Big spender or penny-pincher? Careful planner or impulse buyer?

It's all down to your financial personality. To see which category you fall into, have a go at this lighthearted quiz.

Why does any of this matter? Well, before you launch into any financial decisions, you need to know yourself and understand how you really feel about risk.

Risk is simply the possibility that something negative will happen. And that chance is always going to be there. As much as we all like to demand guarantees on everything from public safety to the bank holiday weather forecast, most things in life involve a degree of risk.

As we can't eliminate risk from our lives, what's important is that we can consider our options realistically, evaluate the degree of risk involved and then decide whether it's something we feel comfortable with.

Naturally, risk is going to play a big part in your thinking about financial planning.

The rule-of-thumb with investing money is the higher the return, the higher the risk. The risk is you might not get the return you expected – or even that you end up losing money. On the other hand, you could get a really great return for your investment.

Here's a quick guide to the relative riskiness of various ways of investing your money.

Savings bank accounts

If you put cash into a savings account, your money will be secure – and so will any interest that you make.

Similarly, if you save every month through a recurring deposit account in bank, your money is not only secured and so also the interest you earn.

Savings accounts are a good option for short-term savings – for instance, if you're saving up for wedding expenses or a dream holiday. It's also the right place for any money you need to be able to get at quickly, such as an emergency fund. For long-term investments, you need a better return on your money, so you should be looking elsewhere.

The real issue with short-term savings is that inflation eats into their value because they offer very little growth potential.

Bonds

Bonds are like an IOU issued by the government or a company – in return for your money, they'll pay you back at a certain rate each year. Your money isn't easily accessible so bonds are a long-term investment.

Bonds aren't risk free – as their value can fall and the company that issues them could go bust – but they do have greater growth potential than ordinary savings accounts.

Buying and selling these bonds also need expertise in the debt market and involves a cost and also require the services of a broker or trading account.

Property

Investing in bricks and mortar – whether it's your own home, commercial property or buy-to-let – can bring great returns if the property market grows. However, it's also rather risky, because prices can fall relatively quickly. It's also a long-term investment, as it ties up your capital.

Shares

The value of shares can go down as well as up, making them risky. However, over the long term, they've traditionally been the option that makes the most money for investors – by a very long way. This is because they are tied to economic performance and over long periods of time – say 10 years – this more than offsets the impact of inflation and the periodic falls in stock markets. Of course past performance isn't a guide to the future.

Buying and selling shares also need expertise in the equity market and involves a cost and also require the services of a broker or trading account.

Weighing up the risk

While it's up to you to evaluate risk and to know if it's something you can live with, there are some things that should influence your decision.

You should have the right sort of investments for the job. Low-risk products are best suited to short-term savings and higher-risk ones to long-term investments.

For those risky, long-term investments, the longer 'long-term' is the better. You need time to give yourself a chance to recover from any losses.

If you're in your twenties and investing in shares for the long term (say, for over 20 years), you're giving yourself plenty of time to make up any potential losses. You can't predict the fluctuations of the stock market, but the longer your money is invested, the greater the opportunity to ride them out. There could be big long-term potential if you can handle the short-term risk.

Of course, if you really can't cope with the fact that you might lose some money at some point, then shares aren't for you. Otherwise, it's a risk well worth considering.

The balance of your investments is another important thing to think about. Don't put all your eggs in one basket – it could be dangerous to expose yourself too much to one kind of risk.

For instance, if you put everything you have into property you could find yourself in trouble if the housing market falls – particularly if you stretched yourself to the limit when you were investing. It's best to have a range of investments and spread your risk.

The balance between your investments shouldn't be static throughout your life. But health care developments and lifestyle changes mean more of us are living longer. This means many retirees are keeping more of their assets in higher-risk equities rather than bonds because they need their assets to continue to grow so that they have enough to live on for 20 or 30 years in retirement.

So, guard against a knee jerk response when you're thinking about risk. But you should also know yourself and what makes you uncomfortable. If you talk to a financial adviser, always make sure you discuss how you feel about risk so the adviser can recommend products that are right for you.


Compound Interest

When you save regularly, each month you not only get interest on what you've saved yourself, you get it on the interest that's been added to the pot in previous months. This is called compound interest and the effect gets better the longer you save.

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Inflation

The rate of inflation refers to the rate at which prices rise. If the annual inflation rate is 5%, then a Rs.100 ring will cost Rs.105 next year. Inflation can eat into the purchasing power of your savings.

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Shares

Another name for equities. You can invest in them either through collective funds like mutual funds, or else directly in individual companies.

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Equities

Another name for shares. You can invest in them either through collective funds like mutual funds, or directly in individual companies.

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Assets

Your assets are the things you own that have value, such as your home or shares.