“The more tied you are to a particular version of the future,” writer Shane Parrish warns, “the less likely you are to adapt as things unfold.”
While I believe this quote has nearly universal application in every aspect of life, it’s especially important in the arena of financial planning. Indeed, the ability to adapt to changing circumstances may just be THE key to financial fitness, because change is one of the only constants in life and money. Let’s look at a few examples where the ability to bend can help ensure your financial plan doesn’t break:
1. Decrease In Income – Whether it comes as a surprise (like the loss of a job) or its part of the plan (like the birth of a child, resulting in a reduction of household income), a meaningful decrease in income can be a significant challenge for anyone. But it’s an even bigger challenge if you’re living off of 100% (or more) of your take-home pay, a scenario that is sadly more the norm than the exception.
Yes, I get it, housing is expensive, and so is day care if you have young children, and we’re all paying more for groceries and gas right now, so there is no shortage of expenses to make a claim to our income. But if you’re spending every dollar you make, a reduction in income can feel tragic. Living below your means—deliberately pegging your lifestyle below your income today—is therefore the only way to adapt elegantly to a reduction in income.
2. Unexpected Expenses – Brakes for the car, a new roof for the house, surprise medical expenses for a family member—these are just a few of the many examples of unexpected expenses that are likely to come our way. If we don’t anticipate these surprises, they can often lead to financial harm, especially if we have to resort to high-interest-rate consumer loans or credit cards to cover the bills.
We can adapt to these expenses, therefore, by setting up a “buffer” or “rainy day” account with a separate line item in your budget, ensuring your entire financial plan isn’t derailed by a single surprise. Because let’s face it: While we don’t know what form they’ll take and when, we know that unexpected expenses are coming.
3. Market Volatility – It’s been pounded into our brains that “the market” should make about 10% per year, but this over-quoted annual return is nothing more than a hypothetical average. In reality, it is our very willingness to endure short and long stretches of unsettling market volatility that give us a right to the handsome expected rates of return that the market has delivered historically.
How, therefore, can we adapt to crazy markets? Explore your ability, willingness, and need to take risk, often with a third party; then build a diversified and balanced portfolio that is designed to help meet your goals without keeping you up at night. As your circumstances in life—or your tolerance for risk—changes, calibrate your portfolio allocation to make sure it is appropriate.
Change and surprises are inevitable in navigating life and money. Adaptability, therefore, becomes the secret weapon of any successful financial plan. Furthermore, when we prove capable at adaptation, this more flexible approach can often lead to even more desirable outcomes than we’d initially imagined.