← Glossary/Finance
Capacity for Loss
A person's ability to absorb an investment fall without an essential need or goal failing.
Example
Mika needs $3,000 for a course in two years and has no backup money. A large fall would cancel the course, so Mika has little capacity for that loss.
How it fits in
Capacity for loss is about financial consequences, not confidence or willingness to take risk. Check the amount and date of the goal, essential spending, other available money and what would happen after a fall. A person may feel comfortable with price changes but still be unable to absorb the loss. Use fictional, supplied cases for classroom comparisons rather than asking learners to disclose family finances.
Related terms
When the money you earn from saving starts earning its own money on top.
Interest paid only on the original amount, never on the interest you have already earned.
Needs are the things that keep you safe and well. Wants make life nicer. Mixing them up is what empties most budgets.