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Cash Needs Conditioning

“How long can I last?”

This is a question asked by every athlete beginning a season. Before any of your skills or talents can be used, you must prove you are in adequate shape to compete. This same question should begin your financial plan. Before you can depend on investments to grow and return, you will need adequate protection to “immunize” your plan from risk

You answer this question by completing your conditioning and passing the condition test. This week, the test is 15 sprints across the field. This testing will remove risks like fatigue and cramping from my game. 

It will prepare me for a scenario like this one:

It is the fourth quarter and as I line up I look at the safety. If he chases the over-route on this play, it will be up to me to get to the corner route, for the win. My legs are heavy from the 10-play drive and I can hear the coach’s voice in my head: “During camp, you could run 15 half gassers (across the field and back), during the season you should run 15 across!”

The beauty of being a Pro is you are your own boss, if you don’t want to do cardio, you don’t have to. No one is going to babysit or make sure you keep a job. I ran 12 across, telling myself I could tolerate the final three if I had to. I didn’t feel the effects until I run my route. I was counting the steps to the pylon and to glory. On my fifth step, I break and see the ball fly. I try but just can’t get there. My calf cramped up and fatigue struck, I did not prepare for this scenario and failed the conditioning test.

To answer the question from a financial view, we look at your annual cash need. You spend $100k a year, so to pass the cash needs test you will need at least $300k or three years of cash need to be protected. This testing will remove risks like market volatility and income dependency from your plan. 

It will prepare me for a scenario like this:

My salary covers my lifestyle, and I want to start making more money. An advisor tells me the stock market is where we are going to see the highest returns. Being aggressive has worked out for me in the past and I believe he knows what he is talking about, so we move all my money into the market. 

A buddy calls and tells me about an amazing opportunity on a rental property, “guaranteed to make money.” I gather the rest of my cash and even take out some loans to get in on this can’t-miss deal. I think I can tolerate the bad scenarios, just like I could tolerate the final three sprints. 

A few months go by and my agent calls, the team signed another player and I am going to be released…?

I call my friend and he says the money is still in “escrow,” whatever that means, but I can’t get it back. The next call is to my advisor and he tells me the market is in a “pullback,” which means the market is down and says “it’s not the best time to get your money out”.

I had thought about the downside risk, but just like the running, I hadn’t prepared to withstand it. 

The conditioning test truly comes after each sprint, when you have the choice to keep going. You know 12 will prepare you for most scenarios and that 15 will prepare you for all of them.

The cash needs test comes with each financial decision when you have the choice to plan or to spend. You know that one year of cash need will prepare you for some scenarios and that three to five years of protection will prepare you for all scenarios. 

The first question in preparing for a season or a financial plan is “how long can I last?” Our goal as athletes is to never be in a game unconditioned. Our goal in finance is to never have money at risk that shouldn’t be. 

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