7.5 MIN READ
Too often we continue to be conservative or risk averse with a lack of opportunities or opportunities for prosperity.
While there is Something like being too hesitant or too cautious is a good reason to move towards less risk when planning long-term.
Even if you are comfortable with risks or are actively seeking them, there is a difference between calculated risks that you can afford and those that you cannot recover from.
Good planning is about understanding how to make a bulletproof record.
What does it mean to make a bulletproof balance sheet?
A bulletproof balance sheet or financial plan can take a hit from the unexpected (or just plain bad luck) and move on anyway.
It is a financial situation that can withstand the realization of the downside risk.
In order to build a bulletproof financial life, you may need to hedge some of your bets. There are times when you may need to opt for the safety of a moon shot that will crash and burn if you fail to land it perfectly.
That’s not overly conservative: it’s good planning. It’s the awareness that if an event has an 80% chance of working out in your favor, there is still a 20% chance that it won’t.
If someone gave you these chances, you might (rightly) feel pretty good assuming there is an 80% chance that the outcome will actually happen.
However, an 80% probability is not a guarantee. A 90% chance is also not guaranteed.
Either way, you still need to acknowledge that there is a 10 to 20% risk of getting the result you want.
And if your finances can’t hold out 1 or 2 out of 10 times when things go wrong, you don’t have a good plan.
Thinking about what happens when things don’t go the way you want them to be is not pessimistic. It’s sensible and a hallmark of solid planning.
To make a bulletproof record, you need to give yourself a runway or margin for downside risk if it inevitably shows up from time to time over a period of decades.
Here’s what that looks like, and how it fits into your own financial life.
Do not maximize the “friendly” numbers in your financial planning
One of the easiest ways to create buffer space in your planning is to use the conservative or lower range for numbers like income, bonuses, stock compensation, and investment returns.
For example, if you could reasonably make $ 250,000 to $ 300,000 this year, you’re not setting up a plan to do that requires You deserve the high end of this range for it to work.
If you usually get a bonus between $ 10,000 and $ 15,000, don’t assume that there is any certainty that you will get the maximum and base your budget on that hope.
And When you’re getting stock compensation, don’t make long-term plans that suggest the stock price will rise exponentially in the future.
Whenever you need to make an assumption about the numbers in your plan, you don’t have to assume the worst. It is reasonable to assume that you will earn something;; However, it is not reasonable to believe that you deserve the top of any possible salary and receive the highest possible bonuses for the next 30 years.
Simply using the lower end of the identified areas will allow you to add some wiggle room to your plan.
Consider a number of possible outcomes
You can’t plan for every single possibility. The future is not in sight, and the longer your time, the more uncertain you become.
What you can do is come up with a few different scenarios, ranging from best-case to less-than-ideal – and know how your plan works under each of the scenarios.
For example, if you want to sell your home in 2 years, you should consider a few other assumptions.
Perhaps, in one scenario, your home will sell quickly and for the price you want. Otherwise, it may take longer or the selling price may be lower than you hoped. And in a final scenario, you might be wondering what if your home has been on the market longer than planned, or if you have to cut the price significantly to get it moving.
In any case, you want to ask: Can my finances hold up? Obviously, with the sale of your home, your finances will be in good shape if your home sells, when you want, at the price you want.
But if you’re having trouble selling, what then?
If you need To move before you sell, can you afford your current mortgage and makeshift home rental in your new location? Do you have the flexibility to bring the price down to sell? Do you rely on it? with a certain amount of equity in the apartment Couldn’t that be realized if you’re selling for less than you want?
Again, you cannot plan everyone possible outcome. However, you can look at some common examples and simply ask, “What if this were the case? Not go exactly how i want it? “
When you ask the question, you have a chance to plan. If you acknowledge that there are possibilities outside of your dream scenario, you can incorporate them into your planning beforehand.
It can also highlight potentially risky behavior – like the fact that you may not want to buy a new home until your home is sold, just in case you are stuck on two mortgages for much longer than expected.
It’s not about predicting the future, it’s about considering plans A, B, and C and how each of them can affect your finances in different ways. That way, you can be better prepared to respond based on what actually happens, rather than just what you hope to see.
Give yourself the financial leeway to maneuver the unexpected or the unknown
One of the most popular ways to “expect the unexpected” is to build and maintain an emergency fund.
Your emergency fund consists of cash reserves that you have reserved to cover unforeseen, unexpected and unplanned events that you would otherwise not be able to cover with your normal cash flow.
Reasons for using emergency funds include job loss (and hence loss of income), accidents that result in high medical costs, major car repairs that you did not expect – the list goes on.
As a rule, we recommend our customers to keep “needs-based” expenses of around six months in cash reserves. This means you’ll have enough cash on hand for six months to cover your fixed costs and non-negotiable spending needs.
Emergency funds are just one way to give yourself the freedom and flexibility to navigate situations that you couldn’t plan ahead for.
Other great ways to develop your financial maneuverability and agility skills:
Save more than you think. For me personally, that means I save 30 to 40% of my income every year. I contribute this money to long-term investments for future wealth growth.
Why? Because I save so much now, I have the flexibility to make more decisions in the future. It makes the work optional and provides the means for big spending goals in the future.
Diversify. When we talk about diversification, we usually mean investing – and that applies here. You don’t want to be exposed to concentration risk and a lack of diversification can affect your ability to generate returns.
But you can diversify in other ways too: like your skills, your ability to generate an income, or the types of assets you own. Do not rely on anything one This is your only ticket to achieving your goals and building your wealth.
Watch out for high fixed costs. One of the biggest mistakes people make is adding massive fixed costs to their monthly budget. Whether it’s the largest mortgage payment you could afford to take on many liabilities at once, the more fixed costs you have – and the higher they are – the less leeway you have to maneuver.
A bulletproof record expects some things to go sideways – so that nothing prevents you from achieving your goals
When we talk about a bulletproof record, we mean a financial situation that can take a hit or two and move on … because it was intentionally designed this way.
A financial plan that only works when everything goes exactly the way you want it to be is not a plan at all. It is a wish.
That doesn’t mean we have to get our best Eeyore impressions or expect the worst to happen to us. In fact, we want to enable conversations that capture hopes and dreams and really big goals!
And after we understand what is most important to you and what your big dreams are, we want to create a plan that is resilient enough to withstand possible setbacks along the way.
This is the only way to make a dream come true: having a plan tough enough to roll with the blows and which will allow you to achieve your goals even when getting there isn’t easy.
About the author
Eric Roberge, CFP®, is the founder of Beyond Your Hammock, a paid financial planning firm based in Boston, Massachusetts that specializes in providing planning services and investment management to professionals in their thirties and forties.
Did you know that XYPN consultants offer virtual services? You can work with clients in any state! View Eric’s Find a Advisor profile.