Recently, Jeff and I had dinner with some friends, and the question “what is the biggest risk you’ve ever taken?” came up. As we went around the table, everyone told their stories. Jeff spent four years in Taiwan and China after college, in two separate trips, with the hope of making a living there. My friend had moved as a single mom with her young son back to Oregon with no job or prospects. When it was my turn, I really couldn’t think of anything.
I’ve always been the cautious type, and I’ve made decisions and changes methodically, always ensuring I had a safety net. I’ve never quit a job without having another to go to. I’ve never moved without being secure in a home and income. Heck, I rarely drive more than five miles per hour faster than the speed limit. Oh, I have risk in my investments. But even there, I only have money that I won’t need for ten years or more in risky stock mutual funds.
For some people, though, living a life fulfilled involves taking risks, and I admire these folks. Whether its following your passion, starting your own business or changing careers, risk is an unavoidable part of the picture. But that doesn’t mean you can’t mitigate the risks you face. All it takes is a little planning. Here are a few examples.
One of my friends is an avid cyclist. She does everything from 100 mile road races to cyclocross. It’s not uncommon for her to reach speeds exceeding 50 miles per hour on her bike. Of course she wears a helmet, but at these speeds, a small mishap could land her in the hospital facing a long period where she is unable to work. How can she mitigate the risk of not being able to work, potentially for months? Disability insurance. Many employers offer disability insurance to their employees, but many employees skip the coverage if they have to pay for it. The Bureau of Labor Statistics reports that at the end of 2014 only one third of workers participated in long term disability coverage. Your ability to earn an income is worth more than your car or home, which you don’t hesitate to insure. Employer sponsored disability insurance is inexpensive. No one should pass it up.
I have a few friends who are small business owners. Opening a small business comes with a whole host of risks. At the beginning there is usually at least a short term loss of income. Over time, income may increase but remain irregular, and of course there are many things that can cause a small business to fail. The Small Business Administration data indicates that only 55% of small businesses survive longer than five years. The business owners often don’t have the safety nets most of us are used to without an employer to offer a retirement plan or benefits. Here are some tips to mitigate these risks:
- Build up some savings before you open your business. This will allow you to avoid going into debt or at least reduce the amount, especially expensive credit card debt.
- Know your limits. Establish limits for how much debt you are willing to take on, how long you are willing to take losses and how much of your personal savings (or your family members’) you are willing to invest. Be disciplined about abiding by the limits, and have an exit strategy.
- Once your business starts to make money, have a plan for reinvesting in the business that takes into account taking care of yourself. No business can thrive without investment, but its important to provide for your eventual retirement and your family’s security with retirement savings and life insurance.
Similar advice applies to changing careers. Understand that you may have to take a step back in income to start in a new field, and prepare ahead of time by building up your savings. If you need additional education to make the switch, create a budget, and set money aside for this as well. If you have to take on debt for your education, take on as little as possible. Before you go into debt, set a limit and understand what your payments will be. Make sure your new career will allow you to meet these debt payments and your need to save for your long term financial security.
Risk is an inevitable part of life, and sometimes we have to take on extra risks to fulfill our dreams. But that doesn’t mean you have to work without a net. Patience and planning go a long way toward limiting the impact of risks that go against you.