I have been thinking about financial resilience this week.
I spend a lot of time considering ways to earn more money, or ways of saving money by reducing my spending, but is there a chance of losing what I already have?
We can take insurance against major catastrophes. And so, heaven forbid should my house burn down or I’m involved in a car accident, I would not need to be concerned about money and could focus on dealing with the fallout instead. But life is full of twists and turns and whoever really knows what is around the next corner? What about those things we don’t always insure against or don’t even think about – am I in good enough shape to withstand any shocks to my finances? Would my early retirement plans be derailed if something major were to happen? What could those shocks even be?
More by luck than judgement I have somehow always done well at work but I have recently got a new manager and we don’t particularly see eye to eye. She is a driven woman – young, energetic and married to the job. There is much to admire about her and no doubt she will do really well in her career. But we are at different stages of life and that is proving difficult. At least she’s based overseas, so that distance certainly helps our working relationship!
I’m old enough to realise that my job is not my life – in stark contrast to her view. I have found ways of changing my mindset to cope with a job I don’t love. I work hard and I am going grey from dealing with the late evening international calls and the 6am meetings. In spite of this I know that she sees me more as a safe pair of hands than an over-achiever simply because I am no longer chasing the next promotion. And so losing my job is a real possibility if she decides she wants a different profile for my role.
If history is anything to go by, I would receive a generous severance payment if they were to let me go. With my length of service, I would be covered for around 10 month’s salary. In that time I should find another job and hopefully bank some of the severance. And that could work positively towards reaching FIRE sooner than planned 😊
If I didn’t work for a company that paid out generous severance or if I worked in an industry where it is not easy to find a new position, I would think about taking insurance against being out of work. In my profession, there is almost always work to be found if you are willing to be flexible, but I know that’s not the case for everyone and the peace of mind from that insurance policy could be invaluable.
(As an aside I’ve known someone that was laid off and had an insurance policy that kicked in and paid up to 12 months at half his previous pay. He took the year off so as not to “waste” the insurance. I have mixed feelings on that one – great to get a year off but it was a struggle for their family financially and certainly caused tension between the couple. Horses for courses as they say).
Company Failing or Being Acquired
What about the company itself – is there any risk to consider there? I work for a large global corporation which is at the forefront of technology. I know that doesn’t guarantee its survival but from a selfish point of view I don’t need it to survive the next 20 years – just the next few that I intend to work there. Revenue and margins are strong, there is a strong pipeline of emerging technology being developed, competition is healthy but not intense – all things that give me confidence the company will be around for years to come.
There is always the possibility of a merger which could mean two people applying for one job, but all things considered, job loss is not an issue I am planning around. If it happens I believe I have it covered – unless that is we enter a time of…..
Recession and High Unemployment
This is definitely something I have considered in the past – what if I lose my job and another one is not so easy to find? I have friends who were made redundant in their fifties and were out of work for as much as 2 years. That’s a sobering thought for anyone who depends on a job for income.
This is one of those cyclical worries. In spite of the all the pessimism surrounding Brexit, the UK is doing well economically and unemployment rates are extremely low. Predicting the next recession is something even our most talented economists struggle with, but for now at least the economy seems stable.
But if the worst came to the worst and within the next few years losing my job coincides with high unemployment what would I do?
Initially it would mean being flexible. Spending less than I earn is a firmly established habit so I wouldn’t have to find the same salary. I could take a break from saving for a while and just make sure I earn enough to cover our expenses which would open up many more job opportunities.
I do wonder though – with lots of people fighting for the same jobs – even at lower salaries, would I be able to compete?
I can see two ways of dealing with this threat. Firstly, to take a good hard look at my skill set and make sure I am up to date with all the latest and greatest developments in my field / new technologies etc.
Or secondly sit it out! Take a mini-retirement and wait for things to recover. Since I’m on the downhill slope to FIRE, I’m tending towards this option (don’t judge)! You could look at it like being a bit burnt out and lacking in energy and drive for my career or you could look at it like doing the right thing for society and leaving the jobs for those that need them more. Either way it’s a luxury that people on a path to financial independence are far more likely to have than anyone living month to month.
Unforeseen Large Expense
Hmmm……really not sure what that could be. Major repairs to the house? Fault with my car that is not worth the repair costs? It’s hard to imagine anything bigger than an emergency fund could cope with or which wouldn’t be covered under an insurance policy. Another advert for the importance of an emergency fund 😊
Failure of a Financial Institution or Platform
This one is a very real possibility that we should all consider. Equitable Life, Northern Rock, Lehman Brothers – who could have imagined these household names could either collapse or severely fail their customers?
No consolation to those that lost money but the silver lining for people following behind is the tightening of financial controls and legislation to protect customers and their money. The landscape is definitely much improved. But much as nobody predicted what would happen at those companies, we don’t know today what previously unimaginable financial calamity or scandal could be lurking around the next corner.
Levels of protection may be in place by the government in terms of compensation (the FSCS in the UK protects up to £85k per FSA regulated financial institution). MoneySavingExpert has a good article with lots more detail on this here.
(I may be stating the obvious but it’s worth noting that this compensation would not cover investing losses – it’s the failure of the institution or platform that is covered, not the underlying investments held in them).
Minimising risk means spreading savings around between different financial institutions to stay under the £85k limit in each and avoiding the all eggs in one basket scenario.
Whilst any losses may then be recoverable it may take a long time for any payouts to happen. So the biggest risk may not be losing the money but would be cash flow while the mess is sorted and any compensation kicks in. And so, again, spreading funds between different financial institutions means being less likely to be in a sticky situation should the worst come to the worst and always having access to some cash.
Stock Market Correction
I have held investments in funds and trackers for many years but it’s only in the last couple that these have become a significant part of my wealth. I didn’t take much notice of previous corrections for that reason. I know the next one that comes will be difficult to stomach. Even the dip in the first couple of months of 2018 was uncomfortable. I have learned enough from other authors and bloggers that I respect (JL Collins is a great example) that I am confident I won’t be tempted to sell out and crystallise my losses. So it will be a case of how long will the market take to recover?
My plan includes a couple of year’s living expenses in cash which should help ride out some of a downturn. It occurred to me recently that I will also be able to withdraw dividends that my portfolio generates (around 2% historically) in these times without damaging the underlying assets. But realistically a prolonged recovery will hurt if I need to withdraw when the market is down, particularly in the early years of my retirement.
In the very long term, I trust the worldwide economy and the entrepreneurial nature of humans. I am confident my wealth will recover eventually. But if I don’t want to sell investments during a downturn, I may either need to work longer now in order to save more cash reserves or be willing to take some part time work if needed later down the line.
In my current frame of mind, I’m leaning towards the second option and dealing with it if it happens rather than working that never-ending one more year. But once I am in a position to pull the plug I recognise I may feel very differently. All I can say now is watch this space.
Interest Rate Rises
We live in unusual times. Interest rates have been at rock bottom since the 2008 financial crisis. I was lucky enough to have secured an off-set tracker mortgage at base rate + 0.5% and so my borrowing costs for property have been minimal for 10 years. I used this facility to fund other property purchases, but as I get closer to the work finish line I see more value in the security of having little to no mortgage debt at all and so I am aggressively paying down my mortgage.
I know this is not the conventional wisdom and that I could get a better return by investing this money elsewhere. But sometimes the heart overrules the head and this is one of those times. Interest rates won’t stay low forever and without a salary coming in, I don’t want to be exposed to those rises.
Interest rate rises may be punishing for those highly geared with mortgages, but they will be useful for anyone with money in the bank. It would be good to see a real return from the emergency funds, currently sequestered away in many small current accounts and regular savers while we try to eke out every last penny of paltry interest on offer.
(What happens to the stock market when interest rates rise? I am far from being an expert on this topic but I understand that gradual increases which are well-signalled should not hurt the market as opposed to steep hikes which could cause a major correction).
It seems like not a week goes by without another story of some poor unsuspecting soul being conned out of their life savings. And gone are the days when I could read these articles and think smugly to myself that that could never happen to me. The level of sophistication that fraudsters now employ to get hold of our money is staggering.
Those of use seeking financial independence are probably better prepared than most since we look after our money and we track our expenses. We should notice if there are unauthorised withdrawals from our accounts or fake expenses on our credit cards. Most of us probably check our credit reference files regularly, shred financial documents, invest in anti-virus software and would never share our PIN number.
For me, it’s the clever scam that is most worrying. When I bought my first rental property a couple of years ago, I had to transfer a large amount of money to the solicitor’s bank account. They sent me their account details by email and I duly transferred the funds. A few weeks later, I remember reading about someone who had done exactly this but the money never arrived at the solicitor’s account. Hackers had intercepted his email and “faked” the solicitor’s bank details. The bank were not liable since they had done nothing wrong and the poor guy’s money was lost and not recovered. It sent a shiver down my spine since that could have been me.
I consider that my warning and now I try to think and think and think about any transaction I make. When I needed to pay a builder recently, I first transferred just £1 and checked by phone that he had received it before I sent any more.
It will be an on-going challenge to stay in front of these scammers as technology continues its onward march. I find podcasts such as This is Money really useful for learning about the latest risks and how to protect against them.
What Did I Miss?
Keeping in front of these risks and thinking about how we will react to these scenarios will go a long way to mitigating the threats. There will be many things I haven’t considered and am hoping you’ll point out in the comments. What are the things you are considering?
18 thoughts on “Financial Resilience – Being Bullet Proof”
Great summary of all the things that can go wrong! Financial Independence is only possible if nothing bad happens, so resilience is the order of the day!
Thanks for commenting Ray
Great post. One of the things I’ve been thinking about recently and touched on in your post is the risk of failure of a platform or provider. Although it’s more complicated in terms of admin I think it’s wise to not just have all your pension money with one broker or investment company if you have a very large fund.
Hi Fu Mon Chu – agreed. I have mine split over three even though that’s not the most optimised from a fees perspective.
I have had many of your thoughts over the years and these have influenced some of the decisions I have made. I work for the UK civil service so redundancy was not really on the cards (although it is more so in these changing times). Likewise life insurance was a low priority due to in service lump sum of 4 x salary (now reduced). And we are lucky with the NHS – no unexpected massive health care bill to plan for.
I have pondered over the issue of platform failure and hubby’s SIPP is now above the £85k limit so maybe I ought to be doing something about that. Likewise stock market downturn has been planned for by 2 years expenses in cash. We lose the interest/inflation element but sleep easy at night.
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I agree, sometimes better to sleep easy than optimise every last thing. Since Vanguard opened directly in the UK I have used them for this year’s ISA allowance. Unfortunately, they don’t offer a SIPP yet, but their website says that should be available by end of 2018
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Great post, and I expect triggers deja vu for many. I for one have often thought/worried about some of the same things. ‘Worry’ could be the word, but is it worry if a thing potentially has a big impact, so you think about it from time to time to consider whether you could handle it / manage the risk better than you have structured at the moment? That revisiting is a part of human success I think, but a fine line between worrying too much.
There’s a quote attributed to Mark Twain, which goes “I’ve known a great many troubles in my life, most of which never happened”. Maybe it’s a case of look at each issue, decide the best course of action, and let it be. Once we’ve done what we can, further worrying might hinder rather than help?
Another comment which stood out was the idea of leaving jobs for people who need them. I’ve always felt that on some level. People talk about jobs moving to growing economies as a bad thing, but perhaps that is just as it should be. Not only they need things more, but as we move along Maslow’s hierarchy, we should need things less.
In the end in today’s economy companies need to make and sell products far more than consumers need to buy them. It is in their best interests (primary interest) to keep everyone in a position of able and keen to buy stuff, and I’m sure they’ll try to do so. In addition, if some catastrophe happens next week, the planet will have the same people, the same skills, the same assets. Today society values your skills and employability very highly relative to others – why will that change? “Never let the future disturb you. You will meet it, if you have to, with the same weapons of reason which today arm you against the present.” (Marcus Aurelius)
(FWIW I’ve always enjoyed stoicism – the life advice is interesting, but I also find it somehow reassuring that this mode of thinking is fundamentally human – despite the difference in ‘stuff’ available, people had the same worries and concerns even centuries ago. A good book is “The daily stoic” – I keep the ebook version open on my desktop, and have a daily does of inspiration and life advice)
Maybe another Marcus Aurelius is especially appropriate for FI – “Very little is needed to make a happy life; it is all within yourself in your way of thinking.”
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Thank you for such calming comments. I agree it’s a fine line between being prepared and worrying too much. I found myself repeating your first Marcus Aurelius comment about the future several times – that’s one that needs to be displayed at my desk I think.
Not at all, I thoroughly enjoyed your article – comprehensively going through all the things I worry about, despite telling myself not to! Niggling me recently is that markets have never been as overvalued (by historic measures), and everyone seems shouting about impending correction. It makes sense – except money supply to this extent via QE has never existed before either – who knows what normal is any more? But I’m pretty sure a correction will still hurt, whatever I tell myself. That’s where diversification helps – money currently in the markets has to go somewhere, and hopefully to somewhere else you’re invested. Just assess the issues, do what we can, and let it be.
I do the same with the Marcus Aurelius comment – I get some reassurance from the fact that the thoughts and worries of a Roman emperor are not that different to ours today!
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Excellent post, FT9T5.
There’s a very real possibility of a merger or the company I work for being acquired in the near future. This would be a right pain as I’m still years from FIRE and if I’m laid off, this time round, I won’t have the cushion of a large redundancy package and will need to rely on emergency funds until I find another job.
I’ve considered ‘failure of a financial institution or platform’ in light of what’s happened at Beaufort Securities and the £85k max compensation and have decided that I will open a third account to house my ISA investments (Vanguard direct) from next tax year, which will also help with the fees as this account will be cheaper than my other two (HL and AJ Bell). As per my recent post, I’ve already opened a new bank account in case I can’t get at my emergency funds should there be a banking meltdown with TSB, Tesco or Visa!
Stock Market Correction and risk of sequence of returns will be a concern as I get closer to my FIRE goal so I try not to think about it too much right now. However, it does mean that at some point, I need to be building a pot of cash to take into account of such a correction so I don’t have to sell when prices have dropped massively.
Love that Marcus Aurelius quote which @John mentioned!
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That’s a shame about your company when you haven’t been there that long. But it could be beneficial to you – more opportunities / larger company bringing better benefits etc. That has happened to me in the past.
It strikes me as I read your comments – what a privileged position we are in that these are our concerns – spreading around our investments and bank accounts. First world problems, as they say.
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Great post! You offered plenty of details. We really have to be careful in an age of technology. Everything we do is online now.
I definitely worry a lot about major fraud or my investment platform getting hit by some major shock.
Hi – it’s one of the bigger worries. Only thing we can do is try to minimise the impact and be on our guard for the fraud.
Thanks for reading 🙂
Very insightful post, love how your articulated the risks and the mitigants! All about trying to control them controllables right! Enjoyed the read.
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