Let’s say I have $100 in the bank and my salary is $10 per week. My expenses each week including utilities, gas for transportation, food, and so on costs $7. Each week, I have $3 extra to save, invest, or do whatever else I want to with it. Saving $3 per week may not be satisfying enough for me, which is why I would be willing to take risks to grow faster. I could take a look at investing in a mutual fund, my own business, or maybe even someone else’s business. In each scenario, I would need to understand what level of Return On Investment (ROI) is realistic. If the ROIs were 10%, 25%, and 30% for the mutual fund, my own business, and someone else’s business, respectively, then it seems like the investment in someone else’s business would be most profitable. Although it may appear to be the most profitable strictly through numbers, the risk involved may be too high and not worth your time.
First, we need to understand what level of investment is required. If the investment required will jeopardize your whole savings ($100 in my situation) and does not give you an immediately ROI, then you should really think twice about it. At the same time, you do not want to keep your money sitting in the bank with very little ROI if any. As they say, you need to make your money work for you. Mutual funds are typically the safest with decent ROI.
Risk management does not only apply to financials, but everything else in your life too. Think about anything you do. Ask yourself, is there risk involved? Is this risk worth the reward? In life, there is good opportunities and bad opportunities. Often, we cannot distinguish between the good and bad opportunities. We can dig further to investigate, but many times we are not going to actually know if the opportunity is good or bad until we make a decision to take the risk or not.
An big issue I see is when people take a risk knowing there is no reward. An example of this is speeding or reckless driving, which is utterly stupid. You are trying to get somewhere faster because you are impatient, but in reality you are not going to get there much faster in the grand scheme of things. If you are afraid of being late, leave earlier. I really do try weighing out the risk when looking to gain a reward.