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Updated on Monday, January 26, 2015
You may be more of a financial risk taker than you think. I know I am. I majored in theatre after all and spent the first five years of my professional career pursuing a life of full-time performing. I followed that risk with another- starting my own business- followed by my most recent risk of reinvesting in myself for a greater career payoff.
As is true for anyone, some risks have returned more than others (I both spent more and made more than ever on my business this month); some were a total flop (that personal trainer certification I never utilized); and others I’ve never even entertained because the level of risk seems far too daunting (real estate, rental and investment properties).
So, after all this trial and error, which financial risks are really worth taking?
Risk: Time and money spent. Debt.
Reward: Higher earning potential. Increased career prospects.
Whether you’re looking to go back to school to improve your skill set, obtain an advanced degree, or pondering college choices, higher education can provide a sweet return on investment.
Last year, The New York Times reported that the pay gap between college graduates and those without a degree reached a record high, with degree holders making, on average, 98 percent more an hour than those without a degree.
The average debt among college graduates with loans however, is a whopping $28,400. Though a seemingly high number to a broke, young professional, that temporary debt is just a small fraction of the long-term economic benefits of higher education.
The statistics aside, a degree doesn’t guarantee career success- hence the risk; but risk can be mitigated by researching fields of study that historically provide a good return on investment and programs that fall within the scope of your budget, supplemented with scholarships and other cost cutting techniques.
All in all, higher education is a risk worth taking.
Big City Living
Risk: Higher cost of living.
Reward: More opportunity, higher salary.
Obviously big city living is not for everyone, but the risk of high living costs should not be the sole deterrent in the pursuit of big city dreams.
While major cities typically come with a higher cost of living they also have many more career opportunities, accompanied with significantly higher salaries. Research by Arizona State University’s Jose Lobo goes so far as to say that highly compensated, metropolitan areas actually provide a better overall bang for your buck.
For example, if pay twice as much for rent in New York City than in Oklahoma City and you make twice as much in NYC – it’s a wash; but when you factor in other cost of living expenses, New York comes out ahead. Things like groceries, home appliances, etc. will undoubtedly be higher in New York, but they won’t be double. So while income is double, only a few living costs are inflated as much, the rest are inflated, but less so, and as such, big city living provides a better value.
Of course this isn’t a hard and fast rule that applies to every person in every big city, hence the risk. To mitigate that risk, individuals can identify companies they’d like to work for and available positions for which they are qualified and compare projected compensation to projected cost of living. By making a well-informed assessment, big city living can become a financial risk with a big benefit.
Risk: Losing money.
Reward: Growing money.
Investing is by definition a risk, but most, if not all, experts would argue that failing to invest is far more risky. If you leave all your money in a savings account earning 1 percent interest, or worse, under your mattress earning nothing, you are certain to lose money courtesy of good old fashioned inflation. If you invest wisely however, you will, hopefully, watch your money grow at a rate that far outpaces the rate of inflation.
Watching the Baby Boomers lose their retirement savings to the 2008 recession was a sobering lesson in the very real risks of investing. So what’s the solution for mitigating that investment risk while cashing in on maximum growth potential? A long-term strategy.
Since 1937, the market has been up 67 out 74 ten-year periods. In his book, “A Random Walk Down Wall Street” Burton Malkiel illustrates the power of a long-term investment strategy using the following example – an investor who put $10,000 into an S&P 500 index fund at the start of 1969 saw her investment increase 31 times to $311,000 by June of 1998.
Though past performance is certainly not a guarantee future returns, historically speaking, a long-term, passive investment strategy, like an index fund that tracks total market performance, keeps the odds in your favor.
I may not have the nerve to be buying up a bunch of investment properties or partake in any venture capital, but there are some financial risks that are simply too good and too easy not to take.