The unexpected is not limited to financial markets. Life is full of surprises, ranging from mildly annoying mistakes or mishaps to life-altering crises. While we can’t predict all of our life’s twists and turns, we can be proactive to shield ourselves from major fallouts. This protective buffer is better known as a margin of safety. It’s a concept that is often talked about as it relates to investing, but margin of safety can be applied all through our lives as a cushion to protect our well-being and quality of life.
In this episode, I’m sharing what a margin of safety is, why it’s essential, how to create it across different areas not just investing, and common mistakes to avoid.
A margin of safety is a buffer that protects you from the unexpected. It’s the space between you and a problem. That problem could be anything between paying your rent on time to a disaster. In investing, building a margin of safety means buying a stock at half price or well below its intrinsic value. The theory is that by buying it so low, you have a buffer in case you’ve made a mistake or something crazy happens in the market. In life, a margin of safety can be used to anticipate challenges and prepare yourself to handle the impacts from those challenges.
Margin of safety isn’t about expecting the worst. It’s about expecting the unexpected and being prepared to handle it with less stress and more resilience.
The margin of safety applies to nearly every aspect of your life. Here are some key areas where you can establish your buffers:
Mishaps and Accidents
Life’s little annoyances, like booking a plane ticket for a month earlier than planned or spilling a whole bottle of water on your laptop. Both are true stories I did to myself. With mishaps and accidents, you can create a margin of safety by:
Health
Health challenges—whether they’re a common cold, something chronic, or unexpected—can derail your life. When it comes to your health, building a margin of safety might look like:
Finances
Securing your finances is a top priority for a margin of safety. Unexpected expenses, a job loss because of a PCS, or a bad investment can leave you in an uncomfortable spot. Having cash on hand and a strategy for your money helps build a moat of protection in many areas of your life. You can build a financial margin of safety by:
Relationships
Military life can be hard on marriages. Even the most solid relationships can experience rough patches. Build an emotional well-being and relationship margin of safety by:
Weather and Natural Disasters
With the recent devastations in western North Carolina and the fires in California, we all know that storms, floods, and extreme weather can disrupt daily life. Build a margin of safety for Mother Nature by:
Related: How to Financially Prepare for a Divorce
The idea of margin of safety is pretty basic. Remember, it’s about putting a layer of protection between you and a problem. It’s simple, but people often fall into traps that take away from their margins of safety.
Building a margin of safety in life isn’t about war gaming every possible thing that can go wrong in life. It’s about acknowledging the reality of uncertainty and taking basic steps to minimize its impact. Whether it’s building up an emergency fund, maintaining your health, or preparing for natural disasters, having a margin of safety gives you space and peace of mind to handle unexpected problems.
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