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Weathering Volatility Through Financial Resilience

Growing up, all his friends had no doubt that Andrew would be successful. He studied hard, got good grades, and always had a solid plan for his future. He went to a prestigious college where he met his future wife, Katie, and racked up a substantial amount of student loans. After completing a successful internship program, both Andrew and Katie received a generous offer at the same company. Within a few years, both made a solid six-figure income. They lived the American Dream. They lived in a large house with a large mortgage, drove high-end cars with sizable monthly payments, and owned a timeshare in Puerto Vallarta, where they spent their two weeks of vacation every year. Andrew's finances were solid, and he was well on pace toward a comfortable retirement.

Then the COVID pandemic hit.

Andrew's company suffered from loss of profits, and furloughed both Andrew and Katie with no pay. Andrew took a loan out of his 401(k) plan to cover his immediate expenses. Due to the stock market crash, he had much less available than if he had withdrawn the funds in December. Andrew recently got word that he would be able to return to work soon, but that his company had to permanently cut several of his close coworkers. He and Katie feel fortunate that they have weathered the COVID crisis so far, and they expect to recover once the economy gets back to normal. Andrew learned from this experience that his income was vulnerable, and found that what he previously considered assets actually dragged him down when his finances took a hit.

Unlike Andrew, no one expected much from Tim. He was not particularly bright, and had no skills to speak of. When Tim was in high school, he worked for one day selling popsicles for a local company. He quit that evening when he saw that his boss took half of his sales. The next day, he started building his own popsicle bike cart, and soon sold popsicles in his neighborhood. He hired some of his friends and brothers to sell for him, from whom he would take half of the sales.

Tim did not go to college. Instead, he sold his ice cream business, and bought a one-way ticket to Buenos Aires. With only a backpack and a used bicycle, he slowly made his way to Chile, then headed north. Tim stopped at various towns along the way, staying a few days to a couple of weeks each place, then biking on to the next town. Tim found hostels or locals to stay with in every town. He found work to do wherever he went, often in exchange for food or lodging. Sometimes he would take tourists out on excursions to places he'd never been to, collecting tips from the tourists fascinated by his stories. Six months later, he boarded a plane home from Bogota. Instead of a college degree, he had gained a lifetime of experience. Tim spoke Spanish at a level that non-natives thought was fluent, while confusing native speakers who could not quite place his accent.

Upon returning home, Tim bought a lawn mower and worked long hours mowing lawns throughout his neighborhood. He soon had a crew working for him throughout the city. In the winter, Tim plowed snow, also with his crew of helpers. Tim then found he could buy used books from thrift stores, and resell them online for profit. Within a few years, he had formed agreements with thrift stores in the region to allow his helpers to organize their books for them in exchange for a share of his online profits. When Tim bought a house, he bought a quad-unit property. He lived in one of the units, rented two out to long term tenants, and used the fourth as a weekend vacation rental. Tim rented out his own unit on holiday weekends while he went camping with his family. Tim loves to travel, generally spending two or three months of the year overseas, where he lives with the locals, and learns new skills.

By the time the COVID pandemic hit, Tim had seven rental properties and five businesses. Some of his ventures took a hit due to the shutdown, but Tim found he could redirect his workforce to new opportunities. Tim has started three new ventures in 2020 in direct response to the pandemic. If you ask Tim, he would say that he does not work, he "looks for opportunities". Tim has no plan for retirement, "Retire from what?" Instead, he has multiple sources that generate positive income, and he continues to expand these ventures. Some succeed, some fail, some morph into something different, but the individually moving pieces move forward as a whole.

Andrew and Tim's experiences illustrate the importance of building resilient finances. Almost everyone wants to be rich, but what they really want is the freedom money can buy. Becoming free through financial resilience is much more important than becoming wealthy. Financial freedom is key to preserving other forms of freedom. Financial resilience consists of three key pillars: Building multiple streams of income, minimizing liabilities, and creating value.

In the book of the same title, Robert E. Allen explains how building multiple, diverse sources of income will make you more financially resilient. As Andrew learned, having only one source of income makes you vulnerable to the loss of that income. This is especially true when that source of income is robust and stable. By diversifying your income, you can more easily weather economic ups and downs. Below are a few examples of how you can diversify your streams of income:

  • Get another job: This is the simplest and quickest way to diversify your income. Two part time jobs are more resilient than one full time job, because if you lose one job, you can increase the hours in the second job.

  • Invest: Make an effort to set aside a portion of your current income to purchase assets that will provide long term returns, or positive cash flow in the short term. You can start small. Young Warren Buffet used money from his paper route to buy farmland and pinball machines as a teen.

  • Start a business: This is similar to investing, but you are investing your own work, skills, and intellect into a project that will reap rewards down the road. Young Debbi Sivyer was a ball girl for the Oakland A's who brought cookies for the umpires during games. Her cookies soon became the wildly popular Mrs. Fields cookies, with franchises all over the world.

  • Own real estate: A cross between investing and starting a business, real estate presents an opportunity to build long term equity, while generating short term positive cash flow.

  • Generate passive income: This is an all-encompassing term that captures anything where you invest money or effort up front, and reap returns from your original investment indefinitely. These include royalties from writing a book, song, or movie script, selling stock photos, creating apps or computer software, inventing a new product, or anything else you can think of. You can find infinite ways of generating passive income based on simple ideas.

Just as everyone's personal situation is different, everyone will have a different mixture of streams of income. Take a look at the potential streams above, and think of them in the context of your personal situation. What skills, resources, and opportunities do you have to create a new stream of income? Creating a new stream of income will take time and effort, but if you commit to working on building a new stream while maintaining your current sources, you will eventually gain more stability and resilience in your finances.

Minimizing Liabilities

Picture yourself walking up an escalator, but instead of going up, the escalator is going down. You need to walk at the speed of the escalator just to stay in the same place. The faster the escalator moves, the faster you have to climb just to keep from falling behind. Now imagine if you can stop the escalator, or even switch its direction to make it go up. Now you can reach the top faster with less effort.

This is the case with liabilities. Liabilities are recurring expenses that chip away at your freedom month after month. They are debts that bind you to continue working, just to stay in the same place. As you add debt and recurring financial commitments, the escalator moves faster. Living under the burden of liabilities can be stressful during good times, and catastrophic during challenging times. Financial liabilities can leave you unprepared, as they strip away your options.

This is not to say that you should never incur debt. On the contrary, leveraging other people's money can be a valuable tool to expand a business or purchase real estate. The key difference is whether the debt increases or decreases your resilience. Does the debt make the escalator go up, or down? Financial resilience is not determined by how much money you make, or how much you spend, but how much you save.

Creating Value

The third and probably most important pillar of financial resilience is creating value. You can lose everything you own in one day, but as long as you can create value, you will remain resilient. Value is an infinite resource limited only by the capacity of human imagination. You can create value by providing a product or service that improves the world in some way to yourself or someone else. Farmers create value by planting and harvesting the food we eat. Musicians create value by producing music to entertain us. Inventors create value by making our lives easier. Mothers create value by nurturing us and teaching us how to be human. Look around you. The world is full of opportunities to create value.

Creating value is different than earning an income, though the two are often related. LeBron James creates value for millions of people who admire his incredible skills as an athlete. He creates value by endorsing products for multiple companies that benefit from his influence. He also creates value off the court through various philanthropic projects. As a result, James earned $88.7 million, including $53 million off the court in 2019. Sometimes creating value does not generate income. Learning how to play the piano will likely not generate income for you, but will create value. Helping your elderly neighbor during a power disruption will not generate income for you, but will create great value for her. Mahatma Gandhi changed the world, though he never generated great income from his efforts. He spun his own clothes, fasted, and lived simply his entire life. Likewise, not all sources of income create value. Unemployment benefits provide an income without creating value. Unemployment benefits are dangerous in the short term, and can be catastrophic in the long term, because they strip those who "benefit" from them of financial resilience.

Creating value is the most important pillar of financial resilience because you can adapt it to any circumstance. Multiple streams of income take a lifetime to build. As long as you have to eat, sleep, and breathe, you will not be able to completely eliminate liabilities. You can create value in good times, bad times, right here, and right now. You can solve problems or improve the world for yourself and those around you. That will make you resilient to whatever the future will bring.

Andrew learned from his experience that while his finances were robust, they were not resilient. He relied on his and Katie's income from a single source to cover a growing list of liabilities. When they lost that single source of income, even temporarily, they quickly suffered financial strain. They learned that because of their debt, they were not free. Andrew and Katie committed to make themselves less vulnerable to volatility as they both admit that they don't know what to expect for the rest of 2020. They remain hopeful that the changes they are making today will help them weather whatever comes next.


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