What is your risk capacity?

Do you know your risk capacity when it comes to investing? We often talk about risk tolerance, but risk capacity is another piece of informed, smart investing.

Your risk capacity is how much you can afford to lose before it begins affecting your day-to-day finances. If you steadily invest $25 per week into a TFSA, it may not have a major affect on your ability to pay your bills, buy groceries, and maintain your lifestyle, unless something major were to happen such as a job loss, unexpected increases in inflation, or interest rates or a major unexpected expense.

What if someone came to you with an investment opportunity, but to invest, you need to put up at least $5,000? Does this fit your risk capacity? Can you afford to put that much money into an investment and still make your day-to-day financial commitments?

Every purchase you make with your money impacts your risk capacity. Investing can have an even greater impact if the investment itself has a high level of risk. Let’s look at the $5,000 example again. How would it affect your long-term financial situation if you lost all $5,000? Would you have to make lifestyle changes to be able to pay your bills, your rent or mortgage, and buy groceries?  Will you have to work longer?

When investing, always make sure you’re taking risk capacity into account. Ensuring you do not exceed your risk capacity will not only help you make better financial decisions, but it can also help you maintain your own mental health as well.