Why You Sometimes Need to Take Risks With Your Money

Written By Mary Beth Eastman
Last updated April 28, 2020

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Investing
March 7, 2018

Simple. Thrifty. Living.

It may sound counterintuitive, but it’s important for you to take risks with your money, especially when you use investments to grow your wealth. If you feel hesitant about putting your hard-earned money at risk, you may want to think about the way the economy evolves and how you can make the most from your investments.

If you leave your money in your checking account, it never has a chance to grow. In fact, it will lose value over time as inflation makes items more expensive.

Inflation can vary significantly from year to year. In 1947, federal budget cuts pushed inflation to 18.1 percent. In 1974, the Watergate scandal caused so much uncertainty in the government and economy that inflation reached 12.3 percent.

Over the last decade, inflation has been fairly flat (around 2 percent). Even if the inflation rate stays that low, your cash will slowly lose value. The bigger concern, of course, is that inflation could jump at any point. When that happens, your cash will lose its value quickly.

Investing gives you a chance to avoid devaluation. When you invest your money in stocks, bonds and other vehicles, you get a chance to grow your wealth.

All investments come with some level of risk. Even buying a historically stable stock in the energy company Consolidated Edison doesn’t guarantee your money’s safety. A stable stock, however, probably won’t give you many opportunities to earn significant returns. At best, it will give you a modest return that protects your money from devaluation.

If you want to earn more money, then you need to invest in riskier companies. The higher the risk, the more you stand to profit when the company performs well. If the company performs poorly, though, you could lose your investment. As a general rule, that’s the way the stock market works.

Obviously, you want to make as much money from your investments as possible. You also want to protect yourself from significant loss.

Diversifying your investment portfolio gives you the best of both worlds: You can make money from high-risk investments while using low-risk investments to create stability. If you’re lucky, the high-risk investments will pay off and you’ll reap the rewards. Even if your risky investments don’t work well, though, the conservative investments will create some balance that prevents you from losing everything. Wondering which online investment sites are the best to use? Check out our reviews.

Risk is an essential part of making money from investments. With risk, you give yourself a chance to earn profits. Without risk, you guarantee that your money will lose its value over time.

About the Author

Mary Beth Eastman

Mary Beth Eastman serves as the content manager for Simple. Thrifty. Living, where she is dedicated to helping readers use money and credit wisely. Mary Beth believes that access to the right financial information paired with a growth mindset are essential tools for getting out of debt and building wealth. Mary Beth has a degree in Journalism from Bowling Green State University and has focused her 20-year journalism career on putting readers front and center, carefully considering their concerns and presenting information that will help them in their everyday lives. She has won numerous statewide journalism awards. Her writing on personal finance as been featured on numerous websites in addition to Simple. Thrifty. Living, including Huffington Post and Lexington Law blog. Mary Beth resides in Pittsburgh, Pa., with her family and two rescue dogs.

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