My oldest son’s best friend very suddenly came down with a serious illness a couple of weeks ago. He has been in the hospital ever since, dealing with a surgery and then a number of post-surgery complications. I don’t even want to speculate as to what their medical bills will look like, even with good insurance.
At the same exact time, another friend of mine abruptly lost his job. It was a good paying job and one that seemed about as secure as a job could be, but his company abruptly ran out of money and closed their doors. He suspects that the company may have been in trouble for a while, but there was honestly little sign of it. Luckily, my friend is single, so there isn’t a spouse or children or other dependents to worry about, and he did have some savings built up for him to live on while he finds a new job.
Now, combine those two pictures together. In the first picture, if one of the parents had abruptly lost their job (and the other parent didn’t have insurance) before their child became ill, their entire financial situation would have fallen like a house of cards.
That picture has been heavy on my mind as of late, and it’s made me carefully consider some of the financial risks that we face in our lives and that many families face to an even more stark degree.
The truth of the matter is that a lot of us are walking a financial tightrope in our daily lives, whether we see it or not. Many of us are just one unexpected bad event away from catastrophe; a lot of us would buckle at two simultaneous bad events like the one above. A lot of American families don’t have rich relatives or extended family who could rescue them in a pinch – the reality is that many families that would be beset by a series of unfortunate events would find themselves in a pretty intense place.
Poverty. Homelessness. Those things can seem unlikely or even impossible when your day to day life has been going well for a while and things are comfortable, but what happens to your life if you’re outright fired tomorrow? What if you get a life-threatening illness that’s going to take a very long time to recover from? What if your wife does, or your child? What if a part fails in your car and you’re in a deadly auto accident and wind up getting sued, and your insurance does nothing to protect you?
Most of us live our lives as though these things simply aren’t going to happen, and that means that, by default, we’re accepting some level of risk, every single day.
Mostly, we ignore that risk. To live a life in fear of that risk would be paralyzing.
But we never forget it. Those fears show up when we’re lying alone at night reflecting on our life. Those fears show up when there’s a close call. Those risks are always in the background, always contributing just a little bit to our stress level, especially when we have people depending on us in our lives – a spouse, children, dependent relatives, and so on.
As a parent and as a husband, I recognize that those risks exist. I want to do everything I can to minimize those risks, for a number of reasons.
I want to minimize the chance of a major disruption in my children’s lives and in my own life. I want them to grow up safely and securely, enjoying their childhood and learning lessons as they mature, not having fear and worry abjectly thrown on them when they’re already struggling with the complications of growing up.
I want to keep that background stress in my life as low as possible. I want my little worries to be safely filed away as “extremely, extremely unlikely” rather than “well, that could happen, it just happened to my friend, gotta hope that doesn’t happen.”
Most of all, I want the downside of things that I’m not even thinking about to be as small as possible. There are difficult situations and unfortunate events that I’m not even considering when I reflect on my own life. Things can happen that I’m not even considering, and I don’t want to be waylaid by them if at all possible.
Those principles occupy a major place among my financial and personal goals. They drive a lot of the actionable goals I set for myself and steer many of my decisions.
Isn’t that a life lived out of fear, though? Not really. In fact, I see the opposite. To me, a life lived out of fear is one where you cover up your worries with more spending, when you go on fabulous trips and buy expensive things while not having a dime in your savings account. To me, a life lived in fear is one where you do nothing to address the things that worry you. A life without fear is one where you do your best to stomp your fears into oblivion and make that background stress and those nighttime worries dissipate. A life without fear isn’t one where you avoid airplanes; it’s one where you go ahead and face that fear head on and handle it and eliminate it.
Here are some of my best strategies for eliminating and minimizing those risks of everyday life.
Build a ‘perpetual’ emergency fund.
The number one thing that anyone can do to minimize the risks of everyday life is to simply take a small portion of their income and set it aside for the future so that when bad things happen, you have a pool of cash with which to handle it. This is generally called an “emergency fund.” Most people do it by moving a bit of cash from their checking account to their savings account on a somewhat regular basis, though some like to keep a small amount of cash stowed away in their home.
My preferred approach for an emergency fund is what I call a “perpetual” emergency fund. You simply set up a weekly automatic transfer from your checking account to your savings account – say, $20 or $50 or whatever you can afford – and just let it sit forever. There will be times when your emergency fund gets nice and fat, and then there will be other times when you deplete it all the way down to nothing. Regardless of the situation, you just keep letting that money trickle in, weekly drip by weekly drop. You never have to lift a finger again to fill or refill your emergency fund.
To me, there is no “maximum” or “minimum” size that an emergency fund should be, provided you are automatically filling it. There will always be an emergency or an unexpected event, thus it always makes sense to keep refilling that emergency fund, even if it gets quite big.
Keep your spending significantly below your income.
This is just an all-around good rule of personal finance. In fact, I usually think of it as the rule of personal finance: spend less than you earn and do something smart with the remainder.
Ensuring that you spend significantly less than you earn has a bunch of benefits.
First, it ensures that you always have money with which to save for the future. If you’re spending less than you earn, that means that there’s money left over to prepare for the future. Retirement investing? Saving for your next vehicle? Saving for a house down payment? All of those are viable options depending on your life situation.
Second, it ensures that a reduction in pay due to a job loss won’t rattle your life nearly as much. If you’re making $60K a year and living as if you were making $40K, then a new job that earns only $40K isn’t going to impact your life too much. On the other hand, if you were spending every dime of that $60K income and had a pile of debts, that drop to $40K is disastrous.
Third, it gives you career flexibility, in that switching to a job with lower pay but other benefits is on the radar and a complete career change isn’t financially disastrous. Again, simply knowing how to live somewhat below one’s means makes career and job switching much less painful than before and makes the range of careers and jobs you can switch to much larger. You don’t have to continue to toil under the thumb of a cruel boss because of limited options if you live well below your means.
Finally, living below your means for an extended period virtually guarantees that you have cash reserves somewhere, so you’re much more prepared if a major crisis hits. If a major life crisis occurs and you’ve been living below your means for a while, you’re going to be much better prepared to handle it, both in terms of having cash on hand and in terms of having less financial need than you otherwise would.
Don’t inflate your spending. Keep it low. Budget carefully and consider your spending very carefully. It’s one of the best things you’ll ever do for yourself.
Avoid all debts, even extremely low interest ones.
I’m a big proponent of complete debt freedom on the personal level. It’s fine to have some debt within a business structure – that’s what many people do when they invest in real estate is that they form a business and invest within that business – but in terms of my personal life, I want as little debt as humanly possible.
Why? Carrying debt is a risk. It means that you have a monthly payment that you have to deal with which gobbles up some portion of your income and thus restricts your cash flow. Simply put, you have to be earning more than you otherwise would just to keep making the payments.
Then, what happens if you can’t make those payments? At first, your credit is seriously damaged, which has an impact on all sorts of things in your life. After that, you may face repossession, eviction, and/or legal action.
The easiest route for an individual walking that tightrope of life is to simply avoid debt whenever possible. Sure, you might need to take out a student loan to go to college, or you might need a car loan to get to work, or you might need a mortgage to buy a home, but you should avoid carrying credit card debt at all costs and you should be rapidly paying off any and all debts that occur.
As I noted earlier, some of these tactics don’t apply as strongly if you have a strong safety net in life. For example, if you have wealthy parents that can support you if things fall apart, then there are situations where taking on debt in order to earn a much bigger return might make sense, but for most Americans who walk a financial tightrope, it is a much riskier move.
Maintain and improve your physical and mental health.
Health care costs are tremendous, especially as you age. Even with great insurance, the costs will hit and they’ll hit hard.
The thing is, you can keep those expenses somewhat at bay simply by keeping your body and mind in good health. Simply eating a plant-based diet, eating until you’re not hungry rather than eating until you’re full, and exercising a little each day in a way that you enjoy will make a tremendous difference in terms of your long-term health outcomes.
You control those choices. Every time you eat something, you have a choice as to what you’re eating and how much you’re eating. Every time you have some spare time, you can choose to do something that’s physically active or mentally active.
Making the choice to eat healthier and be physically and mentally active is a choice that reduces your long-term health care costs. You’ll feel better, too. It’s as simple as that.
- Related: The Truly Frugal Diet
Maintain insurance for things you cannot cover.
This doesn’t mean ensure every single exceedingly rare outcome, but it does mean that you should have adequate insurance to cover things that would be disastrous and have at least some significant likelihood of happening.
For example, if you have dependents, you should have a term life insurance policy that covers you through a time when you no longer have dependents. If you have kids, you should be insured until they’re going to be well out of the house. If you have a financially dependent spouse, you should be insured until that spouse is no longer financially dependent on your income. The earlier you get this policy, the less expensive it will be.
Your homeowners or renters insurance policy should cover against disasters that happen in your area: flood, tornado, earthquake, hurricane, fire, and so on. Make sure that things that are known to happen where you live are things that your possessions are covered against.
If you can’t afford to replace your car out of pocket, then you should be carrying appropriate comprehensive insurance on your car.
While those insurance packages will eat into your monthly budget, they’ll also help protect you from a number of major risks of modern life.
Take a few simple steps against identity theft.
Here’s the simple truth: Most identity theft occurs because of low-hanging fruit. A person uses a simple password on their account that’s easily guessed by a hacker (and if it’s a word in a common language, it’s easily guessable). A person clicks on a link in an email and then promptly fills in personal information. A person uses their debit card and the number gets skimmed.
There are a few things you can do to minimize your risk of identity theft.
First, never, ever give out personal information to solicitors. If you decide to do business with someone, you contact them and look up their contact information on your own.
Second, don’t use the same password on your most important accounts, and don’t use simple passwords. There are a lot of ways to make a more complex password – one way is to simply alternate the digits of your birthdate with the name of the website you’re visiting, like 0a3m1a1z8o2n for example.
Third, make it a regular routine to check your credit report for anything that might be incorrect. The FTC allows American citizens to check their credit report for free once a year at annualcreditreport.com, so take advantage of that.
Fourth, don’t carry any more identification or financial cards than necessary. Never carry all of your identification or all of your debit/credit cards with you. Losing your wallet or getting robbed becomes disastrous in those situations.
Finally, don’t use your credit card as an emergency fund. If your card is stolen or the communication network breaks down or your bank cancels your card, you can find yourself without cash when you need it most. Don’t rely on it. Instead, have a cash emergency fund, as described above.
There are two key purposes in reducing the risk of everyday life.
One, it minimizes the background stress in your life caused by things you can’t control. There are always going to be things you can’t control. What matters is that you’re prepared to handle them, and that’s what all of these steps are about. You’re minimizing the odds of some unexpected events and preparing yourself to handle others.
Two, it gives you some breathing room to take on risks of your choosing. When you already have a lot of background risk in your life, taking on another risk seems daunting, even if that risk holds great opportunity. On the other hand, if you have that personal background risk under control, taking a risk in your personal or professional life suddenly seems to have a lot less downside, making it worth considering. Leaps of love, leaps of faith, leaps of professional advancement – they all become more reasonable if you have the other risks in your life under control.
The strategies in this article enable you to take advantage of both of those benefits. When you lower your risk, you feel less stress and you feel safer taking on additional risks of your choosing. That’s the route to a pretty good life, indeed.