Internationally-known daredevil Karl Wallenda earned his fame by performing acrobatic acts high above the ground — without a safety net.
For years, Wallenda had performed his dangerous stunts countless times without incident, but on March 22, 1978, his luck finally ran out. While walking 121 feet above the pavement on a high-wire stretched between two towers of a Puerto Rico hotel, an unfortunate combination of improper rigging and strong wind gusts tripped up the 73-year-old Wallenda, and he fell to his death.
Of course, Wallenda isn’t the only daredevil who has taken giant risks in life — there are personal finance daredevils who fail to properly manage risks too. And while there’s nothing riskier than putting one’s life on the line, it’s still extremely important to understand and effectively manage the financial risks we face in life.
Risks are typically managed in one of three ways:
- Off-loading the risk onto somebody else.
- Hedging the risk.
- Doing nothing and accepting the risk as is.
Which option to employ is usually a factor of how much you’re willing to spend to mitigate the risk, and the amount of risk you’re willing to accept — otherwise known as your “risk tolerance.”
With that in mind, here are the most common ways to properly manage financial risk:
Carry the proper amount of insurance
Insurance is supposed to protect you from losses you can’t afford to replace — it isn’t meant to cover smaller expenses like a fender bender, or minor roof repairs. Keep that in mind before paying higher premiums in exchange for lower deductibles.
Maintain adequate emergency funds
Keeping dual emergency funds provides a rock solid hedge against the unexpected. So keep a small rainy day fund to help weather short-term, low-impact financial storms of less than $2000, and a larger separate emergency savings account with three to six months of living expenses for longer-term crises such as a job loss or medical issues.
Diversify your investments
Diversification is a critically prudent and important financial planning strategy. And although it won’t eliminate losses in a severe downturn, it will reduce your risk of financial annihilation. Maintaining a well-diversified balanced investment portfolio helps minimize risk by spreading out your investments across multiple classes; think of it as a form of free investor’s insurance that protects you from catastrophic losses.
Have a second source of income
Diversity isn’t just important for your investments — it also pays when it comes to your income. The best way to protect yourself from an unexpected job loss is to find an alternate source of income. Perhaps you can start up a side business doing something you enjoy in your free time. And if you’re really lucky, you may be able to find a way to earn additional money without even having to leave your home.
Have an exit strategy for every investment you make
You can’t guarantee an investment will be bought at the optimal price, but, if you’re smart, you can always control how much you ultimately lose. The best way to do that is by taking emotion out of the equation. So have an exit strategy in place whenever you take a position on a stock, bond or any other investment. The best way to do that is by establishing predefined selling points — for both a profit and a loss.
Maintain your health
I’ve been told more than once by my doctor that staying physically fit is the cheapest health insurance available. We can significantly minimize our risk of disease and other physical ailments by simply exercising and maintaining a healthy diet. I know. This one is easier said than done.
Always read the fine print
Tom Waits once said, “The big print giveth, and the small print taketh away.” Whenever you’re reviewing a contract, make sure you read the fine print; it usually contains language that gives the other party an advantage in the event of a dispute — and that can end up costing you big money.
Everybody can be replaced. Well … except for the guy who figured out a way to make himself indispensable to his employer. Don’t rest on your laurels; constantly challenge yourself. Never stop learning. And always volunteer to take those difficult or dirty jobs that nobody else wants.
Keep your debt to a minimum
Taking on excessive debt greatly reduces the wealth you can accumulate down the road. By staying away from excessive debt you’ll not only maintain more control over your life as you get older, you’ll also avoid the chains that prevent you from ever attaining financial freedom.
Remember, when it comes right down to it, life is a financial high-wire act — so prepare appropriately. After all, sometimes even the luckiest daredevils eventually end up wishing they had a safety net.
Photo Credit: Larry Lamsa
Having a second source of income is a big one for me and I am currently doing my best to expand my horizons in that area.
Jane Savers says
The only way I will ever be able to be financially stable is to develop another source of income.
I have put hours and hours of thought in to how to generate more income but all I can come up with is working part-time at Tim Horton’s.
Looking for suggestions for someone with limited talent and skills outside of what I do at work for 40 hours each week.
Having no luck finding a sugar daddy.
Jane: Take the second job at Tim Horton’s. I have learned that it is not always the JOB that matters, but who you MEET while you work THERE.
Keep your communication skills and gift of gab up, as well as a positive mental attitude – and you just may attract a job more desirable.
Worked for me…
I’m big on risk management when it comes to investments. some of the articles I have recently posted on the Wise Dollar are specifically about managing risk, especially with the record high’s that the DOW is floating around in. Although I’m pretty good at managing investment risk, I need to tackle some of the other areas you’ve covered here.
I disagree on keeping debt to a minimum. As you’ve talked about Len, I think the federal government is going to have to inflate the dollar quite a bit to pay for their debts, and there’s nothing better than owing people a lot of dollars when dollars become very cheap.
I’d rather be holding physical stuff (real estate, precious metals, etc.) which will retain value through a dollar collapse.
Len Penzo says
Here’s the thing, Kevin. While I’ve written why I think economic collapse is practically inevitable (right now, I’d peg the odds of it occurring at 95%) — I can’t say with certainty when it’s going to happen. It could happen sooner rather than later — and I suspect it will — but what if the Fed manages to drag things out for a lot longer than we expect? Remember, the final collapse won’t occur until enough people wake up from their stupor. In a world where most people can name the host of Dancing with the Stars, but have no clue who the current Fed chairman is, collapse could take awhile.
And a lot could happen between now and then — like a catastrophic loss of income.
For those reasons, I refuse to take on the added risk of having too much debt.
So Len, I’ve heard you discuss this both here and on the Stacking Benjamins podcast round table for a long time. I’m not 100% sure I agree with you that complete economic collapse and calamity is going to happen, but I generally do agree with you that things are out of control, and some serious correction is inevitable, at a timeline that nobody can see.
So what’s your plan to combat this? I know in you are, at least tongue in cheek, the precious metals guy on SB, and while that may hedge for a bit, what’s your real plan for total collapse? Scraping off a bit of silver to buy groceries?
I don’t mean this in an argumentative way; I’m genuinely curious. I’ve always wanted to ask if you’d be willing to share what percentage of your portfolio is in physical, in hand (or bunker, or whatever 😀 ), metals.
Len Penzo says
Thanks for the comment, Brendan.
First off, as I write here constantly … a currency collapse will not result in the end of the world. There have been many economic collapses throughout human history and society is still here. The bunker persona is fun to joke about — but it is misleading. The trouble is, most — not all — people who are otherwise very knowledgeable and disciplined with respect to personal finance do not have a very good grasp of macroeconomics. And that’s too bad, because to be truly financially fit, one must understand both! 😀
For example, most people don’t truly understand:
1) what is money
2) the properties of money
3) the difference between money and currency
4) how our monetary system works
5) how the banking system works
6) the difference between fiat currency and a currency backed by precious metals
7) that the dollar is not money at all, but a debt-based currency; an IOU that is rife with counterparty risk
8) why the dollar’s failure is a mathematical certainty — and has been since 1971 (and the math shows that time is almost up!)
Oh sure, they may have a vague idea on one or more of those items, but most people don’t have a firm grasp on ANY of those topics.
When a currency begins to fail, supply chains break; since the dollar is a credit-based fiat currency, this will happen faster than usual (within weeks) because the dollar is credit — and credit is critical in today’s economy. Think of a loaf of bread on the grocery store shelf — to make that a reality, I can think of at least five or six lines of credit that are required between the wheat field and the grocery store shelf.
So the BIG question is: How long will it take authorities to reboot the monetary system? Because until that happens, there will be no credit — and credit is the “oil” required to keep today’s global economic engine from seizing up. In other words, until the system is rebooted, shelves will remain bare.
This is precisely why I urge my readers to prepare for supply chain disruptions. I expect authorities will be smart enough to reboot the system within a month or two, if not sooner. To be conservative, I have prepared to ride out empty store shelves with enough of my daily living items (food, water, toiletries, sanitary supplies, medicines, etc.) for a period of three to six months. (You can’t prepare for “total collapse” and the complete unraveling of society — so why should anyone bother?)
Of course, due to cost constraints, most people can’t prepare to ride out three months of empty shelves overnight; so it must be done slowly over many months. I’ve been there for many years now; I rotate my stores to minimize waste.
In the meantime, I have “junk” silver for barter while the system is down. Junk silver is a term for US silver dimes, quarters, half dollars and dollars minted prior to 1965. They are nearly impossible to counterfeit, and their silver content is fixed — making trade easy. For example, a silver dime is always exchangeable for a loaf of bread or a pound of chicken. A silver quarter is always exchangeable for a gallon of gasoline.
As for my investment portfolio: At the moment, roughly 45% of it is in some form of precious metals — specifically, individual gold and silver mining stocks managed by me, individual gold-mining and silver-mining ETFs, a precious metals mining fund that is professionally managed, and physical gold and silver. The other 55% is tied up in my 401(k) and cash.
What separates my personal finance blog from all the others is that I cover macroeconomics here too. Here are just a few examples:
If you are interested, I go into more detail on what a currency failure will look like here.
If you want to know about some of the shocking ways the banking system operates, see this.
For more on the importance of wealth insurance, check out my article on that topic here.
For more on equivalent wage and commodity values for gold and silver, you can check my article here.
For the 10 ways I prepared for a currency failure, I write about that here.
Kurt @ Money Counselor says
Wow, that’s a pretty thorough list Len. One thing that strikes me: Of the nine tips you list, I think the relative importance varies depending on age, family situation, etc. For example, life insurance is probably very important for a wage earner with a fat mortgage and lots of kids. But it’s less important for a retiree. (In general, I mean.) Most of us don’t start thinking seriously about maintaining health until we either have health challenges or reach middle age I think. This one’s getting even more important for middle-aged folks and beyond because, with the huge deficit in retirement savings nationally, many will need to be physically able to work into their 70s.
Thanks for the thought-provoker!
Thanks for your insight, Len. Great points.
Melinda Gonzalez says
These are all good ideas, and diversifying is especially smart to do. I also think having tangible assets such as precious metals, a paid for in full vehicle, and even a storage of food in case you hit hard times. These things will always have value.
Len Penzo says
Good points, Melinda.
Precious metals should be part of a balanced portfolio (covered via investment diversity) although, technically, I consider gold and silver to not be “investments” per se — they’re main role is to preserve wealth that you’ve already accumulated. But if the price of precious metals end up rising in dollar-terms, then hey — that’s a bonus.
The storage of food can be a huge blessing. You may not have two extra nickels to rub together but you won’t go hungry.
Awesome post and one that reminded me of why we do what we do. It’s so important to make sure the overall picture is taken care of not just ‘debt’ per say. There is more to life than saving money. We just had our life insurance reduced by 50% this month because we quit smoking one year ago and are very happy. Keeping healthy is very important to us now as is making sure we have a plan B. Lots to think about, thanks for the reminder here.
Doable Finance says
One thing I found in Investing is that it’s relatively easy to buy than to sell. Instead of taking a profit of $5,000, I waited till I lost all my $27,000 originally invested. I waited and waited and waited till it was too late.
I did not have an exit strategy for my investment.
Len Penzo says
I’ve made a similar mistake in the past — which is how I learned about the importance of having an exit strategy! I didn’t lose my entire investment, but I lost more than I should have because I was afraid to catch a falling knife.
Nothing beats the school of hard knocks when it comes to learning a lesson.
Thank you Len. I always appreciate you giving of your own time to help us out. Always great thoughts that make this house stop and think…. And for that we thank you.
Len Penzo says
Thank you, Rose.
Len Penzo says
Fernando R says
That list touches great points. Great stuff. I like what you said about having an exit plan for every investment. And you make a great point when you tell us to maintain our health.
Taking a risk is what life is all about, yet the majority of people will stay in their humdrum routines day in and day out and wonder why life passes them by…always a little jealous of the successful people and those who have money. Yet how did the rich and successful individuals acomplished their goals? ….They followed their dreams and they had the…..
Nathalie B says
Thank you for sharing the article. It’s very helpful!
I’ve kept an emergency fund of over a year’s expenses for years now. I am retired and still keep it. It will fund all emergencies I hope until I die of old age.
The no debt advice is huge. If you don’t owe on it, they can’t take it back.
Good stuff. Keep up the good work.
Len Penzo says
Thank you, Bill.
Bret @ Hope to Prosper says
These are all great ideas Len, but keeping the debt to a minimum is my favorite. I was laid off for six months during the dotcom crash and I barely skipped a beat, because all of my payments were low. I put a couple grand on my credit card, but I never had to touch my investments.
Low debt equals freedom and peace of mind.
Len Penzo says
Thanks, Bret. Great to hear from you … hope all is well!
Len what’s ur exit strategy for PMs?
Len Penzo says
Joe: As I am sure you know, the purpose of holding physical precious metal is to protect your wealth from a monetary system failure; physical precious metal allows us to transfer our wealth into a new monetary system after the current one fails.
I will never get rid of all my physical holdings, but my exit plan is to hold them until we get a new currency that is convertible to gold upon demand — not “backed” by gold. Convertible means anyone can go to any bank and exchange their paper currency for gold coins issued by the government. (Without convertibility, the term “backed by gold” is simply a government promise — and we all know what those are worth.)
Once we get a new currency convertible to gold upon demand, I will gradually begin converting about half of my physical holdings into the new currency and then reinvest that cash into stocks, bonds, and real estate after Dow-gold ratio falls to about 1.
Regardless of whether or not we get a new currency, I will also begin gradually converting 80% of my physical silver into physical gold once the gold:silver ratio slips below 30.
John Carter says
If you want to manage your finances properly then
–> Avoid spending money on items that aren’t necessary.
–> Start saving now for a brighter future.
–> To avoid a financial disaster, make a financial or budget plan and stick to it.