The following is a guest post by Jim at Critical Financial. If you are interested in guest posting at Club Thrifty, please be sure to read our guest posting guidelines.
“Winning means being unafraid to lose.”
So said Fran Tarkenton, the legendary quarterback who held many records when he retired in 1978 and was elected to both the Pro Football and College Football Halls of Fame. Tarkenton always played as if he were unafraid to lose, scrambling this way and that, extending the play and then throwing deep, taking many risks along the way, and eventually being rewarded with 342 touchdown passes.
Similarly, when it comes to your money, “winning” might mean being unafraid to lose. Your greatest possible financial gains could come when you take risks that would make others question it. Even though taking risks involves a lot of instinct and gut feeling, there is a bit of a science to it as well. Here are a few tips on taking educated risks that could lead to great profits:
1. Do Your Homework
A risk can be defined as a move that has a high probability of failure, but not every financial move is seen as a risk to every player. That is, what might be a risk to someone else would not be a risk to you if you have done the necessary research to learn that your new investment actually has a high probability of success.
That abandoned store on the corner downtown that no one has been able to make profitable over the years? Perhaps you have done your homework on the changing demographics of your town and you know with certainty that your town is primed for a Starbucks franchise. To others, your purchase of the building looks like a huge risk because they have not researched the possibilities for business in that location. To you, however, the probability of Starbucks thriving on that corner is so high that your risk factor is actually low.
Many good risks that pay off later were based on sound data, not mysterious hunches or visits by soothsayers.
2. Draw up a Budget
Taking a financial risk should not mean saying, “I’m all in for whatever is required. Just tell me!” In very rare instances (you discover oil on your friend’s farm) should you make a move without figuring out what it will ultimately cost. In most cases, you need to draw up a budget and save for a time when you are sure that a risk will pay off.
This risky-day saving strategy will position you to strike quickly when the right opportunity arrives. Most financial counselors would tell you to have emergency savings and retirement taken care of before starting a risky-day fund. You can call this new account your risk budget.
3. Sleep on It
Even though most risks do involve the gut and strong hunches, they should never be totally driven by emotions. Many propositions can cross your desk and excite you, especially if they are being pitched by a skilled salesperson or a close friend that you trust. You might be ready to sign on the dotted line by 5 p.m., but you probably shouldn’t.
Take some time to reflect on the offer, do your own research, then make a more logical decision once the emotions have died down. If the risk still gets you excited days and weeks later, then you should probably move on it. If the risk looks stupid in retrospect, then bag it.
4. Free Yourself to Fail
As Tarkenton’s quote indicates, you must allow yourself the freedom to fail. If you have a risk budget, that failure will not devastate you. You need to make sure that your self-image will not be devastated either.
You can pick any top business book off the shelf that tells stories of huge successes and you will find that every person involved had failures along the way. Not every idea worked, not every plan unfolded according to prediction, markets and conditions changed that doomed even the wisest moves to failure.
Once you are over the fear of failure (and have funds in place to soften your landing), you will be much freer to win in the financial world. So, go ahead: start your own business, buy that low-priced property, invest in that new technology. You will learn something along the way, and you might win big. Risk-taking is part of what makes life worth living, adding a dose of adrenaline to the mundane.
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For more investment topics and historical perspective, please visit Jim’s site, Critical Financial by clicking the link!
I like the “slip on it” advice. All too often people (myself included) jump on opportunities that actually end up being something they should have passed on. Sometimes taking a day or two to think about it really helps avoid “bad” opportunities.
DC @ Young Adult Money recently posted..$100 Giveaway – No Spending Edition
Most Certainly DC, it’s often hard not to, sometimes having someone to run your decisions through is a big help!
Jim recently posted..Creature From Jekyll Island | Birth of the Federal Reserve System in 1913
Love the idea about the risk budget fund. It’s a great idea for novice investors too, to set aside some money that you’re prepared to lose that won’t affect your main budget and obligations – money that if invested poorly won’t hurt too badly but if invested wisely could make a big win.
Thanks for the great post!
Laurie recently posted..Don’t Let ‘Em Fool You
Yea, I have also heard this be called “mad money” just a small stash that you are ok with losing, but who knows you may hit a home run with it!
Jim recently posted..Creature From Jekyll Island | Birth of the Federal Reserve System in 1913
Great points, especially #3! We often do that ourselves as a way to let the emotions die down so we can make a more logical decisions. This often allows us to clear our heads and think more logically.
John S @ Frugal Rules recently posted..Giveaway: Can You Challenge Yourself Not to Spend Money?
Thanks John, totally agreed, its hard not to make rash decisions!
Jim recently posted..Creature From Jekyll Island | Birth of the Federal Reserve System in 1913
Fear is a big killer of change and keeps many people stuck in a bad situation. Even if you “lose” or have a setback, it’s better than not trying,
Kim@Eyesonthedollar recently posted..No Spending Challenge-No Buying Clothes in 2013 and a $100 Giveaway!
Well said Kim!
Jim recently posted..Creature From Jekyll Island | Birth of the Federal Reserve System in 1913
Great tips. I made a few emotional decisions that have cost me and now I take money I could afford to lose if it all went bad, invest it, and force myself to not check it more than once a month. The little market bumps on the way would freak me out.
Pauline recently posted..13 money resolutions for 2013: #10 stop buying!
Thank you Pauline!
Jim recently posted..Creature From Jekyll Island | Birth of the Federal Reserve System in 1913
Thanks for a cool guest post. I believe that the person who is unafraid to make the slightly wrong call and is early will beat the person who verifies they’re making the right decision and is late nearly every time. Great quote, and something that should propel people to have the fortitude to pull the trigger on chasing their dreams.
AverageJoe recently posted..4 Dynamite Strategies to Increase Yield in Today’s Markets
Yep, paralysis by analysis, so many miss the boat, got a friend who can never pull the trigger, cause she looks at too much detail. Good to be prudent by not overanalyze!
Jim recently posted..Creature From Jekyll Island | Birth of the Federal Reserve System in 1913
I would agree 100% Failing it not something that should be looked down upon. During my early days of trading and investing I failed repeatedly and quite frankly it was because I didn’t do my homework and rushed into situations that I didn’t fully understand.
As I’m older and definitely more educated I actually take the other side of the coin and view failure as unacceptable. Of course it happens, that’s the nature of investing but I will never accept it. I do not take huge risks, I take risk where my probability for success is almost guaranteed.
Brick By Brick Investing | Marvin recently posted..Food Insurance
Well said Marvin, Taking measured risks are ideal!
Jim recently posted..Creature From Jekyll Island | Birth of the Federal Reserve System in 1913
Sleeping on it is always good advice in my opinion. I’ve found in life that people who try to hurry me to make a quick decision to invest in or purchase something are almost always looking out for their best interests more than mine.
Alex recently posted..Money and Happiness: What is Personal Branding?
Well stated Alex!
Jim recently posted..Creature From Jekyll Island | Birth of the Federal Reserve System in 1913
Sometimes you have to “fail” to learn. Some of my best life lessons have come from making “mistakes”. From those mistakes I’ve learned that emotional decision making can be one of my downfalls. Now I try to sleep on it before buying or making important decisions. Good tips.
KK @ Student Debt Survivor recently posted..Being “On Call” On Holidays: An Epiphany
Thank you, often we are so afraid of failure when we shouldn’t be. I have truly learned more from failure than success, didn’t they say the same about Abe Lincoln?
Jim recently posted..Creature From Jekyll Island | Birth of the Federal Reserve System in 1913
#3 rings all too true. Before when I was spending a lot of money, I was just going along with my emotions (oops!). Now I step back, sleep on it and then come back with a better decision.
Debt Roundup recently posted..No Spending Challenge Giveaway
That is what I try to do as well!
Jim recently posted..Creature From Jekyll Island | Birth of the Federal Reserve System in 1913
I make too many emotional decisions myself because…well I’m emotional.
But I’ve learned to say the words, “that’s great, I’ll give it some thought” a lot more now. Really helps to give it some time and space before making an important decision.
Budget and the Beach recently posted..Choosing Happiness
So true, maybe seek out a mentor who you feel to be competent with investments and you can run your ideas by!
Jim recently posted..Creature From Jekyll Island | Birth of the Federal Reserve System in 1913
I think once folks leave their bubbles, especially in North America and see how much harder the RoWorld has it.. folks will stop being so afraid.
Financial Samurai recently posted..Why Are Rental Property Mortgages More Expensive Than Primary Home Mortgages?
Isn’t that the truth, we have no idea of the safety nets this country provides us, we are spoiled!
Jim recently posted..Creature From Jekyll Island | Birth of the Federal Reserve System in 1913
One of my goals this year is to learn more about investing. I’d really like to get into it, but I’m such a novice when it comes to it. I guess it’s a lot of risk for us because we just don’t have a lot of money to lose.
Start Slow, read great blogs like this, find a mentor, choose an investment you understand, don’t start out trading derivatives?
Jim recently posted..Creature From Jekyll Island | Birth of the Federal Reserve System in 1913
‘Do your homework’. That is so true. Far too many decisionsare made with far to little information.
Rod J. Rogers (@FreeAgentRogers) recently posted..Guest Post: Using the cash envelope ‘system’ to get out of debt.
Very true!
Jim recently posted..Creature From Jekyll Island | Birth of the Federal Reserve System in 1913
“Sleep on it” is definitely a great piece of advice. I used to make “gut decisions” but as I get older, I really think about things and look at all of the pros/cons.
Mackenzie recently posted..Budget Snafu and a Grocery Challenge Update
Yea it is always best to sleep on it, if the opportunity is gone in the morning it wasn’t meant to be.
Jim recently posted..Creature From Jekyll Island | Birth of the Federal Reserve System in 1913
For me, planning is the key to success! When I plan, I examine the alternatives and do my homework. I monitor my progress and make the appropriate changes. I don’t think I am unafraid of failing, but I try to increase the odds of success. It has worked so far.
krantcents recently posted..How to Prepare for 2013 or Any Year!
Well said krantcents!
Jim recently posted..Creature From Jekyll Island | Birth of the Federal Reserve System in 1913
I’m definitely not opposed to failure–I’ve learned many, many things from my own mistakes!
The Happy Homeowner recently posted..Do No Spend Days Really Work? (and a CASH GIVEAWAY!)
Same here, thanks!
Jim recently posted..Creature From Jekyll Island | Birth of the Federal Reserve System in 1913
I love #3 and #4! Sleeping on it is so important…sometimes I can be very impulsive and regret it later. #4 is important as sometimes I feel like I don’t take action because I am scared. I just started my blog and I was so scared to even start it. I think moving through fear and turning it into action is so important. Also, as others mentioned learning from your mistakes and constantly assessing your situation.
Keep it up do or debt, fear is a motivator, not a deterrent!
Jim recently posted..Creature From Jekyll Island | Birth of the Federal Reserve System in 1913
Risk is a luxury here in America. We have so many opportunities to rebound, it’s nuts! I love the opportunity to take risks, but I’ll admit, I’m a bit of a chicken liver (what does tha even mean?!) when it comes to possible failure. I can’t stand being hated, and don’t like losing, but I’m getting better at it. Great article here!
Jacob @ iHeartBudgets recently posted..Seasonal Budgeting
Many thanks!!!
Jim recently posted..Creature From Jekyll Island | Birth of the Federal Reserve System in 1913
FEAR – False Evidence Appearing Real
Liran @ ChooseTerm recently posted..Instant Life Insurance Quotes
Well said Liran, wrote that one down!
Jim recently posted..The Top Three Leveraged Buyouts in History
Homework is a big one for me. I like doing my research and trying to really understand the risk I’m about to take. Usually, I wind up not taking the risk. I’m a more conservatively oriented investor, so this fits my personality.
My Financial Independence Journey recently posted..Recent Put Options Sale: NSC and INTC
Nothing wrong with being conservative with your money!
Jim recently posted..The Top Three Leveraged Buyouts in History
I always think sleeping on it is a good idea. So many times I have reconsidered buying something because I stopped and waited. 9 out of 10 times it ends up being the right choice.
Glen @ Monster Piggy Bank recently posted..MPB – Pool Room Posts #13 Baby Edition
Totally agree Glen, thanks for your response!
Jim recently posted..The Top Three Leveraged Buyouts in History
I like the sleeping on it advice. It is always good to think things through in a completely different mind set.
What I have trouble is the free to fail part. I am very very afraid to fail. I know it is crutch for me. I have to overcome it if I want to reach my full potential. But I do struggle with it almost every day.
Suba recently posted..How to get cheap prescription drugs and save money on medications
Well your in good company Suba! I have certainly learned more from failing than success, so their are valuable lessons to be learned from failure!
Jim recently posted..The Top Three Leveraged Buyouts in History
Losing is something that you do not have to be ashamed of. In fact, it is taking a risk that can lead to successes. Yes, there will be failures but these can be overcome and the risk will be worth taking after all.
I agree with the main points of the article and feel that taking calculated risks is vital to financial success. Equally important is saving enough of an emergency safety net to catch you if you fail. Thanks for generating some interesting discussion.
Miss T @ Prairie Eco-Thrifter recently posted..Friday Links – Still Swamped Edition
Thank you Miss T for tuning in, I agree with you regarding the emergency fund, something that I am diligently working in for 2013! Thanks!
Jim recently posted..The Top Three Leveraged Buyouts in History