Do you remember those Worst Case Scenario Survival Handbooks that were around everywhere about a decade ago? How to land a light aircraft if the pilot has a heart attack, or how to survive a bear attack. I don’t know if they extended to surviving a zombie apocalypse, but I wouldn’t be surprised if they did. They were good fun reads and made a great Christmas present.
In today’s episode we’re going to explore how planning for the worst case can be liberating. How it can melt the ice that has you trapped in your current state.
And the best bit? It’s not hard – just two easy steps.
Planning for the worst case is a key tool in enabling you to gain the choices in life that you deserve. So let’s dive into today’s Financial Autonomy episode – The Beauty of the Worst Case.
When investing, we know from history that the best investment returns come from growth assets – shares and property.
Why then don’t investors have all their money, 100%, in shares and property? Why diversify and hold things like bonds?
The answer is that whilst we always hope for the best, a wise person plans for the worst.
Planning for the worst case is something that’s common across government agencies and businesses. The Emergency Services for instance will plan out their response to a large bush fire or flood. A bank might develop a plan to handle a significant global disruption to financial markets. Or a pharmaceutical company might have a plan for dealing with an extortionist tampering with their products.
So how can you use this proven process to help you achieve your Financial Autonomy goals?
Step 1 is to acknowledge your fears and define them. If your Financial Autonomy dream it to make a career change, like we heard from Tim in episode 55, then perhaps your worst case scenario is that you quit your current job and can’t break into the new career that you dream of. That’s a totally reasonable fear. And for many of us, that fear is enough to stop us moving forward. It’s paralysing.
Now one solution to overcoming this paralysis would be to just try and push it out of your mind – the “be positive, it’ll never happen to me” approach. Having a positive mindset is certainly important in leading a happy and fulfilling life. But to achieve big changes, we need more.
So on a piece of paper, or my preferred method, a white board, write down your worst case. What’s your greatest fear in embarking on your Financial Autonomy goal? Perhaps there’s more than one.
There’s some relief in achieving this step alone, in acknowledging your fears.
But of course we’re only half done. Now that you’ve defined your worst case, in step 2 we need solutions. So it’s brain storming time! If you feel comfortable, perhaps you could invite others in to join you to get some fresh ideas.
Imagine what you would do if your worst case actually happened. Write down your solutions. Now this is not your preferred outcome, and it’s also not the most likely outcome either. So therefore your response are likely to be things you’d prefer not to have to do. But the point is they are things you could do if you had to.
If the career change didn’t work out, could you go back to your old career? If the new business you started just wasn’t delivering what you needed it to, could you get your old job back? What if you took a year off to travel with your partner, and half way through the trip decided you couldn’t stand one another and went your separate ways. Would you fly home, or continue the journey solo?
When I made my big jump from employee to self-employed in 2006, I had 8 months of income saved up. That was my runway. If it didn’t work out, I had to go and find another job. That was how I dealt with my worst case scenario. And with that in mind, I ensured that before I left I did what I could to strengthen my professional networks, and I made sure I finished up on good terms, so that if I needed a reference or a simple connection in the future, people would answer my call.
I also considered where I was at professionally and how employable I’d be. I felt that given my experience at that point, and some of the successes that I’d had, I would be able to secure another employee role if it came to that.
Now fortunately it never did come to that. But acknowledging my greatest fear – what if this just doesn’t work out – and having a solution to that, was enormously powerful in providing me with the confidence to make the leap.
If you take nothing else away from this post, take this – planning for your worst case is enormously empowering.
I’ve found it so useful that I’m implementing it into more and more of what I do. When I develop my yearly business goals, I now also list some worst case scenarios and how I’d deal with them.
We’ve introduced an affordable financial modelling solution so that you can get a robust answer to the “am I crazy to do this?” question. As part of that we typically explore two worst case scenarios – both involving adverse investment market outcomes, to see what impact that would have on your plans. Adding these worst case scenarios magnifies the usefulness of the work enormously.
Imagine your Financial Autonomy goal is to retire at 50. We build a financial model to show you how that looks over the long term, and the findings are that your goal is possible. Now we could stop there. But how much more powerful does the modelling exercise become if we also add in how it looks if you were unlucky enough to suffer a share market crash in the first year of your retirement? (Refer Ep 38 – Will my money run out? To see why this is a particularly bad outcome).
If the modelling shows that your goals remain viable – awesome! But if instead it highlights a potential problem, you can start planning solutions. Perhaps you change your asset allocation in those initial years so you don’t have too much share market exposure. Or you figure in picking up some part time work so you can give your savings time to re-build.
Whatever the solution, planning for the worst case enables you to move forward with greater confidence.
There will always be uncertainty in life. And for many of us, it’s this uncertainty that prevents us from taking the big steps that we’d like to make. Planning for the worst case could be the way for you leap over your uncertainty barrier.
Learn more about our financial modelling service, including a short video with a sample case.
Resources & Links
- Podcast Version
- Tim’s big jump – from bank manager to primary school teacher
- Will my Money Run Out?
- Work with Paul