Sunday, November 21, 2010

Patchwork Economics - Creating a lifestyle that insulates against adversity

A while back I heard the term ‘patchwork economics’. It really caught my attention.

No, it’s not about making quilts economically; it’s about applying the same patchwork theory to the financial side of your life.

Traditionally, patchwork quilts were created using a variety of fabrics that were salvaged from worn out clothing, off-cuts from the construction of new clothing or recycled from packaging like flour sacks.

This is the approach I am now applying to my financial life. I’m piecing together lots of small changes to create a new financial fabric. This new fabric will insulate us against adversity in the same way a nice cosy quilt insulates against the cold.

Where do you start? You've got to know where you are before you can plan the route to where you want to be. One of the best ways of finding out where you are: assessing your risk for adversity. If you have one source of income and very high expenses, you're exposed to a huge financial risk. What would happen if you lost your job?

Spreading your financial risk is the same for earning a living as it is for investing - don't put all your eggs in one basket. So, look at ways to create new avenues of income - legally, of course! And, just as importantly, find ways to reduce your dependence on your primary source of income and that means also lowering your expenses.

Applying Patchwork Economics requires a considered approach to determining where your money comes from, where it goes, and how you can hang on to more of it while becoming less dependent on it in the first place. It means giving serious thought to what would happen to your financial well-being if the economy took a serious downturn.

It's certainly giving me lots to think about.

How secure is your financial future and can you benefit by applying Patchwork Economics theory as well?

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