In an earlier post, I discussed the idea of organizing your finances into a series of microservices. Each one has a focused purpose, such as emergency cash reserves, life insurance and short term savings goals. Most importantly, they are loosely coupled, meaning they shouldn’t be intermingled. The overall concept is that, by doing this, you create a well laid out system that you can easily maintain as years go by. When we start getting into complicated products and schemes, that’s where we get taken advantage of and/or feel lost in the mess of our financial lives
Ok, what about Chaos Monkey?
Netflix has become a staple in millions of homes. They are also held in amazingly high regard in the world of software development, as they were one of the pioneers that fully embraced a microservice architecture. In doing so, they have been able to scale with the company’s rapid popularity growth (from 19M households in 2010 to 114M projected in 2020).
In 2011, Netflix engineers created a tool that is responsible for randomly terminating production instances of services and applications, to ensure that the services are resilient to failures. This tool was given the name Chaos Monkey. Since then, they have created a suite of tools, called the Simian Army, that cause various types of outages. Examples are Latency Monkey, Conformity Monkey and Security Monkey. The fact that Netflix would willingly unleash their Simian Army into their production applications is amazing to me. But I have no doubt that this proactive practice has been a driver behind creating such a successful and robust system.
As soon as we reach adulthood and go out into the world, our financial lives are deployed into a production environment. In this environment, we are exposed to a lot of factors, many of which are beyond our control. And it’s up to us to make sure that we are built to handle it. So let’s test out our financial microservices:
Introducing the New Simian Army
Severance Monkey - Job loss has a few layers to it. The first and obvious one is the upcoming lack of a paycheck. Ensuring that you have a fully funded emergency fund that is readily available can bridge the gap between jobs. Things are a lot less stressful when you’re still able to pay your bills and put food on the table. And being less stressed translates to performing better when interviewing for another position.
But losing your job is not strictly a financial strain. What if you also find yourself only possessing skills that are no longer in demand? To ensure you’re not caught in that situation, adopt the habit of continuous learning and curiosity. Technology trends move fast, and they’ll pass you by if you’re not careful. Using the phrase popularized in The 7 Habits of Highly Effective People, take time to “sharpen the saw”.
Lastly, one of the most effective ways of landing a job is through connections. Focus on doing your best, always treat co-workers with respect, and go out of your way to be helpful. It’s amazing how just taking that one extra step for a person can leave a lasting positive impression. Often times, that past co-worker will play an integral role in you landing that next gig.
Market Crash Gorilla - This one gets all the headlines. The Great Recession of 2008, the Dot Com bubble of 2000, Black Monday of 1987. The font is huge and they are paired with an image of the bewildered stock trader, or just the big red arrow pointing down.
I firmly believe that no one can predict when the next crash will occur. But it’s going to happen. The answer is not to keep everything in your bank savings account (that’s where the next monkey will come into play). First understand how long you have to save and how much risk you are willing to take. Based on that, create a written plan for a diversified portfolio that outlines how much of your savings you are willing to put into the stock market vs. more conservative investments, such as bonds.
Note: if you are working with a financial planning firm who is managing your investments, the firm should work with you to create an Investment Policy Statement.
Lastly, and the most difficult to do, stick to your plan. Fear and greed are powerful motivators, and are the enemy of being a successful investor. This is another area where an outside advisor/accountability partner can provide tremendous value.
Think of your stock investments as owning a banana plantation. The majority of the time, it’s going to do well and produce a nice harvest. History shows that sticking it out for the long run yields positive results. But when the Market Crash Gorilla comes around, don’t be surprised when you have lost some bananas.
Inflation Chimp - Unfortunately for those who feel most comfortable sitting on the sidelines, being too conservative has its own risks too. That risk is called Inflation, which describes the fact that a dollar today will not have the same buying power that it will in the future.
The 12 month inflation rate as of November 2018 is 2.2%, and the average rate of inflation since 1914 is 3.27%. That means that your investments will need to earn that much just to keep up. Those numbers may not sound like a lot, but the effect of inflation compounds in the same way as an investment. According to US Inflation Calculator, an item that could be purchased for $100 40 years ago would cost $386 of today’s dollars, for a cumulative inflation percentage of 286%!
Icy Road Monkey - This can attack from several different angles. Let’s imagine that you are doing your morning commute to work. You hit an icy patch, lose control of your vehicle and slide into another driver in front of you.
In the best scenario, everyone is physically OK, but both your cars are pretty banged up. A proper level of auto insurance, combined with an available emergency fund to cover the deductible, can soften the financial blow and get you back on the road.
What if the other driver is injured? Your auto insurance carries a certain level of liability insurance to help cover you. But it is a very real possibility that the amount you’re required to pay exceeds the amount that is included on your auto policy. Umbrella insurance is a way to have an additional layer of protection, and it can be surprisingly cost effective.
What if you are the one who is injured, to the point where it impacts your ability to earn a living. This is where long term disability insurance comes into play. Statistics from the Social Security Administration show that more than one in four of today’s 20-year-olds can expect to be out of work for at least a year because of a disabling condition before they reach the normal retirement age. Many employers provide some LTD coverage, but it’d be in your best interest to make sure that you have a level of coverage that it doesn’t derail your financial life in the event you become disabled.
Finally, the one that none of us like to think about, and often avoid. What if the crash takes your life? Properly addressing this scenario would entail an entire blog series, but I’ll just try to address it at a high level.
Have a proper amount of term life insurance in place (the general guideline is 10x your current salary).
Have an updated will or trust.
Make sure all of your beneficiaries are up date. This includes life insurance policies, retirement accounts and annuities. Remember, beneficiary designations override your will.
Monkey Jones - Think about what your starting salary was when you landed your first “real” job. When you deposited that first paycheck, you felt like you have made it big! Gone are the days of ramen and Totino’s pizza (well not completely, because they’re still delicious). You’re going out to eat! Sure you can afford a nice car, and you can get a nicer place too. Fast forward to today, could you maintain your current standard of living on it? In middle class America, there is a natural tendency for lifestyle creep to, well, creep up on you. But then you would meet Monkey Jones. No matter how much money you make and how many nice things you obtain, they will always make a little more than you and have an even nicer car. And did you hear how many times they’ve gone to Paris?
Realistically, you may not know a particular person that represents this role, but we are all definitely bombarded with this message of “you’ll be happy after you get X”. I’m not saying that a nice car and a trip to Paris are inherently bad. The point I’m trying to make is that it is very dangerous to compare yourself to anyone else. Determine what is important and valuable to you and your family. Then create a plan based on that.
Don’t try to keep up with Monkey Jones, because they’re not you.
Fear. It’s a primal feeling to which none of us are immune. Politicians use it to sway voters. News networks use it to increase viewership. Countless industries use it to sell. And it all drives me crazy, because decisions motivated by fear are often ones we later regret. So I don’t want this to be construed as a type of fear mongering. Much like Chaos Monkey is used to periodically test how robust Netflix’s applications are from unexpected events, these examples are meant to allow you to ask yourself how robust is your financial architecture. If there are weaknesses, address them. As time goes on and you need to change things around, re-test.
You can’t plan for everything. But that doesn’t mean you shouldn’t plan for anything. Be intentional, be proactive. Then when life’s Simian Army arrives, you’ll be ready.