A common claim that you will hear when discussing wealth creation is that certain financial strategies are “risky.”
Of course, certain financial vehicles are indeed risky. Some carry the risk of unlimited losses. Others have an extremely low probability of paying out. Others will lose their value at an exponential pace.
The savvy individual, however, learns how to negotiate and manage risk. For instance, it is my personal belief that having a single source of income is the riskiest strategy of all. For most people, that is their day job.
During the COVID epidemic we saw people with the most “secure” jobs in the world get laid off by the millions. We also saw thousands of small businesses permanently close. If these individuals only had a single source of income (which is highly probable), they suddenly found themselves in an extremely precarious financial situation.
Here’s something crazy.
2020 was a strange year for me vocationally. I left a seasonal job for a sales opportunity early in the year. During COVID, that job became obsolete as business-to-business sales plummeted as the economy took a nose-dive. So, great income become low income became no income in a total of three months. One of my tenants missed a month of rent. You know who didn’t miss a payment? The originator of my promissory notes.
We live in a day and age where having a job, and only a job, for an individual or a family is extremely risky. Passive income (or another secondary income stream) is becoming not a luxury but a necessity.
So, I ask again, “What is risky?”
I believe that taking on debt that is unforgivable (such as student loan debt) is a massive risk. Someone else may view a college degree (and the debt incurred by such studies) as the “safest” path to financial security. Mind you, much depends on 1) the individual and 2) the specific degree plan they are pursuing. If someone is dead set on being a doctor, dentist, engineer, programmer, accountant, etc., I could view such a liability as a student loan as justified (even so, however, I would consider a different path to secure such accreditations without the burden of the interest and payments that come with an unforgiveable loan).
A marriage relationship could be extremely risky for someone with a high net worth, but extremely low risk for the spouse has a very low income and kids are in the mix. The stock market could be risky for an older senior citizen, but extremely low risk for a twenty-something who has forty more years to build wealth.
When it comes to risk, I like the analogy of swimming. Any water could look extremely dangerous to someone who hasn’t learned how to swim. If you take some basic swimming lessons, the neighborhood pool looks a lot less intimidating. Swimming in the ocean is certainly risky, especially at dangerous places, at the wrong times (high tide, low tide, for example), or under certain weather conditions. However, swimming at the right beach on a clear, sunny day is wonderfully less risky.