As much as I like to plan my financial future, I understand there are a lot of money variables. Nobody knows exactly what the future holds, heck, even Nostradamus couldn’t predict everything.
You Can Only Plan For So Much
There is no way to plan for every outcome or contingency. We can get a lot of them right but it’s impossible to bat a thousand.
For example, it’s easy to predict that over a ten year period your car is going to need some type of repair. Anyone who has owned a car can tell you that. But there are other things with a car that are harder to predict, like in my case when my car caught fire on a family road trip. True story.
5 Money Variables
These are five money variables that can impact your financial future.
Number 1: The Overall Economy
What happens in the overall economy makes a big difference, especially if you own a lot of assets. An economy humming along at 15 percent growth for a few years in a row is going to provide significantly higher returns than negative growth. This is especially impactful for recent retirees where there’s a sequence of returns risk.
There’s also a psychological component to this. A bull market just feels better than a few years of a bear market. Even though the market historically has always recovered, bull markets are a big psychological boost.
Number 2: Recession
A part of the economy that many fear is a recession. Even though they are part of the normal economic cycle, they don’t feel good and create a lot of anxiety for people.
A recession can change your financial future, both in a good and bad way. Someone just getting started investing will actually benefit from a recession because assets are now for sale.
While someone nearing retirement, or newly retired, has a sequence of returns risk. A bad recession can mean having to adjust the retirement plan, including working a little longer than expected.
Depending on your life stage, recessions have different meanings and impact on your financial situation.
Number 3: Unexpected Windfalls
An unexpected windfall is a huge variable in your financial situation. When I say windfall, I’m referring to things like a big bonus, selling a business, inheritance, etc. Something out of the norm of your regular income.
For example, someone who sells a business has to be wise with their money because that money is a one time event. Invest it well and the money will compound. Blow it, and it’s gone forever.
Same thing with a bonus. A large bonus has the chance to propel your finances to new levels and compound many times over. For example, a $20,000 bonus going to a 25 year old will double approximately every seven years according to the Rule of 72, assuming a 10 percent rate of return.
That’s five doubling cycles by the time age 60 is reached! Longer if the money is invested for a greater duration.
Number 4: Emergencies
Part of what makes an emergency an emergency is the unexpectedness of it. Nobody starts the day thinking they are going to be involved in some type of emergency. One thing that is clear though is that emergencies do happen and we have to be prepared.
Over the course of a few weeks an emergency isn’t likely to happen. But over 50 years it is likely to occur multiple times. That’s why emergencies are a huge money variable and why it’s so critical to keep an emergency fund.
Emergencies also vary in scale and severity. A car that costs $1,700 to repair is a financial emergency that can quickly be solved with a proper emergency fund. While a major health issue is an emergency that is going to have a long recovery and likely months or years of missed work.
While nobody knows when they will happen or how severe they’ll be, emergencies do happen and the best way to be prepared financially is with an emergency fund of at least three months, ideally longer.
Number 5: Black Swan Events
In his book The Black Swan, Nassim Taleb describes black swan events as completely unexpected and seemingly coming out of left field. For example, if you told people in 2015 that in four or five years, there would be a global pandemic most people wouldn’t have believed you.
So black swan events are completely unexpected and rare but they do happen from time to time. Nobody knows the impact each event will have so the best way you can prepare financially is to keep an emergency fund and invest regularly.
It doesn’t do anyone any good to worry and fret about the future but having an emergency fund and investing as much as you can is a great way to protect yourself from these types of events.
Using COVID as an example, someone working in the restaurant business who wasn’t able to work for six months or more would have been in a much better position with a well funded emergency account plus some investments than someone living check to check.
Conclusion
Financial variables are called variables because they may or may not happen. And when they do occur, they can be big. An expensive home or car repair, major illness, job loss, world event, etc. These things are big, but can be absorbed with the right financial preparation.
There’s no use in trying to predict the future other than knowing it’s going to have some twists and turns. Control the controllables and at the very least prepare yourself financially for a variety of situations that could arise.
How do you prepare for financial variables?
