How about a different focus for a change? My usual theme often contains direction and tips to enhance your savings, by checking that you aren’t being financially irresponsible, duplicating management fees or insurance payments. However, in this article I want to discuss why it might pay to also have a degree of duplication in some areas of your finances, or as it is known officially, to practice financial redundancy.
Whereas people are familiar with the term redundancy, the definition of financial redundancy is creating multiple safeguards or backup strategies in financial planning and management to protect against potential risks or failures. Some risks are so significant that we need to take steps to avoid catastrophic outcomes, even if it costs us money.
When duplication can be a benefit
The last number of years has seen one crisis after the other. We rolled from a pandemic, with all its associated adjustments, into the war that began when Russia invaded Ukraine which caused global fallout. Local social unrest and elections impacted on our financial stability, followed by a war that began on October 7th and continues to today. Then a few weeks ago, eight and a half million computers stopped working due to a CrowdStrike update outage, causing havoc across the globe. The cancellation of many flights, and banks/credit card companies ceasing to operate were just two of the many sectors affected. The common denominator between all these crises was the havoc that they wreaked on so many people.
Our technological progress has brought many benefits. However, our degree of dependency on the systems around us should get us thinking about not only the Home Front emergency instructions, but also financial emergency actions that can help us weather future storms. Seeing as we are so clearly not in control (and who really thought that we were?) and have no idea if and what form any disruption (aka black swan) might take, and how it might impact on us, here are a few strategies you may want to consider.
Tips for preparing financially to maintain stability during individual, national, or global crises
- Open up an additional bank account – It may seem a waste of money to pay bank fees for two different accounts, when you can potentially negotiate better rates with one larger account. However, it might mean you can access your funds, should one bank suddenly become non-operational, or your account becomes inaccessible. Having bank accounts in more than one country provides another level of financial redundancy.
- Hold more than one credit card (and possibly multiple ones from different companies and accounts) – if you balance your spending between different credit cards you may well be able to get them to cancel the monthly fees.
- Carry some cash – we are living in an increasingly cashless society, but in the event of some form of energy cut or computer system crash, it could be that cash will be necessary to transact until the situation is rectified.
- Enlarge your emergency fund – make sure that you have at least 3-6 months’ worth of living expenses to cover unexpected costs (as per the point above, some of it should be in cash).
- Check your insurance policies – make sure that you are neither over nor under insured for your stage in life and your various risks (e.g. health, life, property) and that your property insurance for your home and possessions is up to date.
- Diversify into different types of saving funds and asset classes – ensure that your retirement savings accounts and financial investments are not being managed by a single company. Check that your portfolio is fully diversified – in terms of the asset classes that you have, tangible and intangible, the geographic location of the assets, and the professionals who manage it/them to name just a few ways to diversify. Pandemics, wars and technical glitches aside, this is a preferred strategy to minimize the impact of a major unexpected downturn in any one market.
- Diversify your income streams – develop more than one source of income in order to reduce dependence on a single employer or industry.
Create increased liquidity in your portfolio to enable you to access parts of your assets in the event of an emergency, or to take advantage of new investment opportunities that often come up when instability rises. As Sir John Templeton is famously quoted as saying, “the time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell”.
The above points are in no way meant to create hysteria. As I mentioned above, I believe that as we are in control of so few elements of our lives, it is beneficial to do our part and plan for extreme but potentially damaging scenarios, in order to reduce panic and help us weather any storm.
With the hope that these precautions are not necessary we continue to pray for the safe return of our hostages, the safety of our soldiers in all their missions, and the security of our nation.