How To Build An Antifragile Financial Plan With 4 Buckets

I’ve got good news: You’re antifragile. We, as humans, are antifragile. And our financial plans can be, too.

Have you noticed how great books consistently refer to other great books? I’m currently reading Jonathan Haidt’s newest book, The Anxious Generation, specifically focused on how a couple of systemic parenting mistakes have seriously impacted at least one generation—Gen Z—negatively.

Haidt suggests parents were simultaneously too permissive and too protective with this generation. They were too permissive with the rise of technology. In their defense, this technology was emergent, and nobody really knew how bad it could be, but both Gen Z boys and especially girls have paid a heavy price for getting too much tech access too soon.

The ironic twist, however, is that Gen Z’s parents also made an art form of helicopter parenting, overprotecting their kids. Instead of roaming neighborhoods freely and coming home at dinner time, these kids were coddled and corralled into too many overly structured and antiseptic environments, missing out on the many benefits derived from the bumps and bruises that shape us into resilient—or better yet, antifragile—adults.

But what exactly is antifragility?

Here, Haidt points to Nassim Taleb’s work and his book, Antifragile: Things That Gain From Disorder. Consider these three categories that things fit into:

• Things that are fragile break when exposed to stress.
• Things that are robust and resilient withstand stress or recover well from it, respectively.
• And things that are antifragile actually get stronger when exposed to stress or volatility.

One of the things that gains from disorder? Us. Humans. Physically, we strain our bodies to make them stronger. Intellectually, we learn from our mistakes. Emotionally and spiritually, pressure really can produce diamonds.

Our financial plans can be antifragile, too, but not without some tending. So, how can we develop anti-fragile financial plans?

First, we can apply purpose to our resources, including our money. When we don’t—when we just have one big pot of money dispersed across a collection of accounts and a seemingly endless number of prospective expenses to fund—it can creates chaos, destabilizing our financial planning.

We impulsively respond to invitations and opportunities to part with our money without really knowing. Some fall prey to too many invitations and develop a spending or debt problem, while others miss out on opportunities with an overly frugal posture. Both suffer with a subconscious question mark lingering over their every financial decision.

This is where it can be helpful to use our behavioral tendency known as mental accounting to “bucket” our finances in pursuit of an antifragile financial plan. For example:

PROTECT – This first, and most often missed, step may be the most important in creating an antifragile financial plan because it is the strategy that buffers you from the inevitable uncertainty of life and its financial implications. This practice helps us build a sense of confidence that also enables us to take risks with potentially higher rewards.

Think about your Protect bucket as (at least) your checking, savings, and cash management accounts. This is your sleep-at-night money, your buffer of emergency reserves, plus enough to cover any major purchases you expect to make in the coming year.

And yet the worn-out question is begged: How much should you keep in emergency reserves? Well, if you’re starting from scratch, work to build up one month’s worth of expenses in cash so that you’re not living paycheck-to-paycheck (a syndrome that continues to plague even those with hundreds of thousands of dollars of household income). Then, if your household income sources are solid, you might stop when you get to three months of expenses in cash. If your income sources are lumpier, consider up to six months. And if you’re self-employed, 12 months or more is a good best practice. Ultimately, however, many people have a sleep-at-night number that, however irrational, helps them make more rational decisions with the rest of their money—so who am I to judge?

Lastly, please note that for the first time in a very long time, we’re earning real money on our cash savings these days. If you’re at one of the big, brick-and-mortar banks, it’s possible you’re earning much less than you could be, so you may want to look at FDIC-insured online banks to generate a not-immaterial additional stream of income—or talk to your financial advisor about cash management options beyond the banks.

And we can take additional steps of protection beyond our mere mullah, most notably through risk management and insurance. I believe sufficient home, auto, liability, health, and life insurance are virtual requirements for an antifragile plan, and either disability income or long-term care insurance are likely components.

While not a comprehensive list of the Protect elements within a financial plan, these are the foundational components. And while the Protect bucket alone is the simplest and most powerful in fomenting antifragility, three other buckets also play a role.

LIVE – A Live bucket is filled with the income-generation mechanism for every household. While the Protect bucket helps ensure we account for the unexpected in our planning, a properly designed Live bucket accounts for expected living expenses.

For most of our lives, this bucket is more of a conduit, funneling our earned income to satisfy our monthly expenses and to populate our Protect and Grow buckets (as we’ll discuss next), but as we age and ultimately transition into retirement, our Live buckets may be filled with vehicles designed to recreate our earned income in the form of passive income. For example, Social Security, pensions, annuities, and other financial vehicles designed to mimic our salaries help ensure that the lights stay on even when we’re not getting a paycheck.

While most of the commentary in the realm of personal finance focuses on vehicles designed to help grow our money, studies suggest that the role of the Protect and Live buckets, and the sense of security derived from them, is what best enables us to focus on the next two buckets effectively.

GROW – Live for today and save for tomorrow, right? But for those savings to outpace inflation, most of us are required—or prefer—to enlist the help of the eighth wonder of the world, often attributed to Einstein—compound interest.

But compound interest isn’t free, especially in its higher degrees common with stock investing. The cost is the stress we stomach through the volatility—the ups and downs—inherent in these investments. So, where does antifragility come into play here?

Yes, it is true that there is a relationship between risk and reward, and while it’s not a guarantee that risk-taking will result in a financial reward, it is certainly true that few, if any, rewards come without it. Therefore, these greater financial rewards become possible through the endurance of stress.

But there are at least two other ways we can turn the financial stress of volatility in our favor to produce an antifragile outcome: dollar cost averaging and rebalancing.

For those of us who are investing a specific dollar amount every month in a 401(k) (or other retirement vehicle or investment account), we are buying fewer shares when the market is higher and more when the market is lower, under stress. We can apply the same basic philosophy through periodic rebalancing in our portfolios as well—counter-intuitively taking excess earnings from our winners and buying more shares of our losers.

GIVE – But one of the most interesting ways to make our financial plans antifragile is also one of the most unexpected. Through the act of giving, although we are parting with our resources, there is an inherent acknowledgement of our blessing relative to someone else’s struggle.

When practiced regularly, this generosity builds in us a sense of resilience and even antifragility in a way that doesn’t show up on a balance sheet or income statement. And, while it may not be proven, I think you’d agree that those who hold their resources with a tight grip may retain them, but those who open their hands freely in a spirit of generosity also tend to avail themselves to receive more.

For more information on a bucketed approach to financial planning, you can read the following: