The Danger In Assuming

iStock_000013902975SmallYou’re probably familiar with the phrase, “The word assume makes an ass out of you and me”. While assumptions can be helpful, creating shortcuts for understanding and putting situations in context, they can also be quite dangerous, and can indeed, make you into an ass…or worse.

If there’s a lesson to be learned early on, it’s that life is unpredictable and assuming that it will remain any one way, good or bad, for long is financially foolish.

Assumption #1: You’ll stay healthy.

Is there anyone who doesn’t know someone with cancer or diabetes or heart disease or another major medical condition? Even as an avid runner, vegetarian, and clean eater I don’t take my health for granted. I hope that I’ll never have to contend with a major medical issue, but I won’t ignore that possibility when it comes to my financial preparedness.

I keep a healthily funded emergency account at all times. While it might not be enough to cover me in the case of a true catastrophe, it currently holds 4-6 months of living expenses, which provides me with a fairly comfortable buffer.

Assumption #2: You’ll keep your job forever.

At age 50 my parents were at the top of their game, both highly compensated members of major corporate teams. With just a few years separating them from retirement, they were both laid off unexpectedly, the year before I started college. Despite having climbed their way up the corporate ladder and proving their value in millions of revenue and/or savings for the companies they worked for, the structure of each company was changing such that my parents were no longer necessary, regardless of their past performance. Sometimes you can do everything right and still get blind-sided. Assuming you’ll keep your job forever, particularly in this day and age is naïve.

Assumption #3: Your assets will always appreciate and your income will always rise.

Let’s just flash back to six years ago to the burst of the housing bubble, massive unemployment, and the tumble of the stock market to crush this assumption. Unfortunately the recession of 2008 was not an isolated incident. Fluctuations and devaluations have happened before and they’ll undoubtedly happen again. To buy a home under the assumption that you’ll some day make a profit from it or rely on one source of income assuming it’ll always be available to you is financially foolish.

Assumption #4: You’ll never have an emergency.

If the “nothing bad will ever happen to me” assumption were true, there would be no need for insurance. But seeing as how insurance is a multi million dollar business, I think it’s safe to say it’s time to throw that naive assumption out the window. Emergencies happen…to everyone. They can come in the form of a health scare a home repair or otherwise.
When it comes to emergencies, it’s not so much a question of if, but rather, when. So build up the emergency fund now, so that the when doesn’t catch you before you’re ready for it.

Assumption #5: You’ll never have a surprise.

Emergency or otherwise, unexpected expenses arise all the time. The only thing that should come as a surprise is not having any unforeseen or irregular expenses. To prepare for the unexpected, consider starting an additional “buffer” fund. That way when unanticipated but non-emergency expenses arise, like fixing a dent in the car or replacing an old appliance, you don’t have to overload your regular budget or raid your emergency fund to cover it. I recommend adding at least an extra 10% buffer on top of your total monthly expenses.

Don’t take anything for granted- from health, to income, to life in general. The truth is, it’s all incredibly fragile and can change in a instant. If we ignore that possibility and assume that things will always stay the same, we put ourselves and our finances at risk.

Have you ever made an assumption that cost you?


Comments

The Danger In Assuming — 4 Comments

  1. I’ve never personally made any of these assumptions, and I’m glad I haven’t. I did assume once that the IRS wouldn’t chase me for a small debt…wrong! Anyway, I can definitely see how these assumptions can be dangerous. Thanks for sharing!

  2. Great post! I wrote a similar post on my blog on being resilient. It is so important to be prepared for resiliency in our finances, health and emotional well being, because challenges can arise quickly.

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