What is financial risk? A guide for families and future investors
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Financial risk might seem like something only investors or entrepreneurs have to worry about. But it comes up in everyday life, in all kinds of ways. You may be saving for something big, spending on something fun, or just figuring out what to do with your allowance. There’s always a little financial risk involved.
When kids and teens start to understand financial risk early on, it gives them (and their families) more confidence. And it can help them make better money decisions down the road. We spoke with several financial experts to get their help breaking down what this term means.
Understanding what financial risk really means
At its most basic level, financial risk is the chance that your money won’t behave the way you expected. ““Financial risk means there's a chance you won't get the outcome you expect — and that includes losing money,” says Holly Andrews, managing director at KIS Finance. “That could be an investment not growing like you hoped, or a business idea that crashes. It's not always dramatic, either. Sometimes the risk creeps in slowly, like inflation quietly eating away at your savings while it sits there. That's still a risk.”
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Brian Kofford, founder and CEO of Striv CPA, adds a metaphor kids and teens can relate to: “Financial risk is just the chance that your money plans don’t work out the way you hoped,” he says. “It’s like skiing a black diamond run when you’ve only ever done greens. There’s reward, but also the potential for a wipeout.”
Why kids and teens should learn about financial risk now
The sooner kids and teens understand that risk is part of every money decision, the better equipped they’ll be to handle it. “Understanding risk early builds money muscles,” explains Koffard. “It teaches you that not every dollar you earn should be spent — or invested — the same way. Some dollars are meant to work harder than others, but they also might not come back.”
And learning about risk early can help teens embrace uncertainty without fear. “Understanding financial risk early helps teens see that playing it safe has its place, but it’s often the calculated risks that lead to real growth,” says Jake Ridley, a certified financial planner.
How families can talk about and model risk
Risk isn’t just about numbers. It’s about emotion, decision-making, and learning how to handle uncertainty. That’s why talking about it at home is so important.
“Parents can help by talking about their own decision-making,” Ridley says. “They can say things like ‘This feels risky, but here’s why I’m doing it,’ or ‘I’m nervous, but I think it’s worth it.’ When kids hear that it’s normal to feel uncomfortable, it can normalize smart risk-taking.
Frances Rahaim, Ph.D., president of HUG Your Money, Inc., adds that modeling and involving teens is key. “Engage their help. Ask them to assist in anything from collecting receipts for a family budget you're working on to reading the financials in the newspaper together,” she says. According to Dr. Rahaim, avoiding these conversations to protect kids can actually do more harm than good. Learning through experience and exposure is how kids build financial literacy.
Clearing up common financial risk misconceptions
Many kids and teens (and adults!) think risk equals danger. But not all risk is reckless, and not all “safe” choices are totally safe. Andrews points out that even the savings account parents often lean on can carry hidden risks. “Another mistake I see frequently is when people assume low-risk means no risk,” says Andrews. “Parents do this too — they put everything in one savings account for ‘safety’ and completely ignore how inflation silently erodes it year after year.”
Another myth? That higher risk always means higher reward. Dr. Rahaim breaks it down with a simple comparison: a fixed-rate account with a guaranteed return may outperform a risky stock investment if that investment ends up underdelivering. “Sometimes more risk really does mean more risk, with no guarantee of a better outcome,” says Dr. Rahaim.
Helping kids and teens think through financial risk
One of the easiest ways to help kids and teens understand financial risk is to connect it to things they’re already familiar with. Kofford recommends walking through different “what if” scenarios together. “What if you save this money? What if you spend it? What if you invest it in a lemonade stand that flops?” Kofford says. “Then run through the best and worst outcomes. Risk becomes less scary when you walk it out logically.”
Dr. Rahaim agrees with using real situations to help the concept sink in. She suggests talking through things like selling concert tickets, paying for a sick pet’s care, or deciding whether to splurge on something big. Ask your kids what they’d do, what could go wrong, and how they’d feel if it didn’t go the way they hoped. “The goal is to help your teen start thinking about what it means to take a financial risk, how it feels afterward, and how emotions, values, and money all come into play when making big decisions,” she explains.
Financial risk doesn’t have to be intimidating. The more kids and teens understand it, the more prepared they’ll be to face it head-on, whether they’re saving up for a phone, deciding how much to spend on a shopping trip, saving for college, launching a side hustle, or deciding how to spend their next paycheck. Parents don’t need all the answers, but creating space for open, honest conversations about money (and mistakes) can go a long way in building financial confidence.
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