Where Are You Vulnerable?
By Gary Foreman
When you work with people and their finances you begin to see some common
threads. Especially if you have the perspective of time on your side. One thing
I've noticed is that very few people, even people who are pretty sharp, have
taken the time to determine where they are most financially vulnerable. I don't
know why that's true, but it is.
Seems funny to me. If you were the commander of a fort, you'd survey the
situation and try to figure out where your defenses are the weakest. And, once
you found that weakness you'd take steps to strengthen it.
Same thing if you were the coach of a football team.You'd spend hours studying
film to see where opposing offenses might attack you. I suspect that's true of
most team sports. You check to see where you're most vulnerable to attack and
adjust your strategy.
What's interesting about people is that we don't look at our finances the same
way. Very few of us take the time to figure out where we're most vulnerable to a
financial problem (crisis?).
There's much to be gained from asking the question. We'll learn where we should
concentrate our efforts. That means that our time and money will be going to the
place where they'll do the most good. I like that. It's also the place where
we'll get the greatest "bang for our buck".
So how can you find our where you are most vulnerable? One way is to hire a
financial planner to review your finances. They're trained to evaluate risk.
Another way is to do it yourself. By asking yourself three questions you can
identify the major risks. Once you've discovered the risks you can begin to
search out and evaluate potential solutions.
The first risk: what happens if I lose my income? Many of us think about what
would happen if we lost our job. And, it's a good question. No matter how safe
your job appears, it's always wise to have some idea of what would happen if you
were suddenly unemployed.
Depending on your situation you might also want to ask what would happen if your
pension quit sending the monthly check. Or maybe the investment checks suddenly
stopped coming. Or your rental house is empty. Or you don't get your usual
Christmas bonus. Or...(fill in your own lost income here)
The idea is to take a few moments and decide what you would do if the income
stopped and how likely that is to happen. Those two questions will give you a
pretty good idea as to how vulnerable you are to lost income.
The second risk: what happens if you lose your assets (stuff!). Could you handle
your home burning? Or your IRA being wiped out? Any other large asset suddenly
losing it's value? It does happen. Some assets are safer and more predictable
than others. But, you're wise to evaluate and know how much trouble you'd face
if something that you depended on suddenly disappeared.
The final risk: are there surprise events that could cause you problems? Suppose
you had a car accident and were laid up for months or years. What would happen
to your finances if that suddenly were you in the hospital bed? The most common
surprises are medical. But, that's not the only cause. It could be a sudden
change in the economy, a particular industry or even events in a foreign
Admittedly it's hard to predict the unexpected. But the mere exercise is
helpful. You'll be looking beyond the normal boundaries. And that's always good.
Some situations combine all three risks. I know of people who lost their job
when the company went under. They also lost their pension. And, to cap it all
off, most of their 401k was invested in (now worthless) stock of their former
You may find that you have a number of vulnerabilities. If so, you'll need to
prioritize them. On the other hand, you might be the person who can honestly say
that you've covered all the risks. And that's great! But, it doesn't mean that
you shouldn't repeat the exercise every so often.
The saddest stories I've heard are typically from people who thought that they
had their finances in order but found out that there was a vulnerability
somewhere that they weren't aware of. So you might want to take a page out of
the coach's playbook and take a look at your defense to see where you're most
susceptible to an attack. The grief you save could be your own!
Keep on Stretching those Dollars!