Strive for Antifragile, Accept Resilient, and Don’t Rely on Crowdfunding

When I was a child, my father was injured on the job and could never work again beyond sporadic and low-paying temporary work. He got a settlement and a few bucks from the pension each month, but more was needed (made worse by a few unproductive decisions) to keep our house or pay for the necessities of life. I’ll forever be grateful to the many people who helped. Further, I’m happy to pay it forward and provide support where possible in someone else’s moment of need.

A sentiment I often hear is that people want to be efficient in managing their finances. On the surface, there is nothing wrong with efficiency. Waste not, want not, and so on. Most, if not all, aspects of modern society strive for a high degree of efficiency. Therefore, it’s not surprising that we also apply this concept to our finances. The challenge is that highly efficient systems are not built with redundancy in mind and may be overwhelmed by random shocks to the system. As Scotty said in Star Trek III, “The more they overthink the plumbing, the easier it is to stop up the drain.”

Our personal finances can quickly take a turn when an unforeseen event takes our plan on a detour (assuming there is a plan). Unfortunately, we get grim reminders of this from the various crowd-funding pages we see on social media or in the news. Observe, and you’ll note that most of the time, money is being raised to help with a situation that’s not uncommon or unpredictable. It’s just that the victim probably didn’t think it would ever happen to him or her, always to other people. This isn’t meant to be a criticism of people who are experiencing a crisis and are short of money. On the contrary, as mentioned earlier, I probably wouldn’t be where I’m at without the timely charity and support of people in my life.

Here’s where the paradox comes in. I hope you will be generous and contribute to that crowd-funding page you scroll upon to help someone in your neighborhood or community. A few bucks may make all the difference. I also hope that you will arrange your finances with the mindset that you never want to be dependent on the charity of others when the inevitable shock to your finances occurs. In other words, avoid having your finances be fragile. Instead, strive to have them be antifragile. Applying the logic of author Nassim Nicholas Taleb, this would make your finances stronger due to random events or shocks rather than weaker. And suppose it turns out that antifragile isn’t possible to attain. In that case, hopefully, you’ll at least land on resilient, which means that your finances will be able to withstand or recover quickly from difficult conditions.

To that end, here are some examples. Possible examples of fragility in personal finance:

• Insufficient insurance for low-probability but high-consequence events
• Belief that it’s more efficient or even possible to self-insure
• Long-term commitments relying on short-term and/or variable-rate debt
• Too much of savings/investments in retirement accounts or other vehicles that limit access
• High positive correlation in all personal money matters (Ex. I work for a well-known tech company, and all my investments are stock in the same company)
• Expect high returns to make up for poor savings habits

Possible examples of antifragility (or at least resilience) in personal finance:

• Enough life insurance to replace any lost income because of premature death of income earner
• Disability insurance to replace lost income because of sickness or injury
• Umbrella policy to pay for losing a lawsuit or avoiding a lawsuit altogether through a negotiated settlement
• Sufficient liquid savings to pay for an unexpected event and take advantage of opportunities
• Little to no consumer debt and/or variable rate debt
• Consistent saver with tempered expectations of investment returns

Sources:

• Taleb, Nicholas Nassim. Antifragile, Things That Gain from Disorder, Random House, 2012, pp. 5-23