How to become financially indestructible

The InspirationThe concept comes from Nassim Taleb’s best-seller Antifragile: Things that Gain from Disorder.. Drag picture to placeholder or click icon to add Photo: Sam Beebe, via Fli

How to Become Financially Indestructible

Benefit from future volatility

Let’s face an uncomfortable truth:

At some point, you will face daunting economic challenges you never could have predicted.

How you respond will place you

in one of three categories…

Which Would You Be?

1. Fragile—something that breaks when exposed to chaos, disorder, and

stressors

• A simple example: a porcelain cup falling from a table

2. Robust—something that stays exactly the same when exposed to chaos,

disorder, and stressors

• A rubber ball, maintaining its structure when thrown

3. Antifragile—here, we equate this with “indestructible.” Something that gets

stronger when exposed to chaos, disorder, or stressors

• Your muscles, which rebuild themselves even stronger after lifting weights

The Inspiration

The concept comes from Nassim Taleb’s

best-seller Antifragile: Things that Gain from Disorder.

Ideas presented here are either loosely or directly based on Taleb’s ideas.

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Photo: Sam Beebe, via Flickr

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.

There are five key steps to living a financially antifragile

life.

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.

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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.

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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 This can be a significant burden, and force you to take jobs (with higher pay) you ordinarily would avoid You can also have your wages garnished for failure to repay

In the end, you may not be able to totally avoid debt

If that’s the case, repay it as soon as possible

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.Drag picture to placeholder or click icon to add

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?

An Example From Real-Life

I genuinely enjoy my job But my wife and I are constantly working to make sure Plans B, C, and D are in place:

Plan B: We were both teachers in a former life Neither of us plan to go back into the classroom However, we

keep our credentials up-to-date should we need to apply.

Plan C: We’ve always had a farming itch We now spend our winters on a farm to learn more about it We have

also borrowed plots of land and picked the brains of those at farmer’s markets to get an idea for what it would take

to succeed if we wanted to start our own farm.

Plan D: We will likely be building a very small home in Costa Rica this winter Should we need to, we could move

there and live on very little money for many years before it became absolutely necessary to re-enter the

workforce.

5) Use Convex Optionality to Your Benefit

Tinker with ideas that have limited downside and unlikely— but unlimited—upside.

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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.

The Barbell Approach

Taleb defines this as: “A dual strategy: one safe and one speculative,

deemed more robust than a ‘monomodal’ strategy.”

For working adults, this means having one stable income while tinkering with a passion on the side

Though the chances of one “tinkering experiment” being wildly successful are small, your chances go up markedly with repeated attempts

Examples from Real Life

Albert Einstein worked at the Swiss

patent office (safe) while working

on his revolutionary theories

If you find that it’s too late in the game to adopt

this strategy, check out…

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