couple of months of being in the house, the dishwasher broke.
Lovely.
We tried fixing it ourselves, and it worked for a little while, but then it spewed water all over the kitchen.
So, my fiancee had me go out in search of a new dishwasher. Unfortunately, because we have just started consolidating finances and budgets, the pot for home emergencies is pretty low (we’re putting almost all of our extra budget into credit card payoff), and the $400 + $150 for install was going to be a rather large expense.
Then, we remembered something about a “home warranty” with American Home Shield that came with the home when we bought it. After washing dishes by hand for eight months, this was a brilliant thing to remember, especially since the policy was less than a month away from expiring.
AHS was very pleasant to deal with. They sent out a service rep who confirmed our dishwasher was pretty busted, but still possibly fixable, and AHS wound up giving us $215 credit towards a new dishwasher. Since they get dishwashers in bulk for a discount, our total cost with install is about $175, instead of the $550 we were anticipating. Glorious.
But should we renew? Well, for a year of coverage for everything from dishwashers and tubs to the air conditioner and roof, it costs $500 per year.
We decided: $500 is MUCH better put towards a safety reserve for the house in case something big breaks, because unless your air conditioner goes out, it isn’t worth it. Plus, most things in the home (shouldn’t) wear out for at least a couple of years, enough time for us to build a larger reserve.
However, for a house we have just bought that is older (ours is 40+ years old) I don’t think I would consider buying unless the seller had purchased such a plan to ensure peace of mind for at least the first year.
