When my wife and I are on the interstate, nothing makes her more nervous than me passing an 18-wheeler. (In her defense, I’m not the one who would first feel the effects of a tractor-trailer swerving violently in our direction.) If she senses even the slightest movement our way, she ends up in my lap!
She wants me to maintain a margin of safety.
Until recently, Bill Hwang, was considered one of the smartest stock traders in the world. He ran a $20 billion outfit called Archegos Capital Management. But when he bet big with borrowed money, and the tides turned against him, he saw all that wealth evaporate right before his eyes. Poof. Gone. In a couple of days.
Mr. Hwang failed to maintain a margin of safety.
Author James Clear puts it this way:
“Maintain a margin of safety—even when it’s going well.
Rich people go bankrupt chasing even more wealth.
Fit people get injured chasing personal records.
Productive people become ineffective taking on too many projects.
Don’t let your ambition ruin your position.”
Whenever you find yourself eager to beat a certain investment index . . . or frustrated at how little the bank is paying you in interest . . . or itching to ditch your stodgy “safe strategy” and take a big financial risk, remember Mr. Hwang.
Maintain a margin of safety.
What exactly does that look like? Here are five basic ways to create a bigger margin of safety in your financial life.
1. Make sure your big risks are insured. What if you got sued? What if you hit somebody while you were glancing down at your phone? (Admit it. If you’re like most people, you sometimes do that.) What if you got sick or injured and couldn’t work for a year? Or ever again? What if you died before your time?
These aren’t just hypotheticals. Such things can (and do) happen to people all the time. So, maintain a margin of safety. Buy insurance to cover the big stuff.
2. Make sure you’ve got plenty of cash. At a minimum you should have six months income in a bank account. Nowhere near that? No worries. By saving 10% a year, you can create an “emergency account” in just five years (and that’s if you start from scratch). Get started today.
3. Make sure you own things properly. It’s fine to own your house in your own name, but if you own rental property, a profitable business, or a lot of land, consider owning it in a limited liability company (LLC). But don’t just take my word for it. Discuss this with your attorney.
4. Make sure your income will continue after your working years. Retirement is funded by income, not by a 401(k) balance. You need a plan to convert those retirement assets into a monthly income stream once you retire. You also need to know how much Social Security income you can expect in retirement. When’s the last time you checked your SSA account?
5. Make sure some cash arrives when you depart. Death is never convenient. In fact, it often brings financial complications. There is nothing like some tax-free cash to remedy financial problems. That’s why it’s wise to have some life insurance that will pay out at your death, no matter how old you are when you die.
Maintaining a margin of safety in these five ways can make your life less stressful.
Meanwhile, if you’ve got other money concerns, I’d love to send you my new, free e-book. It’s called “How to Put Financial Worries in Your Rear View Mirror,” and it includes the same Financial Freedom Roadmap we’ve used to help countless clients reach their financial goals.
Email me at email@example.com, and I’ll send you a free copy right away. There’s no obligation.
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