Risk Surface is a way of thinking about all the things that could go wrong. It’s a strategy for reducing present and future expenses, both perceived and theoretical. You can kind of put a dollar amount on it, but it’s also more involved than that.
Risk Surface, in so far as it can be calculated, includes all of your monthly obligations (not necessarily your general spending), and the potential costs of things that you require in order to function. For example, your rent/mortgage is a part of this, as well as utilities, subscription services, transportation costs, etc. If you have a car and need it, a part of your risk surface is the cost of repairs, typically the worst repair you can imagine or the cost of another vehicle.
Technically, we all face the very real threat of Risk Surface with respect to health. There’s really no way to put a good dollar sign on that, as every day is a small lottery. Most people still make it through life just fine, however, but the risk is there. This is kind of a category of its own that I’ll discuss later.
However, for pretty much everything else, there are options.
Having kids increases your risk surface. A long commute increases your risk surface. Owning one or multiple cars increases your risk surface. Owning a house increases your risk surface. Having expensive hobbies you consider essential increases your risk surface.
Now, not all things that add up to your risk surface are bad. Just because having a kid increases your risk surface doesn’t mean you shouldn’t have kids. It just means, your potential obligations are higher, and you need to be aware of that.
The point of risk surface is to understand the expected and potential financial impacts of various choices, lifestyles, and possessions.
For example, if you were to lose your job today (and hopefully you haven’t/don’t), how much would it cost you to survive this next month? This would typically be your base expenses, such as rent, utilities, food, subscription services, and any insurance you are paying. Moreover, what if the head gasket on your car blows out, but you absolutely need your car? That’s your next consideration.
You see, people with high incomes can be very unintelligent. When the money starts flowing, they start assuming that the money will always be flowing. They assume they will either always be earning as much or more than they are. To be fair, this is preached to us from every level of society. We call it “quality of life”, and we seem to be on this never-ending quest to increase our “quality of life”, whatever that actually means. Advertisers tell us that quality of life is buying whatever they have to offer, and people often go along with this. Quality of life is a new car, or a big house, or a $400 backpacking tent (…), or a new gun. Organic produce, too! And you, poor soul, you’ve been so deprived! – so why not increase your quality of life and spend more?
Well, see, what happens then is that people get used to this. Humans are extremely good at adapting, and that’s why we’ve colonized pretty much the entire planet (Antarctica to a lesser extent). But in the world of abundance, people are scared of living on less because that goes against comfort and prestige. Don’t hate the player, hate the game. It’s just psychology, even though I still have a laugh at people sometimes. We simply have no frame of reference for really understanding just how much we have compared to people in the past, and that’s how you get iPhone owners complaining about how little they have. (You have a mainframe in your pocket!) And we all suffer from this in our own ways (I just like to pick on iPhones)
And this is why it’s so important to understand risk surface. When you keep “expanding” your life, so to speak, you are increasing your risk surface. Now that you have a new car, you are obligated to pay it. That is that much more you need every month. Now that you rely on that $30 subscription service, you need that much more every month, too. When you are eating out at restaurants every day, this may increase your costs by hundreds of dollars every month. When you own multiple cars and they keep breaking down, that is an absolute sap on your finances.
And people with high incomes…do this! They pay left and right for everything, then when times are tough, they have nothing because they can no longer afford the lifestyle they built for themselves. They should have known that incomes are not guaranteed! That the pay may not always go up. That even if you are a highly accomplished CFO, you may actually become too experienced for the average company to want to hire. This is why the rich people in the news are such fools to most of us. They actually felt they needed that $500,000 bonus! That’s what happens when ‘stupid’ and money collide!
But of course, we all do this in little ways, which is why we have to analyze ourselves, too.
Risk surface is really just a way of measuring the financial fragility of your life. This is also known as tight coupling. Everything becomes dependent on your earnings. And as many people know, your earnings are often not enough.
Now, I’ve ignored the risk of health, so I will mention it briefly. It is very difficult to put a dollar number on your health, though you may be able to calculate the risk surface of your health as the price of your annual deductible, if you have insurance (side note: despite being generally conservative, I actually support universal healthcare, but I won’t say more about that here). But while money can’t solve all of this, exercise, eating healthy, getting good rest, and avoiding toxic people and toxic workplaces are good ways to reduce your risk in this area. But this is a very big topic and I won’t be addressing it further here.
As I mentioned in my previous post, reducing your risk surface is a key way of reducing expenses and, combined with a high-enough income, building wealth relatively fast. You see, it’s so common that people “start getting ahead”, just to have that literal or metaphorical head gasket blow, thus setting them back. And this also happens with consumer goods when people are convinced they are necessary, such a fancy bed system that costs $5,000. “I can’t possibly sleep well without it!”
Letting yourself get dependent on these things is really dangerous. You end up spending your life trying to catch up to your own desires and perceived necessities, and you may never reach that Escape Velocity where your money is working for you rather than the other way around. Again, it’s not easy, and there are many factors. But it is sad seeing people in America with so much money and potential who just…don’t pay attention. They just keep on spending, from one excitement to the next. Lowering your risk surface requires a degree of creativity and strategy. I reduced my risk surface by learning to work on cars. I also reduced it by moving from my apartment to a room in a friend’s house. I’ve made good efforts not succumbing to lifestyle inflation by avoiding ridiculous status symbols, boy-racer cars, expensive hobbies, and $1200 smart phones. This will, in fact, look different for everyone, and it’s okay to take on more risk than the absolute minimum. It’s called risk for a reason: you may be absolutely fine. I don’t encourage living in fear. However, considering most of this junk doesn’t typically make people happy anyway, I think it’s worth everyone’s time scrutinizing themselves to build a better life. Nobody has sympathy for the person earning $200,000 per year who loses his/her job and magically can’t pay their bills. I think most of us would see that person has to be a real idiot for living in blissful ignorance of reality and not setting any money aside.
I had some cool charts I wanted to make to illustrate some of this but I couldn’t find a good tool for it. These are subject I’ll be writing on again.