The holiday season is upon us. Believe it or not, Thanksgiving is here and Christmas, Hanukkah, and Kwanzaa are right around the corner. This is usually the time that some of the most sensible people throw caution to the wind and charge it! Amidst all the joyous festivities, many unfortunately rack up a ton of debt. In case you didn't know, on average it takes about nine years to pay off a $1000 balance at 18% interest. That's 2018! Is the sweater really that cute?

Recently, I have received a lot of requests for credit management workshops. I normally talk about what a credit report is. I always jokingly say that a credit report is a "grown up report card." I usually get a lot of nodding heads and nervous laughs. I think most people know that it's true. We are judged based on our current and past credit history. I then ask why we need credit. Some of the responses I hear include: to buy a home, a car or get a job; all of these answers are correct. With the shortage of "good jobs", something like a blemish on your credit report could be the difference between getting the job and remaining unemployed.

Next, I normally talk about why everyone should check their report. I get a variety of answers. There are a number of reasons to check your credit report. The best reason I can think of is to make sure the information on the credit report is correct. Besides verifying accounts and balances on file, it is just as important to verify your name, date of birth, social security number, current and past addresses and employers. If any of this information is incorrect, it's probably a good idea to dig deeper and file a dispute, if necessary. I always suggest to workshop participants to get a free copy of their credit report from all three credit bureaus because there is always the possibility that the information is not the same. To obtain a free copy of your credit report, visit www.annualcreditreport.com.

Towards the end of the workshop, I usually talk about the components that make up the credit score such as payment history, amount owed, length of credit history, new credit, and types of credit. If you are holiday shopping and opening credit cards at every store you patronize to get the discount on your purchases, beware that it might cost you a dip in your credit score and inevitable a higher cost for borrowing money.

If you want to keep your spending under control during the holidays, consider establishing a holiday budget. The budget can include gifts, food, decorations and supplies, holiday cards, and other miscellaneous items. Lists will be an important part of creating your budget. Create a list for holiday gifts that include what you plan to purchase, the estimated cost and where you plan to purchase it, if possible. This will help you stay focused during your shopping trip. Your food list should include everything on your menu, including ingredients. Check your refrigerator and cabinets before your shopping trip so that ingredients are not purchased unnecessarily.

Finally, reflect on the year we have had. It's been a pretty rough time this year. We have worried about plummeting stock portfolios, foreclosures, and our healthcare coverage. Now, it's time for us to be thankful for the things that we have. If your 401(k) took a dive, be thankful you even had one; many employees don't. If your home went into foreclosure this year, be thankful you had somewhere else to go; someone ended up homeless. Finally, if your HMO or PPO wasn't the greatest, at least you had coverage; millions of Americans are without any coverage at all. During this holiday season, be thankful for the people and the things that are important to you. In the final analysis, that's what really matters. Have a wonderful Thanksgiving. Happy Holidays!!!

I've come across a couple of different articles this week about risk tolerance and risk capacity, after writing my blog post last week. (Maybe it's the same phenomenon as when you learn a new word that you think you've never heard before. But then you hear it 5 more times in the next week.)

The November issue of Money Magazine has an informative article, How Much Risk Can You Stand? by George Mannes. And through the end of November, they have arranged for readers to have free access to FinaMetrica's risk tolerance questionnaire, which the article says is one of better risk tools available.

One of the interesting points in the article is this: "Risk tolerance isn't about how much risk you ought to take when you invest; it's about how much you can take before you crack." Meaning, your risk tolerance (and the asset allocation that it would indicate) should provide an upper limit for the amount of risk (i.e., the amount of stocks) you could assume in your portfolio, rather than a target allocation.

The article also contends that a good risk tolerance assessment tool should limit itself to assessing your "appetite for risk" and not your risk capacity. I think it's important to assess both. But they are probably right that the two should be evaluated separately.

In an ideal world, your tolerance for risk, your capacity for risk, and the actual amount of risk in your portfolio should be in agreement. I have a target allocation for my household's investments; it is based largely on an assessment of our financial ability to withstand losses (risk capacity). I was curious whether it would also match up with my risk tolerance. So I took advantage of the free access to the FinaMetrica tool and got my risk tolerance score. While FinaMetrica does not provide advice about what an appropriate asset allocation would be for any given score, the Money Magazine article suggests a "comfortable ceiling in stocks" for various scores. I was very happy to see that my actual allocation was right in synch with the suggested stock allocation for my score.

But the thing I will take away is this: this number should probably be my maximum stock allocation, rather than my target. My husband and I stood firm with our investments over the past two years, other than doing some rebalancing which actually means we moved money from bonds funds into stock funds. So our risk tolerance was able to handle the craziness of the stock market during that time. But I need to keep a close eye on our allocation. If the stock market continues to make significant gains, we could quickly be over our upper limit for stocks and take on more risk than we want. If we scale back a bit on the stocks, we'll be less likely to exceed our level of risk tolerance before I get around to rebalancing again.

Risk tolerance is a word that gets thrown around quite a bit when you read about investing. I think it's helpful to differentiate risk tolerance (your emotional reaction to risk) from your risk capacity (your financial ability to handle investment risk).

You're talking about risk tolerance when you ask questions like, "What would I do if the value of my investments dropped 30%?" You're trying to predict how you would respond. But you're assessing your risk capacity when look for facts about your financial situation, such as,

• How many years will it be before I need to use this money?
• How much do I save each year? Or, do I spend more than I earn?
• How much do I have in my emergency fund? (Please note that your emergency fund should be saved, not invested. By that, I mean its value can't drop, or not by much.)
• In retirement, how much of my expenses will be covered by Social Security or by a pension? And how much will I rely on my investments for my living expenses?

Determining how much risk you can handle and choosing an appropriate asset allocation may be as much art as it is a science. I'd be curious to hear what your personal experiences are, and what you think about the risk tolerance tools that are out there.

To learn about different types of investments and the various kinds of risk they have, visit University of Illinois Extension's interactive website, Plan Well, Retire Well, Your How-to-Guide at www.RetireWell.uiuc.edu. You can also read my latest news article about risk tolerance which is also posted on that webpage.