About risk taking in life and job

When speaking with individuals in the finance community who aim to maximize their wealth, the most common strategy I encounter regarding property investment is to buy as much as you can reasonably afford. If you have enough cash to buy one flat outright, you could alternatively buy three flats by taking a mortgage.

I’m not going into detail about the reasons here, but on the surface it makes sense. You get 3 flats, get tenants to pay the mortgage, and at the end you have 3 instead of one. Additionally, there are also tax benefits associated with mortgages (at least where I live).

While it is sound financial advice, I don’t think it makes sense for everyone. My thought was that there are different areas one can take risk in. The ones I’m focusing on now are financial risk and job risk. Financial risk is about what you do with money. If you save it, invest it somewhere, buy property, take on debt. I define job risk as how you earn money through your day to day activities. A normal day job and entrepreneurship are the most common ones.

I believe it’s necessary to further explain what I mean with job risk. It involves the ability to change how you earn money. Switching companies is one. It’s usually low-risk, but still a risk. It’s a new environment, new people, possibly a new city. It’s risky because you can’t say how it’ll turn out. You might not like it, or worst case the company might let you go. Going full-time founding a new company is higher risk. You can never know if or when you’ll start making money with it.

A well-known principle in finance is that taking on more risk increases your leverage. With more leverage the reward can be higher, but it’s also easier to get wiped out. In this analogy it means going bankrupt.

Going back to the example, either buying three properties and take on mortgages, or buy one property without debt. The clear benefit of buying three properties is that, if all goes well, you end up with more wealth. Renters will help you out with mortgage payments, and after the mortgages are paid you got three for the price of one (oversimplified of course, forgive me).

On the other hand, until the mortgages are repaid, you’re responsible for significantly higher monthly payments. If renters fall out, you still have to pay. This adds financial pressure, making the prospect of changing jobs seem far riskier.

This is the tradeoff. Assuming financial risk, or debt, can reduce personal freedom, but also has the upside of ending up with more wealth. Taking personal risk, or job risk, means potentially not being able to afford great investments, but often has the upside of liking what you do much more.

There is no right answer. Everyone has to figure out for themselves what’s right for them. Personally, I want to be able to take job risks, and am perfectly happy to give up some potential financial gain for it.