After organizing your financial life into a clearer and more understandable picture, naturally certain problems or issues will surface. Protecting wealth is the next phase on the journey to better finances. What happens if I lose my job? Am I saving enough? What if I get sued? Many questions naturally emerge, questions that you have been asking for years but never had the information to answer them. After understanding the limits of your finances, you can start to move the pieces around to know how protected you and your family are.
Key Takeaways
- Protecting your wealth is critical to improving your financial stability, and consists of three steps:
- First, prioritize the risks that require the most attention,
- Second, assess how much control you have over those risks,
- And finally, choose how defensive or aggressive you want to be.
What It Means to Protect Your Wealth
When most people think about protecting their wealth, the first thing that generally comes to mind is buying insurance. By definition, the role of insurance is to help protect you against larger risks in your life. The problem is that it is impossible to remove all risks, and therefore it is impossible to be fully protected. No matter how much someone tries to sell a product designed to fully protect you, there will always be a degree of risk you are accepting.
Everything has risk associated with it. The car you drive, the plane you get on, the people you interact with, the investments you buy, the businesses you create, all include inherent risks. The concept of protecting your wealth, therefore, should be: to what degree do you want to reduce the risks in your life? Insurance can be one solution to a protection problem, but that may not be the only solution.
By nature, protecting wealth is a defensive posture. It is about reducing risk and/or limiting exposure. You can reduce your risk by driving a safer car or by not driving at all. The former decision could be a wise investment; the latter could simply be unrealistic. If we instead look at protecting wealth as a spectrum within each of our financial endeavors, the next step should be to identify within each domain how aggressive or defensive you want to be, as well as how much control you have to change that.
The protection phase of the wealth journey should consist of three steps that continually evolve. First, prioritize the risks that require the most attention. Second, assess how much control you have over those risks. Finally, choose how defensive or aggressive you want to be.
Who Needs to Be Protected
One way to prioritize what needs protection is to ask a simpler question: who are you trying to protect? Taking a moment to think through how you are using your money to protect your family can reveal certain gaps that need to be addressed. It is one thing to have car insurance to help protect your vehicle; it is another to make sure your kids can attend the same schools, play the same sports, and/or live the same life. Once you start asking how your money can protect your spouse, kids, parents, or other close relationships, then you can start connecting the dots on different financial planning domains.
Life insurance is perhaps the easiest financial example of this concept. Many business owners who are the head of the financial household want to know what happens if they are no longer around. Will my family be okay? Life insurance can help provide money so that if that were to happen, they at least have some financial comfort. Estate planning becomes critical in this situation as well. If you own multiple businesses or investments, imagine what your spouse or family would have to untangle if you suddenly passed away. Protection does not have to be about reducing the total number of financial endeavors.
Using wealth to protect your family is relatively understandable, but the concept still applies to protecting assets as well. Your business may need protection. Your real estate may create risks that need to be addressed. Disability insurance may help protect your future income. The list goes on. Remember, the goal is to prioritize how important a given risk is and how much control you have around it. Everything worth protecting should be in service of some higher good.
Calculated Bets
The final piece of properly protecting your wealth is to balance your offense with your defense. Understanding how defensive or aggressive you want to be can help you make better decisions in your financial life.
How much risk you should take is a question that should be asked constantly in finance and investing. The specific product is less important than why you own it in the first place. How likely is it that a given investment will produce the outcome I want? Can a less risky product achieve the same result? Financial lives are about balancing the risk in your life, whether that is with investments, insurance, estate planning, real estate, etc.
When you feel more secure in your finances and have a proper risk balance, it can be easier to get more aggressive in certain areas of your finances. Take an emergency fund, for example. When a business owner has 6-12 months of monthly living expenses stored away, it could make a new opportunity easier to start. Or investing for retirement: when you have enough assets that are safer and more secure, it can make investing in the stock market more comfortable. Sometimes the best offense is a good defense.
Protect Then Build
It’s easy to look at new investments, businesses, incomes, etc. and see the positive outcomes. But it is equally important to understand the negative consequences. Taking on too much risk in one part of your financial life can have serious effects on other parts. From my experience, most people just want to know if they are “at least doing okay financially”. Protecting your wealth starts to solve that problem. Get to a place where you prioritize what needs the most protection and understand how much risk you are accepting as a result. The process alone should help comfort you and provide encouragement to build your wealth.
