It seems to me almost every week the financial media focuses on some new potential “boogeyman” that might appear and wreak havoc on my investments and if I don’t act now by buying their magazine or watching their program, my dreams of a comfortable retirement will be destroyed.
Will the current “boogeymen” of potentially rising interest rates or a possible economic slowdown impact my investments? Maybe. Maybe not. Even if they do have an impact and that impact is severe, I still don’t consider these risks the greatest threat to my finances.
Here is what I view as my greatest risk
My wife and I have been fortunate enough to have saved a nice nest egg, but even using the highest historic market returns let alone today’s low interest rate environment, it would still only kick off a fraction of the income I make from my job.
If I continue to do my job well, my wife and I still face two risks to my income: death and disability. To reduce these risks we purchased life insurance on me so my “income” is replaced and have structured our finances to be able to reduce expenditures quickly in case of disability.
There are two risks to my job (and really my job is my income) so add these to the above list of risks: my boss and my customers. I was laid off from an employer once because business was slow. My wife was laid off from her employer because her boss’s boss’s boss decided to sell the entire division my wife worked in. One of my friends was fired because he was outshining his boss (I also think it was because he was not shy about telling anyone who would listen about how much better he was than his boss). Whatever the situation, your boss (or boss’s boss’s boss) likely has more impact on your financial security than if the price of gasoline went up or down today.
What percentage of your sales (or your company’s sales) come from one customer or one industry? The higher the number is, the greater the risk to your financial security if that customer or industry falls apart. To reduce this risk, try broadening your customer or industry base. If that is not possible, then make sure to structure your investments so you don’t own any stocks/bonds/funds in that customer/industry.
Whenever some financial scam is uncovered or a company goes belly up, the TV stations always seem to find somebody who claims to have lost their nest egg because they had all or a majority of their money in that company/investment. Haven’t we all seen enough of these stories to know not to have all of your investments in one company?
Who I do feel sorry for are current retirees who felt they had saved enough and would be able to live off of the income from “safe” investments such as government bonds and CDs only to have their income cut dramatically as rates have remained near zero for several years now. One way to reduce this risk is to have several sources of income such as stocks, government and corporate bonds and real estate. The higher your investments are concentrated into any one area, the more risk you face if times change.
Renewing my family’s health insurance plan every year is one of my least favorite things to do. I would much rather listen to my son practice his drums all day than compare and contrast all the different variables such as coverage, co-pays, deductables, etc. but it’s a necessary part of life and after seeing the hospital bills for when our son was born four months early and was in the hospital for three months I never want to be in a position where I don’t have coverage.
I’ve driven while tired. I’ve driven while I ate my lunch. I’ve driven while the kids were screaming in the backseat “are we there yet?” and all I wanted to do was pull over and leave them on the side of the road.
The point is, there are times when I really wasn’t the best driver I could have been and god forbid if something happened that was my fault I don’t want my finances destroyed because I didn’t have enough coverage.
Consider for a minute how much you’ve earned since you first started working and compare that number to how much you’ve managed to set aside now. Chances are, your past income let alone your future income is magnitudes greater than your current savings and I would focus on threats to that number much more than I would be worried about the “boogeymen” the financial press is trying to get you to be afraid of.
Note: This article originally appeared as a guest post at www.kylieofiu.com