Terms of Use 

Determine Your Risk Tolerance

This knowledge article is part of a series of knowledge articles aimed to help you define your roadmap to savings and investing. To review the previous knowledge article in this series, click here. To review the table of contents for the articles, click here.

You are approaching the half-way point in your journey to saving and investing. This is a good point to make sure that you understand some key concepts:


Your "savings" are usually put into the safest places or products that allow you access to your money at any time. Examples include saving accounts, checking accounts, and certificates of deposit (CDs) or share certificates. At some banks or savings and loan associations your deposits may be insured by the Federal Deposit Insurance Corporation (FDIC). Deposits at credit unions are insured by the National Credit Union Association (NCUA). But there's a tradeoff for security and ready availability. Your money is paid a low wage as it works for you.

Most smart investors put enough money in a savings product to cover an emergency, like sudden unemployment. Some make sure they have up to 6 months of their income in savings so that they know it will absolutely be there for them when they need it.


When you "invest," you have a greater chance of losing your money than when you "save." Unlike federally-insured savings deposits, the money you invest in securities, mutual funds, and other similar investments are not federally insured. You could lose your "principal," which is the amount you've invested.

But then, how "safe" is a savings account if you leave all your money there for a long time, and the interest it earns doesn't keep up with inflation? The answer to that question explains why many people put some of their money in savings, but look to investing so they can earn more over long periods of time, say three years or longer.

Though there are no guarantees, investing means you may earn much more money than by relying upon no-risk savings. Investors are not promised a return, but they do get the opportunity of making money that more than offsets the cost of inflation.


Investors protect themselves against this added risk by spreading their money among various investments, hoping that if one investment loses money, the other investments will more than make up for those losses. This strategy, called "diversification," can be neatly summed up as, "Don't put all your eggs in one basket." Diversification can't guarantee that your investments won't suffer if the market drops. But it can help you balance risk.

Risk Tolerance

What are the best saving and investing products for you? The good news is that you already have supplied the answer in this journey to saving and investing. By figuring out where you can save and then defining your goals, you've already determined where it makes the most sense to put your money.

The answer depends on when you will need the money, your goals, and if you will be able to sleep at night if you purchase a risky investment where you could lose your principal.

For instance, if you are saving for retirement, and you have 35 years before you retire, you may want to invest in riskier investment products, knowing that if you stick to only the "savings" products or to less risky investment products, your money will grow too slowly—or given inflation or taxes, you may lose the purchasing power of your money. A frequent mistake people make is putting money they will not need for a very long time in investments that pay a low amount of interest.

On the other hand, if you are saving for a short-term goal, you don't want to choose risky investments, because when it's time to sell, you may have to take a loss. Since investments often move up and down in value rapidly, you want to make sure that you can wait and sell at the best possible time.

It's time to move on! You're now ready for the next stop on your journey: Investment Products: Your Choices.