Imagine that your financial life is a sandcastle you’re building on the beach. You can learn what works for building it up, and in the good times, when the threats to your progress are manageable, you take for granted that it’s easier to build in those conditions. Now imagine the tide rising, the waves start coming in, getting closer and putting your sandcastle in danger of being damaged or worse, being washed away. In this analogy, the tide is a financial shock. The thing about the tides - and economic shocks - is they will always come in. Sometimes very quickly and suddenly as if out of the blue and other times, you can feel it gradually creeping in. Experiencing a financial shock is not a matter of if; it’s a matter of when and to what severity. Shocks can come in the form of global recessions, pandemics that freeze the economy, you lose your job, your kid getting very sick, a parent dying, the industry you’ve worked in for decades slowly getting cannibalized by new technology or war.
In the short twelve years that I've been working: I've lost two jobs, my wife was furloughed, there was the Great Recession, now there is a global pandemic, and between the two of us, we've taken the risk of starting a handful of different businesses over the years. Considering the timeframe, I think we've weathered our fair amount of shocks. And with each one, I learn something new about myself. Bust most importantly, I've learned how to expect the best but prepare for the worst.
How do you absorb a financial shock? You have to prepare for it as best you can
Your preparation might be the only thing within your control in a situation. And it might have a significant impact on where you land on the other side of that shock. You're like an athlete going into a game or a performer taking the stage; you can't control your opponent or the crowd. Being prepared is the best thing you can do. And when the tide comes in, as it always does, trust in your preparation, keep breathing, and absorb the shock.
Traditional financial wisdom wins when it comes to preparing for a financial shock: spend less than you earn, save and invest the difference, repeat.
Get back to basics, financially and otherwise
The most basic way to understand how prepared you are to absorb a financial shock is by understanding your financial position in terms of the following:
What are your essential monthly costs? What are the priorities, and what can you negotiate?
How much can you expect in inflows (income, unemployment, aid, and assistance, etc.) each month for the next one to six months?
How much do you have in reserves (savings) to bridge any gaps in your essential costs and inflows?
How long will those reserves last you?
In both good and bad times, you should know how much your essential obligations are. And in good and bad times, you should also see if you're going to be able to meet those essential obligations. And if you can't, then a lot of your energy and focus should be on finding the balance in that equation. That equation is the foundation of your financial life. It's the bedrock. Hoping things will work out is just not a strategy. Hoping you'll figure it out as you go is also not a strategy. And hoping someone else will step in help you, is not a realistic strategy - at least that's true in America. Our individualistic country is just that - individualistic to a fucking fault. Hence why you are reading an article about what you can do as an individual to financially protect yourself against something that is entirely out of your control.
Understanding your financial position in those terms, I laid out above is like knowing what's in your refrigerator and pantry before you start cooking a meal. You don't just start chopping celery and hope your dinner will just work itself out as you go. First, you have to take stock of what and how much you have. Then, make some kind of a plan for a recipe. And make adjustments and substitutes as needed. Apply this to understanding your finances: what do you have, how much do you have, what's your plan, and what adjustments do you need to make?
During the financial crisis of 2008, a lot of people didn't have a choice, but to consume less; they had to get back to basics, which is not a bad thing. When you spend time doing very basic things - like having picnics in the park, making food, gardening, staring at the clouds, and strumming a guitar under a shady tree - you'll naturally have low overhead (your essential costs). And having a low overhead allows moments of financial shock to feel less like an existential crisis. Having a low overhead means you consume less and can save more. Having a low overhead is freedom, especially in times of uncertainty.
Hurry calmly
After you understand your financial position, decide if there is anything that requires you to take immediate action. Here are some things that might require immediate: filing your taxes so you can get a refund, filing for unemployment, updating your resume, calling your landlord, or reaching out to your student loan servicer. You should act swiftly as not to be irresponsible, but not so hurried as to be irresponsible. In other words, realize that you can move both quickly and calmly. You can be effective and relaxed. Calm doesn't mean that you sacrifice urgency. If you've ever watched a professional fight, like boxing, the fighters are both relaxed and quick. Those two things, being relaxed and moving quickly, are not mutually exclusive. It's much easier to move swiftly when you are relaxed and not holding yourself in a state of constant tension.
Practice struggling so you can learn how to manage your mind
For about seven years, I was really into cycling. When I would ride, I'd go with my dad and his crew of dads. There was a particular ride that we would do that was around 80-90 miles long, with climbs that totaled 32 miles with around 10,000 ft. in total elevation. The thing I learned on these rides was that even when you make it to the top of a summit after you've busted your ass to get there, at the top, all you'll see in the distance are more summits to climb. Life is an endless up and down, an endless climb and descent. And whoever you are, however privileged or unprivileged you are, all of your life, you will have problems that you have to learn how to deal with. So get good at the struggle so you can learn how to manage your mind through the tough climbs.
Regular practice of actively putting yourself in situations where you struggle can help you learn how to deal with adversity in a safe, controlled setting. You can do this through therapy, sports, creative practices, or through constantly learning new things. The opportunity for you to struggle is everywhere; you just have to be open to struggling. You have to embrace the opportunity to struggle. When you struggle regularly, your tools for dealing with struggles are sharp and easily accessible. The struggle doesn't have to be existential. It's just stress that put on yourself, so you know how to deal with stress in real-life situations, like decision making.
Part of dealing with problems during a financial shock is navigating stressed decision making. The decisions you make in these difficult times might have a disproportionate impact on your life. So learning how to manage your mind can help you stay chill and properly reflect when you need to make a decision. It's easy to make good decisions when shit is going great. Just like how it's easy to be a nice person and have a flawless moral character during a time of ease and joy. The real challenge is trying to make good decisions when shit has hit the fan.
Don't fixate on what you're losing, appreciate what you're getting
Inverse your thinking; it's a powerful tool. Instead of fixating on what you're losing, focus on what you're getting. With the current crisis in particular, you are getting the most precious and non-renewable resource: time. A lot of creative people can see this time as an opportunity and a gift. It's a forced pause, a forced time out. There isn't anything for you to miss out on except missing out on being present with yourself. It's easy to look at a crisis or a financial shock as only bad. It's sophomoric. Creativity is also very destructive. Naturally, it's destructive, like how a plant destroys its seed. But it can also be born of it. Plato said it best, "Necessity is the mother of invention."
World War II thrust women into the workforce. In the subsequent decades, women took up ideological arms to fight for their rights, for equal pay, treatment, and opportunity in the workplace. World War I birthed synthetic rubber, ultrasound, air traffic control, blood banks, scientific management techniques, and speakeasies. Recessions have forced inefficient businesses to shut down, while good businesses thrive. And most of all, in a downturn, we are forced to examine the set of beliefs that got us here in the first place and whether or not we want to keep believing in them.
I went an entire 25 years of my life, moving quickly and never stopping to reflect. When I finally paused, it wasn't really my choice. I had to stop and make an assessment because my personal economics were shifting, which threatned my stability. When my wife started her business going on nine years ago, we were broke, and the economy was still very much in the Great Recession. But being broke and struggling gave us a lot more than we realized at the moment. It taught us how to be resourceful. It taught us how to reflect on what we were willing to sacrifice. It forced us to weigh the true cost of everything in our lives - health, relationships, friends, jobs, how we spent our energy. It gave us a chance to realize that we could exist on very little money and still have a very full life. We learned how to be reslient; a welcome quality in a turbulent world.