In our first blog, Determining Your Risk Profile, we’ve focused on your personal risk profile as it relates to your investment strategies, but it’s important to understand that your profile can be affected by other factors in your life. Whether its conservative or aggressive growth, your personal risk profile can help act as a guide for other facets of your financial life. Remember, your personal risk profile will change over the years and will affect other financial decisions in your life.
How comfortable are you with your debt-to-income ratio? This is your percentage of take-home pay each month that goes to paying down your debt. Is 20% of your income going to debt comfortable for you? What about 40%?
There’s also the question of home equity and mortgage financing? If you’re purchasing a home, what percentage of a down payment is comfortable for you? Would you feel better about a traditional 30-year fixed rate mortgage or a 20-year variable-rate mortgage?
Obviously, saving money should be a big part of your financial life. A good question to ask yourself, is how much emergency savings do you feel you need to have? A rainy-day fund can help with unexpected needs such as car repairs, a new roof, or an unexpected job loss. The consensus amongst experts is an emergency savings fund equal to 3-6 months of income.
Are you comfortable with the amount of medical insurance you have now? Many health insurance plans include HSAs, another savings account focused on saving money for doctor visit co-pays, prescription co-pays and medical expenses outside of your network.
Do you have life insurance? Many employers offer a basic life insurance plan, but you may decide a more comprehensive life insurance plan would benefit you more. Are you comfortable seeking one out?
Based on your personal risk profile, are you comfortable with a 9-to-5 job that provides you with stability? Would you prefer to seek high rewards (and high risk) while working for a start-up? Perhaps, self-employment or an independent contractor position is a comfortable employment status for you. The ultimate risk takers have been known to start your own business. If that’s you, does your risk profile inform you to start slowly to make sure everything is in place for a such a move, or do you just jump feet first right into a new venture?
Your investment portfolio strategy is shaped by your personal risk profile and your profile is influenced by your overall financial life. Your personal risk profile can and will change over time, based on a variety of factors that can affect your financial well-being. Looking at your risk profile also involves examining your comfortability level with items like your debt-to-income ratio and your emergency savings plan. It’s not just about investing, but also your financial life holistically.