As we had seen, passive savings and narrow investment portfolios may be very efficient but they do not build resilience. Being financially resilient is hard work, maintaining the socio-economic status after unforeseen events is the key factor.
As a salaried person, understand and tune the skills to the market that will keep us employed for a long time. Each economy is different and is dynamic, mindless savings to aim for early retirement will put a strain on mental and physical well being. Once we do not work, the cash flow stops and we would not realise how fast the reserves deplete. Aim for resilience, sustainable lifestyle than early retirement. More here
Cheap loans are everywhere, which will tie you to hefty monthly repayments. Any thing that demands a huge monthly outflow puts a dent in the resilience. Try saving up, if possible fund big purchases like car and homes with as less loans (or lesser tenures) as possible. More here
Resist the temptation to succumb to marketing. Think like a Finance officer, not as a Marketing Executive who has a budget to spend on improving brand recognition. It is your money to be invested at your discretion for your future self, don’t be hard on your future self and end up disposing of what is in hand. More here
Risks are difficult to understand and mitigate. Tail risks are even harder to imagine and plan for. Unless someone diversifies their portfolio of savings and investments along with insurance, safety gears, high quality equipments, healthy habits etc, it is hard to mitigate. It is inefficient to be resilient, but resilience keeps you afloat in dire situations while efficiency drowns you. More here
Summing it all up, realise the concepts of resilience as early as possible. Nothing is too early to learn when it comes to finance. Try to pass on this knowledge to the young ones as soon as possible in a practical way so that they don’t have to learn the hard way. I realised this as an intern in a different town, who was sick in the middle of the month, no cash in bank, hefty credit card dues. Luckily came out of that mess, but learnt a very valuable lesson and changed how I look at finance forever.
Based on our ability to foot the bills for standard of living we are often placed in socio-economic classes. The middle class is one long continuum before reaching affluent or HNI class. What I observed is, unforeseen events can push an individual and their families a notch or two below their current status more often than well planned savings and investments pushing individuals few notches above. Thereby it is easy to lose wealth than to gain and keep it safe, so extra care needs to be taken to preserve it. Someone who has an enviable lifestyle of a luxury apartment and a D segment car can lose it all within a month due to either a natural disaster or an accident which was never thought of.
These type of risks are tail risks, we are inherently optimistic and given the low probability of these high impact events we always think that such cases never happen. So we never have a mitigation plan in place. These risks when materialising will not just cause a setback, it ruins. Tail risks cumulatively increases, which means though as a single risk in single exposure looks negligible, multi risk, multi exposure over time will increase the likelihood of ruin very much.
Consider the following risks taken together – You don’t wear a helmet while riding a motorcycle, you frequently ride in the night in accident prone highways, you don’t sleep well often, you don’t eat a balanced diet, your motorcycle is not maintained routinely. The combined risk of having a serious injury has a very high likelihood thereby leading to a ruin.
Some tail risks like lifestyle diseases can be avoided altogether with a healthy lifestyle, many others like a geopolitical instability can’t be mitigated but can only be prepared to sail through with diversification of holdings. Insurance is a good option against many unforeseen circumstances, though many people view insurance as a expense, it is a way of paying it forward and praying such a scenario never happens. Someone not paying for insurance will have some money left in hand but at the grave risk of losing it all.
Identifying the tail risks in our life and planning for a mitigation is very much necessary. Being poor is expensive, once we are knocked off the socio-economic position, it is very difficult to claw back on to the same position. Mitigations are not just insurance, it is healthy lifestyle, adherence to safety standards, avoiding risky behaviours, hedging, diversification etc.
I like Nasim Taleb’s work on this topic and much more on probabilities. We don’t realise the skin in the game in the long term as we are too short sighted as a common human.
In the last blogs we saw how debt inflates our needs for bigger purchases and traps us into situations that are undesirable like tolerating bad work culture, poor working conditions etc. Next step in achieving resilience is to avoid the marketing traps especially the ones that call your money “Disposable”.
A lot of people get into buying properties on loan because they would spend the money on luxuries when they see a big withdraw-able balance and it is growing month on month. People prefer being locked into long hefty repayments to prevent the temptation to dispose off the money, so they will end up with a housing loan with hefty repayments. The reason for this mindset is, any money left over after taxes and essentials (rent, medical, food, utilities, child care etc) is called disposable. Forcing us to prime it such a way to spend.
If we ask someone what will they do if they have million dollars, a vast majority of people will give ideas on how to spend a million dollars like buying an exotic car, expensive jewelleries etc which may bring joy momentarily but also drag the wealth down by many notches. While we need to spend on joy to remain sane, how much of it is required is the question we need to answer. By default we humans are hedonistic, we will keep wanting more and more of the same thing or something bigger than what we want. So we will end up disposing what we have in hand without thinking twice.
Unless we think about the cash in hand as a capital than disposable money, we would not have the mindset to invest large sums of money across different asset classes which makes us resilient. Replace the term ‘disposable income’ with ‘discretionary income’ that is waiting for its business owner to be invested. You will realise ways to budget spends for joy and standard of living, yet set money aside for investments. Best piece of advise I got from a friend was to create two other bank accounts apart from the salary account. One is to keep 3-4 months of expenditures for emergency usage and another one to fund SIPs, equities and loans. The moment salary arrives, the account is left only with budgeted money for essentials, living standards and joy and the rest goes to investments. In other words, the disposable income becomes limited. This helps in not succumbing to temptation to spend until zero or buy a huge property with hefty repayments so that we will not spend it away.