Section 1.1: Strategies to Mitigate Financial Risk

There are numerous strategies to enhance income and lower financial risks. However, a crucial aspect often overlooked is understanding one's financial risk tolerance. For instance:

• Some creatives require solid financial stability to feel secure in their work, leading them to seek jobs with consistent hours to allow for creative pursuits outside of their working hours.
• Others may embrace higher financial risks, enjoying the flexibility that comes with a more dynamic career. The downside is increased dependency on creative work for financial stability, which may not always be fulfilling.

While neither approach is inherently wrong, many creatives plunge into their careers with blind optimism, hoping everything will fall into place. Without a clear plan for assessing their risk tolerance, they can easily find themselves in challenging situations.

Section 1.2: Assessing Your Financial Risk Tolerance

To help you evaluate your financial risk tolerance, consider the chart below, which breaks down four key areas—family, location, material possessions, and debt. Each area features levels of risk tolerance from low to high. The lowest levels of financial risk tolerance are at the bottom, while the highest are at the top.

Here are two scenarios to consider where you might fit in:

Scenario 1: Imagine you are a freelance artist living alone in a studio apartment in Brooklyn, NY. You have significant student loans, totaling over $50,000, and while you don’t have a family yet, you envision a future with your partner, also an artist. Living in Brooklyn means indulging in various cultural experiences, which can be costly.

In this case, your financial risk tolerance would be low due to your expenses and debt, suggesting that you may need a stable 9-to-5 position to secure your finances.

Scenario 2: Now consider a recent college graduate who relocates to Madison, WI, with friends to start a new venture. With no debt and shared living expenses, this individual enjoys a lower cost of living and does not foresee starting a family soon.

In this scenario, with fewer financial obligations, your risk tolerance is high, allowing for greater flexibility in pursuing riskier opportunities.

Your ability to engage in work that carries more financial risk must also be weighed against these life factors. Evaluating the four key areas mentioned will ultimately guide you in determining the level of financial risk you can take on.

Taking a closer look at the graphic below, keep these points in mind:

• This is not a fixed formula: Use this graphic as a tool to gauge your comfort level with financial risk. High expenses, debt, or living in an expensive area can all heighten your financial risk profile.
• Consider a minimalist lifestyle: Living with a lower budget, sharing living spaces, or driving an older car can offer financial flexibility while you determine your path.
• Temporary measures: Understand that these strategies are not permanent. Your financial landscape can shift over time, allowing for greater risk as your situation stabilizes.

By establishing a timeline for when you aim to stabilize your finances, you set a clear goal for when you might embrace greater financial risks.

I hope this exploration of financial risk provides valuable insights. Where do you see yourself on this spectrum? Feel free to share your thoughts below, along with any feedback on the accompanying graphic!

This video from Khan Academy delves into ways to manage financial risks, focusing on insurance and financial literacy for creatives.