In this article, we will discuss how to teach teenagers financial risk management. Financial risks will play a role in many decisions that teenagers make regarding money, and it is important to talk about the impact that these risks can have and how they can deal with them.
What are Financial Risks?
Financial risks refer to the possibility of losing money. Risks can appear in various forms related to financial matters, including some aspects that teenagers may not consider themselves.
Investment-Related Risks
First, financial risks are a term used in investing, which is when you use your money to buy assets that may increase in value. Whenever you invest, you accept some level of risk, which is the probability that you may lose money.
Borrowing-Related Risks
Teach teenagers that they will also face risks associated with borrowing money, including through credit cards, student loans, car loans, personal loans, mortgages, and more.
Other Forms of Financial Risks
Financial risks also include risks that come with not having a secure financial foundation. For example, if you do not have enough emergency savings, you may face unexpected costs like car repairs or a hospital bill that could push you into debt.
How to Reduce Financial Risks
As teenagers learn how to reduce risks that play a role in their lives, it is also important to talk to them about how to mitigate these risks. It is generally recommended to build a solid financial foundation by budgeting and saving money before starting to earn money through investments.
Diversify Your Portfolio
One of the most important steps you can take to reduce investment risk is to diversify your portfolio. You should have a variety of financial assets that you invest in. Scherer advises selecting from stocks in different companies across various sectors, sizes, and countries.
Do Not Try to Beat the Market
Today, there is more information available than ever before. While this is great in many ways, it also leads to young investors learning about advanced investment strategies that may be risky for them.
Financial Risks and Your Emotions
It is impossible to talk about financial risks and investing without discussing the emotional side as well. After all, when something surprising happens to a teenager’s investments or in another area of their finances, they are likely to react emotionally. Investors, especially new investors, may make emotional financial decisions when the market drops. They may panic or fear further losses. When the market rises, investors may react with greed or fear of missing out on profits.
Conclusion
Financial risks are unavoidable. When talking to your teenager about money, you need to teach them about financial risks and their role in their financial lives and how they can manage them. Understanding financial risks will be crucial for teenagers as they begin to invest. Discuss how to build a strong financial foundation with a diversified and simple portfolio that does not aim to beat the market. Help them recognize and manage their emotions – and be there for them as a source of advice and support.
Source: https://www.thebalancemoney.com/talking-to-teens-about-financial-risk-5222545
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