How to Hedge Against Uncertainty

Reading Time: 4 minutes

Trump, Brexit, the rise of the far right, sometimes it feels that there is no end to the current uncertainty. In the current climate, how does one set themselves up to mitigate this uncertainty?

I don’t pretend for a moment to have all of the answers but I will attempt in this post to promote thought on this topic and to identify the requisite characteristics to hedge effectively against uncertainty.

Agility
My use of the word agility here is intended to capture the rate at which you can move into a different career. Let’s say you’re a blocklayer and making a decent wedge. All of a sudden, there’s a property crash and your livelihood is effectively decimated. How quickly can you transition to a new career?

Another way of looking at this is, what transferable skills do you possess which you can use to transition to a new career? The above use of a blocklayer is not intended to limit this analogy to only manual labour. Currently there are many “desk jobs” under threat from automation, artificial intelligence and economic change.

It would be prudent to identify what your transferable skills are and how they might be useful in pursuing a new path. If you find that you don’t have many transferable skills, can you take steps to develop some?

Frugality
Are you leading a debt fuelled lifestyle? Do you really need to splurge on pay day on that needless item? Have you got a rainy day fund? The ability to live off scraps ensures that in the instance of a recession, you will be relatively less worse off then a colleague who is in up to their eyes in debt. When your existing career goes kaput the ability to live off less will ensure that you have:
a. Some savings put aside.
b. More time to live off those savings while you develop an alternative income source.

Here’s a piece I wrote on how to save more: Show Me The Money

Resilience
Faced with a negative event, how quickly can you pick yourself off the floor and get back on your feet? What are your thought processes when confronted with a setback? Do you spend time blaming external events and looking for sympathy or are you already formulating a plan to move forward?

Ever tried. Ever failed. No matter. Try again. Fail again. Fail better.” – Samuel Beckett

Everyone has set backs, it’s those of us who recover quickest generally achieve more.

Have a Back-Up Plan
I’ve currently reading The Start-up of You: Adapt to the Future, Invest in Yourself, and Transform Your Career by Reid Hoffman and Ben Casnocha.
In it, there is a process called “Plan ABZ”. It’s a simple yet powerful way of having multiple options available to you regardless of what situation you find yourself in. It’s written focusing on career topics but stems from the start up world and can be easily re-used in many other walks of life.

Plan ABZ

  • Plan A: This is what you are doing right now. You make minor adjustments and iterate regularly.
  • Plan B: This is in the same general ballpark as Plan A. It’s what you pivot to when you need to change your goal or your means to achieve it. Pivoting can occur because Plan A is not working or because you’ve just discovered a new opportunity and Plan B is now more promising.
  • Plan Z: This is your fallback, effectively your lifeboat. The certainty of a reliable, stable Plan Z allows you to take on more risk and uncertainty in A and B.

The benefit of this method that no matter what stage of life you are at, you will always be planning and adapting. This method is thus not a time specific event but rather a habitual process.

Another variation on the Plan ABZ theme is the phrase “Two is one and one is none”. This phrase stems from military circles. It means that if you are out on a mission and you bring one of anything, then effectively you have no alternative when that item, tool or weapon breaks or has been mislaid. Having two of everything will ensure that when your knife breaks, you have another ready to go and the mission will not be jeopardised.

Bringing this back to civilian affairs and specifically in a career sense, most people have one source of income. If that disappears or is greatly reduced, they are significantly adversely effected. Writing these words has made me think about this more, I hope it has the same effect on you.

In summary, a combination of agility, frugality, resilience and the presence of a back up plan will ensure that no matter what scenario you find yourself in, you will be able to get your life back on track.

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Show Me The Money

Reading Time: 4 mins

“Losers have goals. Winners have systems.”

– Scott Adams

 The inspiration for this post came from having a conversation about personal finance and savings with one of my close friends. I outlined what I was doing for the last few years and how I had increased my savings amount in step with my income. He said he left the money he hasn’t spent at the end of the month in his current account. I asked him how much he had saved? He answered that he hadn’t saved a whole pile. I asked him how much he expected to save in the next 12 months. He didn’t know.

I then described the simple steps that I thought he should follow and the rationale behind them. While I know at the time he thought I was being a bit over the top, he thanked me for my advice and said he’d think about what I’d said.

I didn’t think any more of it and I was taken aback when some months later, he brought up the conversation we had again. He had fully implemented what I had outlined and he reaffirmed my belief in what I had said. This is what I told him:

Assumption:
The basic premise of the below process is that there is some amount of your net income which you can set aside. I believe that nearly everyone should be at least be able to put something away, no matter how small. Obviously for various reasons including but not limited to: education, debt, dependents and unemployment; the below steps are not applicable.

Decide
I would recommend targeting 25% – 30% of your net income but start with whatever works for you. The fundamental point here is to establish a habit. The amplitude of your savings amount can be altered as a secondary activity. Even if you are only saving 5% – 10%, that is enough to start with.

To be precise, net income here is gross income less taxes, I’m estimating that 75% of net income is sufficient for food, rent/mortgage, bills and other discretionary expenditure. The only callout I would make is that if you have some debt then paying it off should be your priority. Short term debt such as car finance, credit cards, overdrafts and personal loans are typically offered at juicy interest rates so fully paying this kind of debt off first is prudent.

Prioritise
Enjoy life but be disciplined and realistic. Achieving a savings target should not be at the cost to your lifestyle, is missing that gig or not going on that random session with friends worth hitting 30% every month? No it’s not. Like everything, it’s about achieving a balance between short term pleasure and long term satisfaction.

Automate
If you have to physically transfer money to a different account every month, you will find an excuse not to. Set up a standing order or direct debit. You might think, I’ll do it next month. You won’t. Do it now. In three months time, you will be grateful.

Scale
If you have ticked the box on the above steps, congratulations! This is the primary and probably the most challenging step. Now that you have established a savings habit, you should try and scale it up. So maybe you are saving 15% of your net income, can you try and get this to 20%?  The trick here is build a system which you can scale as your income grows.

Let’s say you get a raise, what’s the most likely thing you do? Spend it. Or maybe you have got that new job you have been working towards and have a few more shekels making their way to your account at the end of the month? Do you really need to spend that money? Can you divert it straight to your savings account?

In summary, the baseline target here should be that if you receive an increment of 10% then you should be aiming to increase your monthly savings amount by at least 10%. Otherwise you are effectively reducing your monthly savings percentage.

Reward
At the end of the day, it’s fine to splurge some of your hard earned savings. It’s your money! The point of this post is to help you build a war chest not dictate what that “war” should be.

In closing, frugality is the best defense against uncertainty and this system encourages you to adopt frugality.

In a worst case scenario, if you lose your  job or have your income reduced, it provides a platform which you can pivot from.  The variables in the equation are how much you can put in and how soon you can start. Time is a constant. It will not wait. Get it done.

SMTM