The Long Arithmetic: Issue 26

One familiar way to stress-test a financial plan is to move the markets around. What happens if stocks fall 30% the year you need the money? What if rates stay high, or a fund you own has a bad few years? A good plan runs those numbers, and it should.

But a market stress test often holds the money coming in steady. The salary keeps arriving. The bonus lands in March. The business has its usual year. The sale closes when everyone expected it to. We find out what our savings can survive while leaving the money that feeds them undisturbed.

I don’t think anything bad is about to happen. I just think the money we expect but haven’t received yet deserves to be tested too.

The market test deserves its reputation. Markets do fall, sometimes hard and sometimes for years, and a plan that only works in a good year isn’t much of a plan. Running the bad years on paper before they happen is one of the more useful things a household can do.

But the test has a frame. It asks how the money you already have holds up. On its own, it won’t tell you what happens to the money you haven’t received yet: the next few years of pay, a business’s profits, a payout from a deal, the proceeds of a sale you’ve already planned around.

And a lot of commitments rest on exactly that money. A mortgage sized to this year’s income. Tuition that runs four more years. A pledge to a school or a cause. A plan to save less now and catch up later. A date you’ve picked for stepping back from work. Each one is a promise made today and paid for with money that hasn’t arrived.

None of these are mistakes. People make commitments on expected money all the time, and most of the time the money comes. The trouble, as I see it, is that the expectation rarely gets written down as an expectation. It gets written down as a fact.

I think I understand why. A market return feels like a forecast, so it gets tested like one. A paycheck feels like something you earn, so it doesn’t feel like a forecast at all. You show up, you do the work, and the money arrives.

After enough years of that, the income stops looking like an assumption and starts looking like a plain fact of life. It’s the one number in the plan that feels like it’s yours to control.

And sometimes it is. But a projection can put money you control and money you’re expecting in the same column. Unless you question it, the difference can disappear.

I learned this one the slow way.

A property I co-owned went on the market, and we expected it to sell soon. It took over nine months to find a buyer. We went under contract three times. Then closing took another three months, so a sale we expected to happen soon closed the following year.

I had already counted that money. I was buying another property, and the proceeds were part of how I planned to pay for it. So that purchase waited too, for months. And while we waited, we kept paying the costs of holding the property that wouldn’t sell.

In the end, nothing about the sale failed. It closed, and the money arrived. It just arrived long after my plan said it would, and my plan had no room for the wait.

What I do now is simple, maybe too simple. I don’t rely on money I don’t have in my bank account yet. That rule has a cost of its own. It can mean waiting on something I probably could have done sooner. It’s my rule, and it may be stricter than another household needs.

A sale is one kind of expected money. For most people, the bigger one is a paycheck, and it’s the one plans tend to treat as the most solid.

In 2018, the Urban Institute published a study by Richard Johnson and Peter Gosselin on exactly this. They used the Health and Retirement Study, a long-running University of Michigan survey, and followed people who, in their early 50s, had worked full time for the same employer or had been self-employed for at least five years. On paper, these were people with steady work. The data ran from 1992 to 2016.

The researchers only counted job separations that hurt: at least six months without work, or weekly earnings cut by half or more for at least two years. By that measure, 56% of this group later experienced an involuntary, employer-related job separation with serious financial consequences. That included layoffs and business closings, leaving over job conditions, and retiring earlier than they had expected. Layoffs and closings alone accounted for 28% of the group. Among those whose weekly earnings fell by at least half for at least two years following a separation, only 1 in 10 later earned as much per week as before.

The limits matter here, so I’ll be plain about them. The data stops in 2016, so it says nothing about the last decade. It covers people with long, steady, full-time work histories, including some who were self-employed, a group the authors say represented about half of adults in their early 50s. It doesn’t separately tell us what these numbers look like for business owners, contractors, or households with several income sources. It describes a group of Americans, and it can’t predict what will happen to you.

What it does suggest is that, for more than half of this group, the decision about when their pay changed wasn’t entirely theirs.

Here’s the more honest version of a plan, as I see it. Say a plan reads “we pay off the house by 2032.” What it usually means is “we pay off the house by 2032, if the income keeps arriving at about today’s level.” The second sentence is longer and less comfortable. It’s also the true one.

Here’s an example, made up to show the shape. Say a household has three promises on the table: two more years of a child’s tuition, a five-year pledge to a cause it cares about, and a plan to save less now and catch up in a few years. Written as facts, they look like three separate items. Written with their “if” next to each, all three may turn out to rest on the same salary arriving every two weeks. That’s one condition holding up three promises, and it’s easy to miss when each promise sits in its own column.

Writing the condition down won’t make the money any more certain, but it does make it visible. Once a commitment has its “if” next to it, a few questions tend to follow on their own. Which promises share the same “if”? Is it one income carrying three commitments, or three sources of money carrying one? If that money came late instead of never, which promise would bend, and which would break?

Late deserves its own attention. My sale came late. It still closed. A gap between jobs, a delayed business payment, a bonus paid later than expected, a payout from a deal that gets pushed back a year: each can leave a household waiting for money it had counted on. Plans tend to treat money as either there or gone, and a lot of real life happens in between.

None of this calls for expecting the worst. Most income keeps coming, and most sales close. The point is smaller than that. It’s knowing which of your plans rest on money that isn’t here yet, so that if it’s late, you’ve already thought about what waits.

At the start, I said a market test often holds the money coming in steady. A second test could run the other way. It would hold the markets where they are and move the money coming in instead. What would still work if it came a year late? What would still work if it came in a third smaller?

A plan can only be as solid as the money it assumes, and that money probably deserves a test of its own.

So here’s what I’d like to know. Have you ever had to put a decision on hold because money you counted on arrived late? If so, what was it?

Reply and tell me, even in one line.

If someone came to mind while you were reading this, send it to them.

This is not financial advice. This material is for educational purposes only and not financial, legal, or investment advice. Private investments may be risky. Do your own research and consult licensed professionals before acting on anything specific to your situation.

Until Monday.

Alina

One more thing. Besides this letter, I offer to work privately with a small number of readers through The Long Arithmetic Review, for examining a particular capital decision. If that sounds useful, reply with a sentence about what you’re trying to sort out. I’ll tell you honestly whether it’s a fit. If you write to me about it, put Review in the subject line, so it doesn’t get mixed in with replies to the essay.