For months, Mr. SixFiguresUnder has been brainstorming ideas for a series he wanted to write for Six Figures Under. On our road trip this past week, I took over the wheel and let him get typing. I’m sure you’ll enjoy his great insights!
On July 9, 2012, a Chinese acrobat sought a new world record by walking a high wire more than 600 feet above the floor of a ravine in Hunan province. The wire was 2,297 feet long. The acrobat, Aisikaier Wubulikasimu, was blindfolded and walking backwards. He wobbled a few times and once had to pause and sit on the wire to regain his balance. Fifty minutes after he started and just a hundred feet from the other end, the wind picked up, fatigue took its toll, and he stumbled, failed to recover, and plunged to the earth.
Aisikaier wore no safety gear and had no safety net. He survived only because he had already passed the highest sections of the crossing and because he fell into trees and bushes that broke the fall. It’s something of a miracle that he walked away with minor injuries.
Personal Finance
Managing personal finances sometimes feels like walking a tightrope, outdoors, in low visibility, with the wind picking up. It’s a balancing act where a misstep, a gust of unexpected expenses, or a wobble in commitment could send you into financial free-fall, with serious injury to your financial well-being awaiting at the bottom.
What can you do? The ultimate goal is to improve your ratio of income, expenses, debt and savings so that your financial path becomes more like a sidewalk than a tightrope. That transformation will likely take some time. In the meantime, you can seriously reduce both the stress and the risk of financial tightrope walking by ensuring that you have a strong safety net in place. When the winds of unexpected expenses, loss of income, illness, or disability cause you to stumble, your financial safety net will catch you before the fall can do serious damage, and you’ll be back on your feet and moving again with minimal disruption. Of course the consequences of many major life events can’t be eliminated even with good planning, but a safety net can help dampen the severity of even these larger problems.
Safety Net
So what is your safety net, and how do you get it in place? Your safety net is woven from a unique combination of individual strands that work together to protect you from those risks which are most likely to confront you and your family. You get it in place by identifying the risks you are likely to face and making provisions to mitigate the consequences if those risks should ever become reality for you or your family.
It’s important to note that it’s your choice which risks you want to protect against, and how much of a fall you can take before the safety net catches you. There is no way to eliminate risk entirely and some risks are so unlikely that they probably won’t require any action.
Height and Wind
We’ll call the known, expected risks, the risks inherent in your current financial system, the “height” risks. Those might be debts incurred, regular recurring expenses, extra obligations like caring for a disabled family member, and things like personal liability of business owners for some business assets. The higher your regular risks, the higher your tightrope sits above the ground, and the further you could possibly fall if a gust of wind surprised you.
Unexpected events, like loss of a job, large unbudgeted expenses, divorce, illness, disability, or other adversity we’ll call your “wind” risks. These are the risks that could knock you from your precarious perch, however high it is.
Seriously consider the height of your tightrope and the types of events that could knock you off your wire. Without honestly brainstorming your height and wind risks, you won’t have a clear enough picture to decide which risks to mitigate, and to what level. Without a clear understanding of your risks, you might end up with a strong safety net in the wrong place and nothing where it’s most needed.
The Series
Over the next several weeks, each Wednesday here at SixFiguresUnder.com we’ll examine one type of risk and the ways you might be able to build a financial safety net to mitigate the damage should that risk become reality.
Between personal experience and working as an attorney helping clients understand and manage risk, I have a list of several types of risks and several mitigation techniques. Even so, I’d love to have your input. You, readers, have been on the high wire and have felt the winds blow, and your collective experience will be more helpful to us all than my individual experience. Rather than set the boundaries by laying out my current list of risks, I would ask you to help build and expand the list by answering just three quick questions, or as many of them as apply to you.
- If you’ve ever been thrown from your precarious financial position by the winds of adversity, what sort of a challenge was it?
- As you walk your own financial tightrope now, what are the height and wind risks you most fear?
- For those risks which have turned real, or those which you fear, what have you done to get your own financial safety net in place and mitigate the damage caused by a stumble or fall?
I look forward to your comments. Until next week, keep your eyes open and don’t look down.
-Mr. SixFiguresUnder
Other posts in the Financial Safety Net Series
- Why a Durable Power of Attorney is Part of Your Financial Safety Net
- Creating a Cash Buffer
- Insurance We Do and Don’t Carry– Our Cost, Coverage and Reasons
Thanks for one marvelous posting! I enjoyed reading it, you are a great author. Keep up the wonderful works on. I’ve added you to my blogroll as well.
Our situation has been very bizarre. We have a child that had severe medical problems. We ended up having over a million dollars in medical expenses even though we had insurance. About the time that started to ease up, we learned that we had toxic mold in our house. We had comprehensive insurance (including earthquake) but the insurance company excluded coverage. It was not only losing our home, but all our belongings had to be thrown away and we all had serious health problems. Recently I learned I have a really complicated life-long disease. There’s no treatment to eliminate it, there are treatments that can improve quality of life, but once again they are expensive and not covered by insurance. Twenty years ago we were debt-free except for our home that was within five years of being paid off. We have gone backwards financially. We took money from our 401K, we didn’t put money in our 401K and now even though we are getting closer to retirement age, we have a mortgage. Trying to balance this has been very tricky. I can relate to the tight rope walker.
Worst fear is that we hit another parked car this winter and have to shell out $1K to fix our bumper! And when I say we I mean…uh, we.
This is a good idea for a series! I think the risk I fear most is major illness/accident. There are others (my industry is contracting and it’s extremely difficult to find work, let alone well-paying work) but that one scares me the most because if I can’t find a job in my field I can find *some* job, but if I’m so sick that I can’t work at all, who takes care of me, how do I pay the normal bills and the crazy medical bills, and so on. I also hate that it’s so unpredictable; I could live to 95 without cancer or getting hit by a car, or one of those things could happen tomorrow with no real way to guard against it.
Twice my husband has been laid off, and in both circumstances – in hindsight – we realized that God had something better in store. The most recent one was this past summer (the other time was 10+ years ago). My husband wasn’t at all surprised by the news as he’d seen others being laid off systematically for a couple of months. However, he thought that it’d be better to protect me by not telling me what was going on at work, so that when he called me with the news I was pretty blindsided by it. Yet I wasn’t worried; an overwhelming sense of peace kept me from panic. He actually had an interview with his former employer within an hour, and a job offer within the week, so the two weeks he was home we were able to take care of several things on our to-do list. I keep the freezer and pantry pretty full so there wasn’t a worry there either. In his line of work it isn’t unusual for people to move around and change jobs periodically, but I do hope that where he is now is where he’ll stay for a long time.
I think that what I fear most (#2) is that I’ll get tired of working through the slow pace of paying things off. I know how the snowball effect works, but I also know it takes time to build up the momentum and see significant results. The problem comes from wanting to see the significance now rather than waiting. Our pastor once said (while talking about addictions, but I translated it to debt) that when you are in that situation you work yourself into a hole. Once you realize a change though you still have to work yourself out of the hole. ‘Work yourself out’ – it doesn’t happen overnight. We just need to be patient while being persistent.
I just want to say that it’s so awesome that you guys are on the same page with your financial goals. It’s taken my husband and I a while to get to that sweet spot, but in the years since we hit that sweet spot, it’s made a huge difference!
We went through my husband’s job loss about four and a half years ago right after a big move and the birth of our second child. We wound up cashing out his 401k to get through it. We were very fortunate that it was only short term unemployment (less than sixty days).
We have now more than recouped the loss of retirement funds and have at least 3 months worth of living expenses set aside as our safety net. It’s a much better feeling than when we were living paycheck to paycheck!
That’s quite the tightrope story! I’d much rather be on a sidewalk!
We’re a single income family, so lose of income is a pretty big risk for us. So, we keep out expenses low so that we could live on a temporary lower income, we keep a nice cash buffer, and I’m qualified for a good paying job if I need to re-enter the workforce.
Right now, our biggest fear is job loss. Fortunately, we could live off of one salary, so it wouldn’t be extremely horrible, just would derail our FI plans…. so I would say we aren’t on a financial tightrope, but more likely a 2×4… so we don’t worry too much. Although, one of my biggest fears for the future is healthcare and taxes – I worry how much the prices might go up, and how much I should plan for them to be when I am much older.