Is Being Risk-Averse Good or Bad for Your Finances?

What is your risk tolerance?

I’ve been giving some thought to the notion that we must take chances – or better yet, informed chances – in order to succeed sometimes.  There are times when situations can offer potential benefits that make the risks worth taking.

Nevertheless, many of us have a low tolerance for risk that can manifest itself in many situations.  Some examples of such situations are:

• Investing conservatively instead of pursuing higher returns
• Staying in our comfort zone instead of trying for a “stretch” job that pushes us and offers potential
• Being afraid of speaking up with a novel idea, worried that we may be ridiculed instead if people don’t like our innovation

I also think that being risk-averse (side note: think of grammar and wealth, and PLEASE do not ever say “risk-ADverse”) is rooted in fear of loss or of some potentially negative consequence.  It seems to me like a defense mechanism that many of us take on in order to protect ourselves.

Personally, my big financial motivation, deep down, is to avoid being really old and needing to work for money.  Generally, we don’t get more energetic or healthier as we get older.   I really don’t want to be struggling financially at an old age.  Not that I am now, but the thought of things going bad is a something that helps light that fire of motivation to get me hustling. I know this might sound more defensive that aspirational, even though I clearly do have aspirations as well. However, this fear is probably the leading motivator, while not being the only one.

That being said, intellectually I believe something that rides a bit counter to that motivator. Intellectually, I think that a smart approach to handling finances and prioritizing time is to remember that we need to make money before we can save money.  Why spend most of our personal finance efforts on pinching pennies, when the ROI on our time is often better when oriented toward income generation?  That’ s not to say that saving money is a waste, because anybody who has read this blog and especially the squirreling gone wild series knows that I often celebrate extreme efforts to save. But, while we need to focus on making and saving, it’s the making money part that should get more time.

Do you see the dichotomy?

While on the one hand I am saying that it’s better to spend more time on income generation than on frugality, on the other hand my biggest motivator is fear-based: being old someday and not having enough money. That defensive primary motivator guides behaviors that support it, which are often risk-averse.

That brings me these questions:

1. Does risk-aversion harm one’s finances, or is it a good thing?
2. Is it more profitable over the long run to err on the side of being a risk taker, as opposed to being risk-averse?
3. How would you characterize yourself in this regard with money? Let’s use a 1-10 scale, where 1=very risk averse, and 10=having a very high tolerance for risk (or even seeking it out)