Pre-Investment Check: Financial risk appetite

Welcome to the second article in this series of personal finance management. If you haven't read the previous one, please click here and read that one first. There I've discussed about basic overview on how one can distribute monthly income and utilize it to meet some best practices towards financial discipline.

First 04 sectors are petty easy to understand. But the fifth one - Investment, comes with a big mystery around the corner. If you are a beginner, you'll see a lot of chaos around the this term. So much so, that it starts sounding like alien and many of you just decide to drop the plan. In this article we'll try to figure out few basics and some pre-investment guidelines.

• What is an investment?

Definition says, using money to buy assets with an expectation to earn profit on it over a period of time. Because the time factor is involved and profits are expected in future, there come another jargon - Risk.

• What is financial risk?

It's a possibility of losing money in particular investment. How is it incurred? Because the asset bought is no longer worth that money. As discussed in previous article, gaining wealth is not just a number game. There comes some real life situations which can disturb your financial planning and risk on investment is one of them.

To achieve your financial goals with minimum losses, you will need to do something called risk management. Before that you will need to know your risk appetite. Don't worry about another jargon; in simple words, you will need to know how much you can 'afford to lose' and then start accordingly.

There are many platforms out there which can help you to calculate your risk appetite and even suggest you best suitable option to go with. (But remember first rule of investment - don't trust anyone blindly). You can definitely make use of the utility they are offering to know your risk profile/appetite. But always keep in mind, your investment decision must be backed by your own research.

Just to help you, I've listed down a questionnaire. Each question has 03 choices - a,b & c. Try to answer all the questions honestly to get advice which is best suitable to you.

Important: Answer all the questions first and then move towards results.

Results:

1. If your answers contains more number of 'a's, then you are a risk taker. You are very much prepared for challenges and tend to digest some temporary losses in order to gain long term wealth. Go ahead and start your research for investment instruments where promised returns meets your goals and of course your 'tax planning'.

2. If you got more number of 'b's, then you are a medium risk taker. You better plan your investment equally among high risk vs traditional, secure instruments. However, gaining more knowledge will always be a value ad to your financial journey. So don't settle here, keep learning. :)

3. If you got more number of 'c's, you must invest time in improving your financial knowledge and start following some best practices. Read some finance related books, blog articles, subscribe to such social media handles. In short, follow some genuine resources for guidance. Trust me there are loads of it out there, that too free of cost. I'll upload another article to mention a few, so stay tuned. Also focus more on your savings and don't get into any kind of investment unless you understand its pros and cons.

That's all for now. Hope you got a better picture and feel comfortable with the term 'investment'. Now you have your next plan of action ready, so go, run for it.

Books Recommendations:

1. The Parable of the Pipeline

2. Rich Dad Poor Dad

3. The Richest Man in Babylon