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I read an opinion piece recently that lamented the advice financial advisors provide to budding investors — essentially telling people to sacrifice the little things in life that bring them moments of joy and pleasure in order to save toward retirement or a financial goal. The piece weighed the happiness a person gets from a $7 latte a few times a week against the satisfaction and security of putting that money aside. It was a fair assessment, but it begged the question: what good is financial security if you don't get to enjoy the little things along the way? That tension is exactly what brings us to this week's discussion — risk versus reward.

In just about everything we do, there is a risk involved. In the case mentioned earlier, we are trading the reward of enjoying a latte several times a week for the risk of falling short on a savings goal. In another instance, you may take the risk of paying a high upfront cost for a degree or professional certification with no guaranteed return — but the potential earnings uplift over the course of a career can far outweigh that initial investment. It works the same way with money.

In simple terms, risk versus reward measures the trade-off between the possibility of losing money and the potential for financial gain. It is this concept that helps financial advisors determine your risk tolerance. Essentially, how much uncertainty you are willing to accept in exchange for a potential reward. As the saying goes, the biggest risk is not taking any risk at all. However, things get a little more complicated when you are deciding how to invest your hard-earned savings rather than simply whether to treat yourself to a coffee every now and again.

Understanding how you feel about risk does two things. It helps you get clear on what you are willing to sacrifice in pursuit of a goal, and it puts into perspective how much you can genuinely afford to lose. That second part is important. In investing, there are no guarantees — so a good rule of thumb is never to invest an amount that would derail your financial wellbeing if it disappeared entirely.

Think of it this way — a high-growth stock can make you a lot of money, but it can also lose significant value almost overnight. A cash savings account will not make you rich, but your balance is predictable and stable. The higher the potential reward, the higher the risk you take on to get there. Neither option is wrong. The right choice simply depends on what you are trying to achieve and how much uncertainty you can stomach along the way.

So how do you determine where you fall on that spectrum? Start by asking yourself three questions. First, what is this money for, and when will I need it? If you are saving for a goal that is five or more years away, you can generally afford to ride out market fluctuations and take on more risk. If you need access to funds within the next year or two, capital preservation matters more than growth. Second, how would I react if my investment lost 20% of its value tomorrow? If the honest answer is panic and sell, a more conservative approach is likely the better fit. Third, do I have an adequate financial cushion outside of my investments? An emergency fund covering at least three to six months of expenses means that a bad month in the market does not force you into a corner.

These choices can be daunting as you navigate the complexities of life, but with every decision, seek to find balance. Whether you are deciding to splurge on a vacation, go back to school, or put money into the market, the goal is the same: understand what you stand to gain and whether the risk is worth more than what you can afford to lose.