“The more attached you are to a particular version of the future,” warns writer Shane Parrish, “the less likely you are to adapt as things evolve.”
While I believe this quote has almost universal application in every aspect of life, it is especially important in the financial planning arena. Indeed, the ability to adapt to changing circumstances may just be the key to financial fitness, as change is the only constant in life and money. Let’s look at a few examples where the ability to bend can help keep your financial plan from going haywire:
1. Decrease in income – Whether it is a surprise (like losing a job) or part of a plan (like the birth of a child, resulting in a reduction in household income), a significant reduction in income can be a significant challenge for anyone. But it’s even more of a challenge if you’re living off 100% (or more) of your allowance, a scenario that’s unfortunately more the norm than the exception.
Yes, I get it, housing is expensive, as is daycare if you have small children, and we’re all paying more for groceries and gas right now, so there’s no shortage of expenses to claim on our incomes. But if you spend every dollar you earn, the reduction in income can be tragic. Living below your means—deliberately tying your lifestyle below your current income—is therefore the only way to gracefully adapt to a reduction in income.
2. Unexpected expenses – Brakes on a car, a new roof on a house, sudden medical expenses for a family member – these are just some 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 damage, especially if we have to resort to high-interest consumer loans or credit cards to cover the bills.
Therefore, we can adjust to these costs by setting up a “buffer” or “black day” account with a separate item in your budget, ensuring that your entire financial plan is not disrupted by a single surprise. Because let’s face it: while we don’t know what form they’ll take or when, we do know that unexpected costs are coming.
3. Market volatility – It was drilled into our brains that the “market” should make about 10% per year, but this above-mentioned annual return is nothing more than a hypothetical average. In reality, it is our willingness to endure short and long periods of unsettling market volatility that entitles us to the bargains as expected rates of return that the market has delivered historically.
So how can we adapt to crazy markets? Explore your ability, willingness and need to take the risk, often with a third party; then build a diversified and balanced portfolio designed to help you achieve your goals without keeping you awake at night. As your life circumstances—or your risk tolerance—change, calibrate your portfolio allocation to make sure it’s appropriate.
Changes and surprises are inevitable in navigating life and money. Adaptability, therefore, becomes the secret weapon of any successful financial plan. Furthermore, when we prove ourselves capable of adaptation, this more flexible approach can often lead to even more desirable results than we initially envisioned.