How to Become Financially Indestructible
Channel: Biness
Date: 2015-07-10

How to Become Financially Indestructible. Author: The Motley Fool. Download from SlideShare ➞ http://adf.ly/1KYT4u

Transcript
How to Become Financially Indestructible Benefit from future volatility
A Working Definition Financial Antifragility: Not only being protected from personal or systemic financial stressors, but positioning one’s self to actually benefit from them.
1) Limit Your Downside Remember, this isn’t about maximizing your returns in the short- run. It’s about surviving and thriving in the long-run.
Two Key Ways to Limit Downside Emergency Cash Make sure you have enough cash set aside to cover all of your family’s costs for six months without any forms of income. This will provide a cushion to prevent you from having to sell other assets. Insurance Beyond basic health insurance, investigate if you or your family would benefit from life, auto, home, renter’s, disability, or supplemental insurance. Though writing these monthly checks can be painful, they limit your downside should significant life stressors occur.
2) Avoid Debt In times of uncertainty and distress, nothing is more constraining than the burden of debt.
If another Great Recession occurred and you lost your job, consider: Housing debt (mortgage): This would prevent you from quickly moving for a new job, and you might be forced to either go through foreclosure or sell the house for less than you paid for it. Auto debt: For new cars, you’re immediately “under water” when you drive your car off the lot. If you lose your job, auto payments will need to continue, or you’ll be forced to sell your car. And since you were under water, you’ll lose money in the process. Student loan debt: Even if you declare bankruptcy, student loan debt stays with you. 
3) Live Frugally The less you need to be happy, the freer you are!
One of the key tenets of Antifragility is that smaller is beautiful—but also less fragile. • If you need more things in your life to make you happy, that will require more money, which inherently makes you more fragile. • By living frugally, you get an unmatched one-two punch that leads to financial independence and antifragility: 1. You have more money left over to save and invest, which brings you closer to self-reliance. 2. You don’t need to save nearly as much, as you know you don’t need all the bells and whistles of life to be happy.
4) Have Redundancies in Place Planning for things to go wrong means that you’re prepared when they do.
Efficiency vs. Redundancy The business world are focused on making things as efficient as possible. Taleb argues that this can be a mistake. Nature doesn’t work that way—things that survive have many redundancies. The ideally “efficient” body would have one kidney, one lung, and so on. Therefore, it is somewhat counter-intuitive to have redundancies in place. It often means spending money for things that we may never use.
Are Your Redundancies In Place? If you lost your job tomorrow: Do you have a different employer in your field you are familiar with that you could call? Is there another field you’d like to get into that you’ve already started tinkering with? Have you done the requisite research to see what it would take to make such moves?
5) Use Convex Optionality to Your Benefit Tinker with ideas that have limited downside and unlikely—but unlimited—upside.
What is Convex Optionality? This graph shows what convexity looks like. • The potential downside is limited to something manageable. • Upside, however, is unlimited. • One thing to understand: the upside usually has a small probability of occurring—you have the “option” of continuing or trying something else.
Examples from Real Life Albert Einstein worked at the Swiss patent office (safe) while working on his revolutionary theories (speculative). Blogger Glennon Doyle Melton started Momastery.com (speculative) while teaching kindergarten (safe). Her book is now a New York Times best-seller.Photo: Amazon.com
A Quick Review 1. Limit Your Downside 2. Avoid Debt 3. Live Frugally 4. Have Redundancies 5. Embrace Convex Optionality

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