Analyzing and managing the risks in lifestyle change

So, you’re looking to make a lifestyle change? 🤔 

You want to be financially independent with a goal of retiring early or perhaps work part-time to be able to spend more time with your kids.  Maybe launch that project you have been dreaming about for a long time or it could be launching your own business and being your own boss.

The link between risk and fear

There are many reasons why lifestyle changes fail. Generally, we are scared of many things that prevent us from moving forward.  I wrote about this in an earlier article as have many others. It’s a topic that fascinates psychologists also. Its even been written that “Fear is a Money killer” as it drives us strongly in the way we manage, or fail to manage our money.  As money is the tool that can bring us time in our lives to be able to focus on our chosen priorities, its imperative that we can get this fear under control for 2 main reasons if want to really change the way we live our lives:

  1. Give us the confidence to actually make the changes we dream about
  2. Increase substantially the chance of making a successful and sustainable lifestyle change

Taking a pragmatic approach

Based on my experience in moving from a traditional 9 to 5 job to a completely atypical life (focusing on my passions and helping others to escape the Rat Race) I want to share my method for managing the risks – and helping you get your fear of running out of money under control.  It starts with you identifying all the risks that keep you up at night during your reflections of a lifestyle change towards financial independence.  Write them down and keep your list updated and more risks come to mind.

There are many types of risk

To help you get started, I identify the main families of risk:

  • Health Risk: The risk that you or members of your family will have health issues requiring substantial funds to pay for the associated treatment costs
  • Inflationary Risk: The inflationary cost of living will increase faster than your passive income sources will be able to cover
  • Investment risk (stock market or other financial products): The financial products you invest in don’t perform at the desired level.
  • Real Estate market risk: Your investment properties lose value or you are not able to obtain the desired rental income that hoped for.
  • Natural Disaster risk: A natural disaster destroys or severely damages some of your property
  • Income Risk:  The activities that you target for some of your main or side hustle incomes don’t bring the anticipated level of revenue.
  • Death: You or your partner are struck done by some tragedy leaving you or your family alone and leaves you or your partner financially exposed.

Simulating the risks

Inflation

My wife and are quite cautious in nature and once we had built our risk list we then used our financial simulation application, EFILYM to determine the impact of each of our risks on our lifestyle change plan. 

If we take inflation as an example, we took the statistical data for world inflation and were able to see that for the last 60 years inflation varied in general between 0 & 16 %.

Example inflation analysis – USA

In our simulations, by simply changing the inflation rate we were able to see the impact that either an increase or decrease of inflation would have on our plan for financial independence.

We are able to determine that for in our case if inflation went above 4% then we would have a problem and our lifestyle change plan would not support us for the period required. 

Based on historic inflationary figures, in the graph above we were comforted to know that this level has not been surpassed since 23 and that this risk was something that we could accept as being under control and we could move forward with our lifestyle changes with a sense of relief.

Of course history does not guarantee the future, but it was comforting to know that exactly the level of risk we had and whether we need to really worry about it or not.

Health / Life Risks

Another poignant example of a risk that we thought a lot about was if something happened to either my wife or I and the remaining spouse was left alone.  By running certain simulations where either my wife or I died early or got really sick, we were able to determine what our life insurance coverages should be so that the remaining person would be able to continue to live in an autonomous manner.  Death is not a pleasant subject to have to consider, but taking the time to think about the difficult subjects on our minds was a strong enabler for us to make leaps and bounds in the acceptance of our lifestyle change plans and find the courage to make the big steps (such as quitting my 9-5 job to set up the EFILYM website and launching the financial simulation application to make it available to others).

Managing the risks

Just in the way we analyzed the risks above, you can do something for all the other types of risk that you may have on your list.  There are a number of ways to manage the risks that you might have. 

  • You might want to boost your emergency fund for the ‘just in case’ approach.
  • You can take an action (often a type of risk management purchase) to be rest assured concerning the risk – Medical insurance, Life insurance, Rental property unpaid rent insurance, Maintenance contracts, etc. Most of these have a significant cost and you will need to weigh up whether building the additional expenses into your plan outweigh the size of the risk. Its always a personal decision for you to take. Don’t let others decide for you – especially the pushy salespeople.
  • Decide that the risk is acceptable and do nothing.  For my personal case, I found via my simulations, that some risks had much less impact on my lifestyle change plan that I had anticipated, and it was not worth worrying about them. In that case, just get on with life and put it in the back of your mind.
  • Re-organize your investments. Some investments involve more risk than others.  If you really cannot support having too much risk in your wealth portfolio, then choose other more conservative options.  This may mean that you need more time to reach your new lifestyle, but its the counterpart to bring more secure in your position.
  • Update your Will & Testament. For us we were worried if something drastic happened to one of us, how would the remaining person cope (financially).  Some subtle changes to our Will & Testament enabled us to address those risks.

Building confidence in your lifestyle change plan

For us, the real key in building confidence in how we had managed our risks was via the literally dozens of simulations we did together.  The more simulations we did and more we understood the true risks and what were the elements with the heaviest impacts on our lifestyle plan towards financial independence, the more we grew comfortable with our plan until one day we had reached the point where there was no looking back.  Simulations alone were not the only factor that allowed us to build confidence. It was also the fact that a long period of time went by during our reflection period. Ive stated in previous posts that from Go to Woe for us was around 4 years, but in the actual true simulation and planning phase, it was around 2 years.

Time is key. It’s very easy to be in a hurry to escape our existing lifestyles, but it’s more important to move towards our ideal vision rather than to act just to escape our current situation.  It’s a construction process that takes time so that mentally (and financially of course) you can make the leap towards your new lifestyle in confidence and for the right reasons, and with the adequate preparation.

For those you who have managed to make the leap towards a lifestyle change, and perhaps financial independence, Id love to hear your comments and stories on how you have identified and managed your risks. Feel free to comment below.

Photos by JESHOOTS.COM and Erol Ahmed on Unsplash

Analyzing and managing the risks in lifestyle change

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