Flexibility is a concept the globetrotting population is familiar with, but we often face it with mixed feelings. “You need to be flexible” probably ranks among the top phrases you hear in this community, as if whenever we feel life is slightly out of control, it’s because we are not “flexible” enough.
However, the longer I live this globally mobile lifestyle, the more I value flexibility. People often treat flexibility mainly as a mentality, or a quality that we need to adopt to be happier with ourselves when things don’t go our way. In reality, it’s more than a mindset. In order to be flexible, you need to have the “capacity” to change your plans or react to unexpected circumstances. More often than not, that capacity is tied to your financial preparedness.
Take yourself back to the last time you had to deal with a substantial life change or with a large, unforeseen expense. What was your reaction? How different would that reaction have been if you had (or didn’t have) a good financial cushion or emergency plan to take the blow? We can’t avoid life throwing curve balls at us, but we can take them by building in a level of flexibility in our finances.
Flexibility usually comes with a cost. You probably experienced this from booking hotels or air travel. It is likely you are able to find cheaper options if you pay months in advance to secure a lower rate or availability. If circumstances require you to be flexible, such as you are not sure whether you can get the vacation days, you book at the higher rates that allow you to cancel or modify without a fee at the last minute.
There will be periods in your life that require greater flexibility, and that’s usually when you are facing new or uncertain situations. Moving to a new country just happens to be one of these transitions. For others it might be getting married, welcoming their first child, or switching jobs. Whatever that transition might be for you, you need the financial flexibility to face the unknown. And often times, having the capacity to be flexible financially also give you a more flexible mindset, even if you don’t end up needing it.
Since flexibility is necessary, and it comes with a cost, we need to be actively thinking about how to buy flexibility. You pay a premium for flexibility, and the premium comes in the form of opportunity cost. You may not be able to maximize your earnings or minimize your costs in all situations, but in return you get the financial flexibility to make mistakes, learn, and grow in a new normal.
So here are some ways to buy flexibility:
#1: Leave some slack in your budget
This is the most basic thing you can do, no matter your asset or income level. In addition to living within your means, make sure your budget has some wiggle room so you can adjust quickly when you are facing unexpected changes.
There are two main things you can do in your budget to give you the wiggle room. First, control your obligatory expenses so you are not stretched too thin. These include mortgage, loan payments, childcare and your minimum living expenses. If all these combined is more than 80% of your after-tax income, there is very little room to save, needless to say no room to absorb sudden changes in expenses due to uncertainties.
Second, don’t budget 100% of your income. No one is perfect at estimating their expenses, less so when facing unknown situations. Pretend that you only have 90% of your after-tax income, and plan your expected expenses and savings that way. If you don’t end up spending more in transition, you will see a surplus in a few months and be able to save more.
If you are the type of person that budgets down to the cents, give yourself wiggle room by adding 5% to your expenses in advance. Yes, you incur an extra cost by not being as frugal as you can be, but flexibility sometimes outweighs saving every last penny.
#2: Keep larger than comfortable emergency fund
Whatever cash reserves you felt comfortable with before heading into transition, consider increasing it by at least a quarter. This helps you cope with the uncertainties in transition costs and living expenses. If you don’t end up needing the extra cushion, you can always decrease it when your situation is more stable. But expect to use the cash! Emergency funds are for unforeseen circumstances, and the extra costs in transitions definitely count.
You are “buying” this flexibility because you forego the higher return you could have gotten by investing the cash. That is an opportunity cost. Only you know how much you need this flexibility, and how much you are willing to pay for it.
#3: Preserve liquidity
Having cash in an emergency fund is one way to preserve liquidity for unforeseen circumstances; however, it’s not the only one. If you are just starting to save or have a small financial cushion otherwise, you need to also look at other sources of funds.
You may be saving in your company’s 401(k). Find out in advance whether you can “borrow” money from it with interest if you absolutely need it, instead of distributing it, resulting in extra taxes and penalty. Also, before putting money in IRAs, be aware that a Roth IRA allows you take out your contribution portion anytime without penalty, while a Traditional IRA does not, even though you may get a tax benefit up front.
Another example is to consider whether to over withhold your paycheck. Many people choose to over withhold so that they can get a large refund; however, it’s also money that is locked in until when you can file a tax return next year. You are essentially using the inflexibility to help you save, but some times flexibility may be more valuable.
Overall, have a good understanding of the restrictions on your money in different types of accounts and investments. Imposing restrictions on your money may give you higher returns, for example from tax benefits or longer lock in periods, but you also lose out on the flexibility to use the money. Depending on your situation and goals, preserving some liquidity for flexibility, such as investing in publicly traded investments in taxable accounts, might be worth it.
#4: Maintain good credit and availability of credit line
The last line of defense when you need flexibility, but have no financial cushion, is having good credit. Although funding expenses with debt is generally not a good idea, you may be in a situation where that is your only, or even cheaper, option. Even if you do not need credit right now, always check your credit report at least once a year to make sure you have access to credit when you need it.
For the fiscally disciplined, having credit cards with relatively low interest rates on hand can help extend your flexibility, not getting into debt. For one, the balance payment date sometimes can be as long as two months after your purchase, which can give you more time to formulate a plan.
The goal should always be paying off the balance on time to avoid interest charges and fees; however, having the option to put some large, unexpected expense on a credit card may be the difference between keeping afloat and having absolutely no cash in the bank. You may be paying $50 extra a month to be flexible, but that gives you more options to get your finances in order than having no liquidity whatsoever.
If you have a home with substantial equity, a home equity line of credit (HELOC) can also be useful for emergency funding. Keep the credit line open, but don’t use it unless you absolutely have to.