The income from your savings is affected by the uncertainty of the promise.

If you deposit your cash with a major UK bank which promises 3% interest, that’s pretty safe. But if you deposit it with a bank in a developing country there’s some risk that it will be blocked or confiscated. So you wouldn’t do that unless you were being paid more than 3%.

But how much more? Put another way, how much extra interest would you require to deposit your cash with Country X? And how would that decision - putting capital at risk to make more money (possibly) - affect your life plans in total?

This is a theme that runs through all aspects of money management. It is usually called ‘management of risk’. But ‘risk’ is such an ambiguous concept (and has been hijacked for some very technical financial issues). So we prefer ‘certainty/uncertainty’ in Easy Money.

Return

We have to talk about ‘return’ on an investment. We’ll explain it properly in Simple Money, but for now understand that it’s the amount of money you make, annually, out of the investment, expressed as a percentage. In the simple case of a cash deposit your ‘return’ is the same as your interest rate, e.g. 3%.

For an asset such as a company share it is more complicated. For Easy Money understand that you want to make as much money as possible so you want as high a return as possible. Bigger is better.

Here’s the key. Nobody likes uncertainty. So an uncertain asset will be worth less than an otherwise identical certain asset. Which means it will be cheaper. Which means it will have a higher return.

The price of uncertainty

So this is the question. Does the extra return being promised offer sufficient compensation for the uncertainty of the promise? (This is sometimes called the 'trade-off between risk and return').

The right answer is 'whatever you feel comfortable with'. Like so much in personal finance there is no general right answer but there is a right answer for you. How stable is your income? How secure is your job? How flexible are your living standards? Do you have dependents and what are their expectations? Are you getting close to a savings objective (house/education/retirement)? Are you a risk-taker? What does your partner feel?

Two different uncertainties

So we have uncertainty about how your investments will perform and how that affects the return you can expect. Their is also uncertainty about your future wants and needs, both controllable (wants) and uncontrollable (needs, health, lifespan, and unexpected events).

It’s these uncertainties that make regular discussion and review so important in money management.

Disasters

……are uncertainties. You’ll need either cash or insurance. See Cash Cushion.