Feeling uncertainty regarding your financial future is perfectly normal even if you have a thoughtful plan to account for multiple contingencies. You can never plan for absolutely everything. No matter what considerations you make while financial planning, you will encounter something that your 20-years-ago self could not predict. Your financial plan will go off course at some point.
But that does not mean you should not plan. The opposite is true. The more you plan, the fewer unpredictable events you encounter.
Some individuals use life’s unpredictability as an excuse not to make a financial plan. Those same individuals experience more tumultuous life events in a week than I have experienced in my entire life because every moment-gone-wrong is a crisis. Consider this situation: A person is paycheck-to-paycheck without an emergency fund and gets a speeding ticket they cannot pay. They do not pay the ticket because they cannot afford it. They get pulled over again and are arrested because of the outstanding payment. The arrest means missing their shift without notice and losing their job. Now they have no job, a suspended license, no way to pay the rent, and no transportation to get to a job interview beyond walking distance.
All of this happened because this hypothetical person did not have an emergency fund to cover a $150 speeding ticket. If this sounds like an extraordinary situation, I know someone who lived it. I do not recommend going down that path.
Instead, plan. Planning starts small and grows over time. Financial planning is no different.
Life is Unpredictable
Financial planning starts with an emergency fund because life is unpredictable. The emergency fund covers the speeding ticket, pipe burst, sudden job loss, or minor emergency medical bill. Small unpredictable expenses happen all the time, and being thrown for a loop by a small financial hardship is no way to live a happy life.
At some point, something may happen that will stretch you past the amount of your emergency fund. For many folks in certain industries, the hard closures in 2020 due to the COVID-19 pandemic lasted beyond their six-month emergency funds. This prompted a number of financial gurus to start recommending 12-month emergency funds instead of six months. But a larger emergency fund misses the point of unpredictability.
No matter how much money you save and how much you analyze where to invest your money, you cannot guarantee beyond a doubt that your financial future is perfectly secure. However, you can decrease the probability that you will experience financial hardship until it is a minute fraction of a percentage point. This happens by slowly but consistently improving your financial position over time.
The farther you progress along the path of increasing your investments, the more safety nets you have for the big unpredictable emergencies that can happen. When you get to the point of opening a brokerage account because you have an emergency fund and already maximize contributions to an IRA, HSA, and 401(k), you are much more prepared to cover an emergency than someone contributing only 5% of their income to an IRA or 401(k)—in most cases, even if that individual has been contributing longer than you. As your net worth and credit score increase, you also increase your opportunity to receive loans in a serious pinch where you could not possibly find the funds to cover a crisis. Wealth creates more opportunities to survive unpredictable hardship.
Surviving the Worst Case Scenario
Again drawing on the COVID-19 pandemic, many feared the lengthy hospital stays that came with catching COVID-19 before vaccines became widely available in the first half of 2021. As someone with healthy investments and health insurance, I gamed out the worst-case scenario thanks to articles that discussed treatment costs for different age groups, lengths of stays, and insurance coverage. Figuring that the worst-case hospital stay for Patrick or me would likely come out to $150k was comforting. This number meant drawing from funds that would normally not go towards healthcare, but it was an amount that was possible to pay.
Wealth accumulation gradually puts you in the privileged position of being able to quell the financial fears plaguing individuals around you—often including folks that live in your same neighborhood or work a similar job. If your savings rate is higher than folks with similar incomes, you will have more peace of mind and fewer worries than those with lower savings rates.
If your financial fears still keep you up at night despite accumulating the kind of wealth that would cover many emergencies, game out absolute worst-case scenarios. For some, this means determining how they would live if they were unable to afford a home. One FI couple figured out that living in Los Angeles made the most sense in the worst-case scenario because they could camp without enduring too much terrible weather, access computers at the local library, and buy a gym membership to access showers. Having free Internet and affordable shower access was bound to facilitate finding a source of income relatively quickly.
Particularly if you suffer from a scarcity mindset, it can help to think about worst-case scenarios because they often show you that even the worst-case scenario is not that bad. Especially if you plan for it.
Unpredictability is Predictable
As the original speeding ticket example showed, unpredictable crises happen to folks who do not prepare. These crises stop mid-course for those who prepare because they are prepared. While you may be just starting out your financial journey and fear unpredictability in your early years, just taking the first step to building a more robust financial future will prepare you for most small inconveniences. The fact that you have considered contingencies and the unpredictable events that could impact your life prepares you more than you can imagine.
The only predictable aspect of life is that something unpredictable will happen. The better your financial position is when the unpredictable happens, the easier you will weather the situation. Start planning for those things you cannot predict. Embrace unpredictability by planning rather than fearing your unpredictable financial future.
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