Sidney Rittenberg is a dynamic, interesting guy who ended up living in China for many years after World War II, and served in unique roles including being the official translator between the U.S. president and China. While imprisoned in China for years for communist activity, he coined a new modern-day Confucian saying:
“If you go out on a limb, listen carefully for the sound of saw.”
What an effective way to describe personal risk calculus! Life is an exercise in constant risk management. Each of us makes countless daily decisions about now vs. later, safe vs. unsafe, cost vs. quality, and more, in a world where unknowns and change are a constant. For example, someone with serious skin cancer propensity can cover up her skin a lot with clothing, use sunscreen, research which sunscreens are best, and assess the tradeoffs of fun in the sun and the health benefits of natural Vitamin D vs. certain death if a melanoma grows and spreads. There is no clear right or wrong path. We can try to make deliberate choices to moderate risk, and we may succeed or we may fail.
The hard part of risk management is this: You do not know in the present whether the risk you seek to avoid will come to pass. For example: if you save most of your income for retirement or a later stage, and forgo vacations, new clothes, and meals on the town for years, you might actually die prematurely from illness or an accident, never having enjoyed the fruits of your labor. Then again, you might live a long time and end up frustrated if you are bankrupt without retirement savings, struggling with medical bills and other hardships. You can plan well and still have unexpected events change everything.
Look at your own risk appetite honestly. Are you too far on one side of the spectrum? Think about why, and whether you may want to stretch in the other direction. A reasonable approach is to manage your risk profile like the advice for managing a stock portfolio, with a spread of diverse strategies ranging from safe to brave. For example, recommended balancing options for a retirement savings plan often suggest a mix of stable, low-profit assets combined with a mix of riskier investments that have higher chance of profit and loss. The theory is that by spreading risk along a range, from safe to aggressive, you can harvest growth and financial upside while also maintaining a reserve to hedge against market downturns.
Calibrate your risk tolerance to your personal record. Let’s say you are taking out a mortgage and deciding between a very low rate and monthly payments vs. a longer-term loan with a higher cost. If you are in your mid-30s or older, you have enough data points to examine your patterns by now. Things could take a different turn, but you can only make decisions based on the facts in front of you. You may note that you have moved frequently in the past decade, even when you intended to stay put longer. This time, you really intend to stay long term, but unpredictable variables could change that calculus. Perhaps a seven-year ARM (adjustable rate mortgage) is a good compromise—it allows you to leverage the low fee structure, but also buy yourself enough time to be in the home for a relatively lengthy time period. Should you want to stay or rent the property out at the end of the loan, you can assess options closer to the end of the seven years: refinance, pay down some principal, or bring on a partner. Or if you have been a highly stable person in one location with long term jobs, long-term financing may make more sense. Examine your history and goals to inform decision-making.
Choose what things you enjoy most now and do them, while also tucking away a sizable amount in savings. Focus on activities you enjoy, and decline spending time or money on those you do not. Channel social and leisure activity toward your priority areas.
Do live for now in some parts of life! Just maintain awareness over your habits and spending. For example, eating out can cost a lot, especially if alcohol is involved, and can take up many hours. It can also be a great way to connect with people and enjoy two of life’s pleasures: food and drink. To scale back costs but still enjoy many of the benefits, you can suggest cooking together at a home or getting takeout instead occasionally. It can also be more relaxing to connect with people at a home.
Save enough for the classic recommended reserve of at least six months of unemployment. Those who have been in abusive jobs but have been unable to quit because of money quickly learn the lesson of never putting oneself in that situation again willingly. Keeping a solid buffer at all times is smart regardless of other risk management strategies.