Find out how to leverage your financial assets if the worst happens – 05/07/2023 – From Grain to Grain

Nobody starts the journey to financial independence with the assets they need to have at the end of the journey. After all, there would be no journey if we were already where we wanted to be. The problem is that almost no journey evolves exactly as predicted. In this way, I describe how you can anticipate the final equity, in case some mishaps occur along the way.

The journey to financial independence usually takes between 10 and 30 years. As I said earlier, this time depends on when you start and your final goal.

With all this deadline, it is not possible to predict everything that can go wrong until the end of your journey. Nor is it impracticable to cover all risks that may eventually arise by then.

Some of these risks can definitely prevent you from reaching your financial independence. I’ll give an example, but it can be extended to similar cases.

Consider a surgeon doctor. There are several ways for this professional to earn money. However, the ability to manipulate medical instruments to perform surgeries is essential for maintaining their income.

Therefore, what would happen if, for some reason, an accident or illness in your hands prevented you from performing new surgeries?

Your income and your initial plan would be compromised.

Leveraging your financial assets with insurance means making your assets the size you need today if something happens. For example, functional disability due to an accident or illness.

Imagine that this surgeon is 35 years old, earns BRL 30,000 a month, has assets of BRL 500,000 and intends to retire at age 60.

Considering a real interest rate of 6% per year, he would need to save BRL 4,000 a month for the next 25 years, to have an income of BRL 30,000 a month from the age of 60, thus achieving his financial independence.

When he turns 60, he will have a net worth of R$ 5 million at today’s prices.

If something happened that made it impossible for him to work with his hands to perform surgeries, he could still teach, give clinical consultations and perform other medical activities. However, possibly, his income could decrease in relation to what it is today. For example, assume that he loses his ability to save by 50%. Soon, he would only be able to save R$ 2 thousand monthly.

That means your initial plan would be compromised. At age 60, he would reach a net worth of just R$ 3.6 million.

In order for him to reach the same net worth of BRL 5 million, considering the ability to save only BRL 2,000 a month, he would need to have BRL 1.4 million in equity today.

Soon, he would need to have R$ 900 thousand more than he has today. That is, he would need to almost triple his equity instantly. It seems unlikely.

However, he could indeed leverage his assets to the amount of R$ 1.4 million if he had taken out disability insurance due to accident or illness.

For this doctor, this insurance with a capital of R$ 1 million would cost around R$ 155.00 per month.

Therefore, with just BRL 155 a month, you can leverage your financial portfolio by BRL 1 million, should the worst happen. This is not the only form of leverage with insurance, but the objective was to provide a practical example.

Probably, the value of this insurance is less than half the cost of car insurance that this same doctor has.

One might argue that the probability of something happening is low. Yes, but the impact is significant.

In the risk matrix, there are four quadrants to manage. I will delve into this matrix in a future article, as it will be fundamental in the plan for independence. But, I will exemplify now.

If you are a cautious driver, car accidents have a low probability of occurrence and low financial impact. The most valuable asset is inside the car, that is, you and your family.

In this car insurance example, there is also the leverage of your financial portfolio, but much less. Considering insurance with a premium of BRL 4,000 per year, the sum insured must be BRL 100,000 for your vehicle and another BRL 100,000 for third parties. So, R$ 200 thousand in total.

In the case of a personal accident of a doctor that compromises his hands, we can say that it also has a low probability of occurrence, but has a high financial impact.

Therefore, it is much more rational for this doctor to assume the risk of the car, but to transfer the risk of the personal accident to a third party.

Insurance is an exceptional risk management tool. In this risk management, you choose which risks you want to take on yourself and which ones you want to transfer. In risk transfer, you leverage your financial portfolio if the worst happens.

Michael Viriato is an investment advisor and founding partner of Investor House.

Talk directly to me via email.

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Book: The Journey to Financial Independence

summary

Introduction
Understand how you will achieve your financial independence
Living on an income is the last step on the journey to financial independence
These are the biggest questions about the journey to independence

Part 1 Construction of the plan
Chapter 1 The first step in building the blueprint for financial independence
Chapter 2 How do you define the rate of return in your plan for independence?
Chapter 3 Find out what equity you need to achieve your financial independence
Chapter 4 On your journey to independence, don’t overlook the importance of this factor
Chapter 5 Understand the two ways I applied to increase my saving capacity
Chapter 6 If You Double This Factor, Your Equity Can Multiply Much More
Chapter 7 Connecting the dots to build your plan

Part 2 Assembling the portfolio to lead you to financial independence
Chapter 8 Before making any investment, define these two factors
Chapter 9 For your investments to beat the CDI, you need to make two choices; understand
Fixed Income
Chapter 10 You should not build an income portfolio if you want to reach equity to live on income
Chapter 11 Avoid these two common fixed income investor mistakes
Chapter 12 In fixed income, does it pay to invest in private credit in relation to public credit?
Chapter 13 Discover how to win the private fixed income premium, but with low risk
Chapter 14 This is the simplest way to plan your financial independence with fixed income
Chapter 15 With our interest rates, find out if it pays to invest in dollars
Variable income
Chapter 16 Taking a risk can accelerate your journey to financial independence
Chapter 17 What is multimarket funds and how did they come about?
Chapter 18 Understand how to select hedge funds
Chapter 19 Is Real Estate an Appropriate Investment for Achieving Financial Independence?
Chapter 20 Real estate funds are better investments than real estate, but most prefer the worst; understand
Chapter 21 These real estate funds are more like fixed income funds
Chapter 22 When selecting Real Estate Funds, be careful with this indicator
Chapter 23 Discover the five indicators that you cannot disregard in paper real estate funds
…
Chapter 26 Don’t Invest in Stocks If You Think This Way
Chapter 27 Stock Investing Is For The Long Term, But Not For Every Term
…
Chapter 33
Chapter 34 When Should I Trade a Risky Investment That Is Not Performing?
Investment funds and Private Pension
Chapter 35 Find out when it pays to invest in investment funds
Chapter 36 Understand the five steps to select investment funds
…
Chapter 37 Multimarket funds disappoint in the semester; what to do?
Deciding your investment portfolio
Chapter 38 This application lost CDI in the last 12 months. So why invest?
Chapter 39 Answer these 4 questions to learn how to deal with investment uncertainty
Part 4 Managing risk on the journey
Chapter 40
…
Chapter 43 Find out how to leverage your wealth if the worst happens

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