Diversify your income as well as your investments

Diversification applies to more than your investments!

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A lesson in financial survivability

Chances are that you are familiar with the concept of diversification as it pertains to investing and hopefully you have been applying this principle to your retirement portfolio. Put simply, diversification means not putting all of your eggs in one basket. As a rule of thumb, you should never invest more than 5 or 10% of your total stock portfolio into a single company. The less you know about a company, the less your portfolio should be concentrated on that stock.

But diversification should also apply to your income. If your job is your only source of income, then you are putting all of your eggs in one basket! Before you skip this article thinking that your job is 100% safe and that you can find another job in no time, you may want to question that assumption. No matter what industry you work in, or how irreplaceable you think you are to your company, or how specialized your skills are, your job may not be as safe as you might think in the long run. There are several factors that everyone should consider when it comes to job security.

The first factor is the economy itself. The International Monetary Fund just released its report of the US economy where they have pointed out several threats to our financial system. One of the biggest dangers facing the world economy at the moment is the fact that many governments have limited tools left to fight the next recession. Given that the US economy has been growing since 2009 (6 years), it is only a question of time for the next recession to hit us. Are you financially ready for another recession?

Another factor affecting virtually all industries is the intense competition between companies which is driving cost-cutting across all levels. You might think of yourself as an asset but many companies, both large and small, look at their employees as liabilities as is illustrated by the thousands of people of are regularly laid off because their services are “no longer needed”. Just a few days ago, Microsoft announced that it is cutting another 7,800 jobs from its phone business. Employees are now often fired for the smallest of offenses (remember AOL’s CEO firing an employee during a conference call?). Of course, today’s cost-cutting goes beyond layoffs. Millions of employees across the country are feeling their company belts tightening and are pressured to do more with less.

An increasingly important (and worrisome) aspect of cost-cutting is the automation of many tasks, which is reducing the number of people needed to complete those tasks. Once automation programs are implemented, many tasks that used to take hours to complete now only take minutes or seconds. As competition between companies of all sizes continues to drive the need to increase efficiency and reduce expenses, more and more companies will be automating as many tasks as possible. As someone with programming experience, I know first-hand that even relatively complex tasks, such as computer troubleshooting, can be broken down into logical rules and automated. Although many complex tasks still require trained personnel, automation programs are becoming increasingly sophisticated.

The latest edition of Foreign Affairs focuses on the increasing presence of robots in our lives and their impact on our jobs over the next 10 to 20 years. Although experts disagree on the long-term impact of robots on the workplace, it would be foolish to discount the possibility that many of our jobs are going change significantly or even disappear over our lifetime. That is why it is critical to keep ourselves competitive in the job market by constantly expanding our skills and acquiring additional certifications. However, this is no longer enough.

An important pillar of Inveduco’s financial philosophy is to prepare for a worst case scenario. Financial survivability is measured by how well you would do if you lost your job or if you faced a major unexpected expense. The first step to increasing your financial survivability is to never assume that your job is safe or that you will always be able to find another job.

 

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