Financial Risk Tolerance: Why Spend While You’re Young?

This article is an excerpt from the Shortform book guide to "Die With Zero" by Bill Perkins. Shortform has the world's best summaries and analyses of books you should be reading.

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Why is it important to understand your financial risk tolerance? Why does your risk tolerance decline with age?

If you feel torn between spending your money on experiences now or saving it for later, then the concept of financial risk tolerance may hold the key. According to Bill Perkins, spending on experiences while young is important as you lose the ability to do so meaningfully as you get older.

Read on to learn why Perkins says financial risk tolerance is important for getting the most out of your money and life.

Financial Risk Tolerance & Age

Author Bill Perkins writes in his book Die With Zero that people generally tend to over-save and under-experience, but at the end of our lives we’ll actually value experiences more than the money we saved. He claims that one good way to die with zero is to spend more money when you’re young. If you don’t invest in experiences while you’re young, you risk missing out on many of the best moments in your life. If you wait until later in life, your financial risk tolerance or ability to take a financial hit might be too low, or you might not be willing to risk failure. For Perkins, forgoing experiences when you’re young just to save money is illogical. You might not get the chance to have those experiences again, and they won’t be the same when you’re older. For instance, your 25-year-old self might be thrilled to go skydiving, while your 65-year-old self might not be. 

(Shortform note: It’s true that some experiences are best enjoyed—and purchased—at a young age: Studies show that our bodies begin to decline in strength, endurance, and balance in our 50s. If you wait until then to have experiences that rely on physical health, you might not be able to have them or enjoy them as much as you might have as a younger person.)

However, you’re almost certain to be financially richer later in life, and financial costs that might seem daunting when you’re young will at that point likely seem inconsequential compared to the value of an experience. For example, say you’ve always dreamed of opening a toy store. It might make sense to spend nearly all your money or even borrow money to make it happen while you’re young. If the business fails, you’ll likely make the money back throughout your career, and you’ll be able to say you gave your dreams a chance. As you get older, your financial risk tolerance may decline, and your willingness to take a risk on your dreams decreases.

(Shortform note: Some people don’t have to wait until retirement or old age to become rich: Studies show that the average age of first-time millionaires is only 37. People who work at the cutting edge of technology or have a degree in engineering stand a better chance of becoming millionaires than people in other fields. Such lucky individuals have such high financial risk tolerance that they might be able to have rich life experiences at any age because they have so much wealth that whatever they do incurs little financial risk. However, to succeed as a tech entrepreneur, you probably have to work far more than most people (perhaps even up to 120 hours a week, if you have aspirations to become like Elon Musk), which would eat into your time to have experiences.) 

Aside from increased financial risk tolerance, the other reason you should start spending young is that if you wait until you’re deep into retirement, you’ll likely run out of time to spend all your money in a meaningful way. Perkins explains that many, if not most, Americans increase their net worth up to and sometimes through their retirement years. At this point, your physical abilities and desire to spend money on many experiences are likely lower than in previous decades. Therefore, you may die with a balance in your bank account. For example, by age 80, you might prefer to stay home and read a good book than to take a road trip to a National Park, so the money you could have spent on the trip will sit in your bank account. 

(Shortform note: Some disagree with Perkins’s assertion that if you hang on to your money into retirement—and possibly until you die—you’ll lose the chance to spend it meaningfully, arguing that leaving a legacy to charity when you pass away is a very meaningful way to spend your money. In your will, you can leave a charitable bequest to an organization of your choice, where the money may well do more good for others than it would if you simply spent it on yourself. Still, a middle approach might be best so that you don’t forgo all enjoyable experiences:

Take Precautions Based on Your Tolerance

Your financial risk tolerance will likely shape your response to Perkins’s recommendations on how to spend all your money before you die. Readers with a low risk tolerance might find some of his advice difficult to digest, citing, for example, potential medical complications, damage to property, or a stock market crash as reasons to save instead of spend. Perkins acknowledges the possibility of negative unforeseen circumstances and suggests looking into insurance policies that guard against unforeseen circumstances. This will allow you to invest in experiences while minimizing catastrophic financial risks.

(Shortform note: In The Psychology of Money, Morgan Housel provides additional approaches to minimize your financial risk. If you have investments, limit those investments to only a fraction of your entire savings. That way, if you lose money, you’ll still have plenty of savings to draw on. Additionally, have backup sources of funding in case your main source—like income from a job—disappears. This might simply be a savings account that you only tap into in emergencies. For people who are extremely risk-averse, a combination of these and Perkins’s approaches might be the best way to spend all your money before you die.)

For example, if you’re worried about crippling debt due to medical complications, you might look into long-term care insurance (which can cover costs not covered by health insurance should you ever need help performing activities of daily living). Alternatively, you might purchase life insurance to protect your loved ones should you die unexpectedly. Perkins also suggests an annuity to guard against the ‘risk’ of outliving your money.

(Shortform note: It can be challenging to navigate the world of insurance, so other experts supplement Perkins’s recommendations with their own. In The Wealthy Barber, David Chilton recommends only purchasing life insurance if you have dependents and your living estate (your assets minus your liabilities) wouldn’t be enough for your dependents to live on. If you’re interested in an annuity, make sure you understand the tax implications. These can often be complex, so it’s recommended that you work with an advisor to set it up. Finally, if you’re considering long-term care insurance, be aware that companies may deny you benefits for conditions like addiction or injuries sustained during war.)

Financial Risk Tolerance: Why Spend While You’re Young?

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Like what you just read? Read the rest of the world's best book summary and analysis of Bill Perkins's "Die With Zero" at Shortform.

Here's what you'll find in our full Die With Zero summary:

  • Why your goal in life should be to die with zero dollars in your bank account
  • Why you should use your money to the fullest, instead of saving it all
  • How to maximize enriching experiences throughout your life

Emily Kitazawa

Emily found her love of reading and writing at a young age, learning to enjoy these activities thanks to being taught them by her mom—Goodnight Moon will forever be a favorite. As a young adult, Emily graduated with her English degree, specializing in Creative Writing and TEFL (Teaching English as a Foreign Language), from the University of Central Florida. She later earned her master’s degree in Higher Education from Pennsylvania State University. Emily loves reading fiction, especially modern Japanese, historical, crime, and philosophical fiction. Her personal writing is inspired by observations of people and nature.

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