In order to thrive financially and build wealth, you must make yourself antifragile.
In his most famous work Antifragile: Things That Gain from Disorder, Nassim Taleb describes three possible states a thing can have:
- Fragile: Things which become harmed when exposed to stress or random events
- Robust: Things that are neutral and remained unchanged when exposed to stress or random events
- Antifragile: Things that thrive and become stronger when exposed to any kind of stress or random events
The fragile is weak as it breaks down so easily — any uncertainty or stress could destroy it. The robust is an improvement as it can handle basic stress and uncertainty, but its growth potential is limited to good times. The antifragile is able to grow at all times. It thrives when faced with stress, uncertainty, and variability.
To build wealth, you must strive to make your finances antifragile. Unhindered by challenging financial situations and able to thrive in even the worst economic conditions.
I’ll show you how in this article.
“Some things benefit from shocks; they thrive and grow when exposed to volatility, randomness, disorder, and stressors and love adventure, risk, and uncertainty. Yet, in spite of the ubiquity of the phenomenon, there is no word for the exact opposite of fragile. Let us call it antifragile.”
The 3 Levels of Fragility in Finances
Before I show you how to become antifragile financially, it’s helpful that we first define the 3 levels of fragility within the context of finances. That way, you can see what good and bad finances look like, and can aim for the good.
Being fragile means that you are vulnerable to financial stresses and uncertainty.
For example, if you are fragile in your finances, then getting laid off from your job would put you in a seriously dangerous situation of being unable to cover basic living expenses. If some regular inflation happens, you’d be stressed out about the new higher prices. If an unexpected expense pops up like the fridge breaking down, it’ll be tough to find the money to buy a new one.
As you can see, being fragile sucks. Any extra costs or financial challenges really hurt you.
The following are the things that put people in a financially fragile state.
- Debt, by far the worst thing. This is usually in the form of a mortgage, student loans, or car payments. You’re constantly paying interest. Most people who have debt are living paycheck to paycheck
- No emergency fund for extra cash. Having an emergency fund is critical for weathering storms like layoffs or unexpected expenses
- No investments to combat inflation. If you only keep your money in savings, then your purchasing power actually decreases over time due to inflation
Being robust means that you can handle some basic financial stresses and uncertainty.
For example, if you are robust in your finances, then getting laid off from your job wouldn’t be so bad, you probably have some backup money. As long as you find a new job within a few months then you should be fine. If some regular inflation happens, it’ll suck but you’ll be fine because you have a few investments that grow in value. If an unexpected expense pops up like the fridge breaking down, then you can cover it but hope that nothing else pops up in the near future.
Being robust is pretty good. You’re able to cover regular financial challenges and overall are doing decently well. The downside is that if anything very risky happens, like a major financial expense popping up (say, your car gets tottled) or a severe economic recession (no jobs available), then you’ll be having a hard time.
The following are the things that put people in a financially fragile state.
- Little to no debt. You shouldn’t be paying a whole lot of interest or owing anyone major money. To pay interest for any time more than a few years is basically throwing your money into a fire pit
- 3 to 6 months of an emergency fund for extra cash. This covers short layoffs or random expenses that need extra cash. Though, you wouldn’t be able to rely on it for long term unemployment or major expenses
- Some investments to combat inflation. Usually, you’ve got some money for saving up for retirement. You’re well on track to retire with enough money by age 65, but won’t be investing millions in stock or real estate anytime soon
Being antifragile means that you can handle any and all financial stresses and uncertainties, you even thrive from them.
For example, if you are antifragile in your finances, then getting laid off from your job wouldn’t even matter. You have extra cash and even other sources of income. You may even enjoy the extra time away from the office and use it to focus on your other income streams. When an economic recession happens, you take advantage of it by buying even more assets at lower prices. You’re able to take more risks that have the potential for huge returns because you have a solid safety net.
Being antifragile is the absolute best state of all. Any extra costs or financial challenges are easily handled. When everyone else is scrabbling during a recession, you’re creating new income streams and buying up more assets while things are cheap.
The following are the things that put people in a financially antifragile state.
- No debt. This is a no-brainer for being antifragile. You never owe anyone money and can spend your own however you wish
- A solid emergency fund for extra cash. Your emergency fund covers all kinds of extra expenses
- Multiple streams of income for major challenges and extra investments. Even if your emergency fund runs out, you don’t care because you have money always rolling in from other places. Because of that constant flow, you can also take advantage of cheap prices during a recession and random investment opportunities
- Lots of investments to outpace inflation. The vast majority of your money is in assets. The value of your assets is growing at a faster rate than inflation, thus increasing your purchasing power over time
5 Steps to Becoming Antifragile in Your Finances
Antifragile is clearly the financial state you want to be in. You’re able to weather the harshest storms and even thrive from them while everyone else is scrambling.
Here are the 5 steps you can take to become antifragile in your finances. I’ve written the steps in the context of starting from a regular day job as that’s the situation most people are in.
1. Pay off all debt
The very first thing you should do is pay off all of your debt. When you have debt, you’re paying interest. That’s wasted money that you’re throwing away.
Pay off your highest-interest debt first, usually your credit card. Work your way down to the lower interest ones. Freeing yourself from debt will be a huge weight lifted off your shoulders. You’ll feel great with the stress gone and extra cash floating around.
2. Establish an emergency fund
Save up your money in a savings account as an emergency fund. I’d recommend 6 months to 1 year of savings. This will be enough to comfortably cover any short to medium term job layoffs or unexpected expenses that may pop up. As a bonus, many savings accounts offer 1% to 2% interest rates. Your money will grow a bit even while just sitting in the account.
3. Increase your primary income
This one has to be mentioned because a lot of people talk about it but very few actually implement it. Finding a job you love is important, but so is making as much money as possible from your primary income source.
Do whatever you can to increase that one source. Aim for promotions that bump up your salary, switch to another company that pays you more, switch to private contracting, read up on and practice your negotiating skills. All of these techniques can increase your primary source of income without having to put in many extra hours.
4. Invest your surplus money
Once you’ve established your emergency fund, the rest of your money should be going into assets. Assets are things you buy that grow in value and make you money while you sleep. Think stock, bonds, or real estate. Diversify among those different asset classes to be antifragile to price drops in any one of the categories.
5. Create multiple streams of income
Finally, once you’ve maximized your primary income and are investing in assets, you can look into setting up multiple streams of income. Multiple streams of income build your wealth faster and stronger. The streams stack on each other and add up big. And, with so many sources of money, you’re far more antifragile to losses in any one stream.
Your primary income and investments are two great streams to get you started. Other ones you’ll want are based on selling a product you create. Write code for an iPhone app, blog on Medium, make YouTube videos, sell your photography, or build your own new product to sell online. Those are all assets that can be created and easily sold at scale with very little overhead costs.