Our ability to earn an income is an underappreciated asset.

Manyof us spend far more time worrying about investment returns than we do about protecting the cash flow that makes every financial goal possible.

In this episode of Investing Compass, Mark LaMonica and Shani Jayamanne discuss a question that every investor should ask themselves:

What would happen if your income stopped tomorrow?

The conversation explores why income is often overlooked when people think about wealth, despite being the engine that funds mortgages, retirement savings, holidays and everyday living expenses. They look at how your earning power changes over your lifetime, why your financial priorities should evolve alongside it, and how investors can build greater resilience against unexpected setbacks.

Whether you’re just starting your career, in your peak earning years, or approaching retirement, understanding the role your income plays in your overall financial plan can help you make better decisions today and avoid financial stress tomorrow. If you’ve ever wondered whether you’re truly financially secure, this episode provides a practical framework for thinking beyond your investment portfolio and considering the asset that underpins your financial life.

You can read the full article here.

You can read Shani’s article on lifestyle creep here.

You can find the transcript below:

Mark LaMonica: Welcome to another episode of Investing Compass. Before we begin, a quick note that the information contained in this podcast is general in nature, does not take into consideration your personal situation, circumstances, or needs. So Shani, Will is very angry.

Shani Jayamanne: At us?

LaMonica: I think just in general. Now, I’m obviously exaggerating a little bit, but periodically we ask people to subscribe to our YouTube channel.

Jayamanne: I would say he’s motivated. I wouldn’t say he’s angry.

LaMonica: I was trying to inject a little drama into this whole thing.

Jayamanne: Okay.

LaMonica: Motivated Will tells us that 60% of the views on our YouTube channel are from people that have not subscribed. Now, one interpretation of this data is they watch us and are like, God, I would never subscribe to that. But maybe people just haven’t done it yet. So if you could subscribe, it would make Will happy and I guess make us feel better about ourselves. All right.

Jayamanne: Good call out.

LaMonica: That’s our pitch. Let’s get into today.

Jayamanne: Okay. So for this episode, so I recently listened to another podcast.

LaMonica: Wow, Shani.

Jayamanne: I know. And it’s by fear and greed, and they discussed the process of being made redundant. And this is something that both the podcast hosts had experienced, and I think about this scenario a lot. So take from that what you will, but this shouldn’t come as a surprise for a lot of podcast listeners or anyone who has read Invest Your Way. I’ve been pretty candid in the book and throughout the podcast, and I’m a naturally conservative person financially.

LaMonica: That’s uh that’s an interesting way of putting it.

Jayamanne: How would you describe it, please? And don’t hold back.

LaMonica: I think you are unnecessarily paranoid about losing your job. And I say that because you do a great job.

Jayamanne: Well, that’s nice.

LaMonica: You are. And I tell you this all the time. I wrote in an update email today, how great of a job you’re doing. But anyway, that’s what you think about. And I think like all people, Shani, of course, her experiences have shaped her relationship with money, and this is where we can psychoanalyze you a little bit. And I think that you lean, your instincts just have you lean towards certainty. And I think I’m a little different. So I think I’m more comfortable with risk because I had exposure to investing at a very early age. So I think I focus a little more on the opportunity with investing, and Shani, you tend to focus on the downside.

Jayamanne: And investing is an artificial contortion of my natural tendencies. And if I did what came naturally to me, I would be saving all of my money where I could see it and where I could access it immediately. And part of my anxiety around money manifests itself in thinking about what would happen if I lost my income. And this has been exacerbated by knowing several people who have experienced redundancy, but I should take comfort in the fact that they are all again employed, but I just don’t think about it that way.

LaMonica: Okay, well, there you go. So if you don’t spend all your time fixated on losing your income, you can benefit from Shani doing all of this thinking and worrying for you as she runs through every possible scenario in her head. And the simple question that we’re going to answer today, or Shani’s going to answer today, is what would your life look like if you lost your income tomorrow? And we tend to avoid answering this question honestly to ourselves, and not because losing your income, at least temporarily is unlikely, but because it forces us to confront the pretty fine line and balance in many of our financial lives. So there’s a natural tendency to think of income as something stable that will just continually come into your account. It arrives, it gets allocated, and life just moves forward. But beneath this routine that we get used to is this pretty uncomfortable dependency on the continuity of a paycheck.

Jayamanne: And a break in cash flow can see the rapid collapse of this finely balanced system. So let’s run through how it might actually go for a lot of us. And let’s start with the fast shock.

LaMonica: Okay. So the immediate impact of income stopping is rarely something that’s dramatic in any sort of visible sense. So it’s not some sort of sudden collapse. It’s pretty quiet. It’s just confronting because your bills are going to continue to arrive, and those direct debits are going to continue to come out of your account. There’s rent, mortgage repayments, utilities, insurance, child care, subscriptions. Nothing pauses because you’re in this new situation. And this is where most people realize pretty quickly that their financial system is designed for continuity without any interruption.

Jayamanne: And I often think about how long I can go without any additional income. And that is where my emergency fund comes in. And I know I have four months. An emergency fund allows you the time to think, adjust, and avoid decisions made under pressure. And without that buffer, the choices are usually liquidating assets or turning to credit, and both make a difficult situation worse.

LaMonica: So we’ve gone through that first month where all those bills are arriving and the income stops coming in. And if your income doesn’t return quickly, your behavior actually starts to need to shift. So the first adjustments are generally to discretionary spending. So subscriptions are paused, investments aren’t topped up, and travel plans are canceled. Some people realize their lifestyle may be largely non-essential while it can still be habitual. So it can be quite challenging mentally as you start to give up on all of these things that have become central to your life.

Jayamanne: And as time passes, the pressure starts to build from fixed costs. Housing, debt repayments, schooling, and essential household commitments that don’t flex easily. Financial stress starts to rise, particularly when free time increases.

LaMonica: And one thing we talk about a lot on this podcast when it comes to investing is action bias. So it’s that feeling that you need to act to be productive, or what you need to do in response to stress. And this rarely benefits you as a long-term investor. When you’ve lost your source of income, it is often combined with lots of spare time and this lack of activity can increase the financial stress on you.

Jayamanne: So at this stage, a household start shifting financial structures in response to fixed costs, present and future. So typically one or more of the following parts are followed. So where you’re negotiating payment arrangements with lenders or service providers, like with your bank for your mortgage, you’re drawing down savings more deliberately. You might be using credit as a bridging mechanism, or you’re reassessing what’s truly non-negotiable in the budget.

LaMonica: Then you might make it to the three-month mark. If income disruption extends beyond a few months, most people start falling into three different broad positions. So the first is those who have built up meaningful liquidity buffers. And this is the best position to be in, even if it’s an overall bad situation. That provides time to make good decisions about the next steps. So this might be in the form of cash savings, offset accounts, or liquid investments, which give you the time and the opportunity to act strategically.

Jayamanne: Then there’s those in the position where they have limited buffer, but they have access to credit or investments. This isn’t ideal, but short-term disruptions can be managed. So long-term goals may have to be sacrificed, and the opportunity cost may be high depending on the investments that are liquidated. And this might result in tax consequences that do need to be managed in the future.

LaMonica: And you wrote another article, mining your anxiety. You wrote another article and you suggested a list. So basically, you put an order what assets you should consider liquidating if you’re put in this unfortunate situation where you have to do it. And the resource and that article is linked in the show notes. But we want to get back to the last situation. We referenced three situations. There’s one more, and that is those that do not have a buffer or assets to liquidate. And this is when you enter acute financial pressure. And in this situation, decisions are often driven by urgency and desperation rather than trying to optimize your situation. And being in this position may cause long-term financial damage. So Shani, this is your brain child. This comes from what you’ve been thinking about. Why don’t you talk through how you thought about this?

Jayamanne: Yeah, so I did a stress test exercise of my financial position and how long I would last. And I did it twice. So considering a scenario where my husband keeps his income and a situation where he doesn’t. And one insight from this exercise is financial vulnerability is rarely about my total spending, but it’s really about my fixed commitments that I have. So I have accumulated several commitments that add a lot of inflexibility to my financial position. So my mortgage, the recurring housing costs that come with it. So land taxes, council payments, etc.

And I have day-to-day essential living expenses and that would have to continue. And I think you know, my hesitation to spend money means that my discretionary spending is very lean. If my income were to stop, there are some superficial costs that I could cut back on that I would be able to have some breathing room by halting my investments. And the source of my vulnerability is mainly housing costs and bills that create a baseline level of expenditure that is almost impossible to reduce. And my two scenarios with my husband had very different levels of resilience and how long I could last before liquidating my investments, which are designed for my long-term goals.

LaMonica: All right. Let’s talk about different life stages, because losing your income at different stages of life means very different things, Shani.

Jayamanne: Yeah, I’m in a very different situation to where I was early career. I’m in a relatively niche industry and have specialized early in my career. And this can make it really hard to find a job with similar pay. And this difficulty often increases as careers progress. And early career, I could easily replace my income one-to-one in most economic environments.

LaMonica: And that’s why all of this can change depending upon career stage, your household structure, and the nature of the work that you do. So as Shani mentioned, in early career, generally it means you have lower fixed costs and typically fewer dependents, and that often means you’re able to recover from losing your income faster. The key risk is lifestyle setting in too early. And so what that does is of course that will reduce any financial flexibility that you have. Then there’s mid-career. And this is often where financial vulnerability is high, even if it doesn’t feel that way. You usually have higher fixed costs like mortgages and you have family commitments, which means that you’re pretty dependent on your income. If you replace your income, it may not match what you made before, even if you find a job quickly.

Jayamanne: And then there’s later career. You’ve got lots of experience, but the market for equivalent roles is often narrower. And there is some financial vulnerability here as people try to keep in suitable roles until retirement. And the risk is not unemployment, it is underemployment relative to previous income. And this is where financial independence and reduce fixed costs become increasingly important.

LaMonica: And there are a couple of other scenarios that can change how your income ceasing can impact you. So we talked about this a little bit, but niche roles in specialized industry. The issue is not employability, but you need to worry about the market depth in those positions. It might take you longer to become employed again because opportunities are fewer and more specific. So you just need to be aware of that. Then there’s those that are self-employed or contractors. So income interruption is generally built into your life already. In most cases, there’s just more risk when it’s unplanned. Like if there’s an illness or injury where both current income and income in the pipeline stop at the same time. So financial resilience for this group often means you need a bigger buffer.

Jayamanne: So why don’t we move on to how we’ve prepared? And I think financial well-being is often framed as a function of how much you earn and invest, and what’s equally important is ensuring you have a strong system in place when one assumption breaks. Financial resilience is a priority for me. So once you have achieved a degree of financial independence, it’s a pretty scary thing to consider things going wrong. And it’s a priority for me to always have a fully stocked emergency fund. And I’ve also stress tested my situation and simulated what would happen if my income stopped. But I do this by laying out my annual costs. So I pick out the most expensive part of the year to have my income stopped to test my resilience. And I’ve enrolled in appropriate insurances as well. So if I’m somehow not eligible for my insurance cover, I’ve ordered my long-term investments first to last in terms of what would do the least damage to liquidate if my cash buffer was exhausted. What about you, Mark?

LaMonica: Well, I’m not going to be able to offer something, you know, these constant stress tests you run and ordering all your assets. But you know, I think it’s a little bit about life evolution. And, you know, when I first started working, my wife was not working. She got a PhD, so she spent a long time going through that process where she didn’t make any money. Then she had a couple years while she was doing all of her post-doctorate work where she didn’t make much money. And so we set up our life around one salary. So once she did start working, it took her a little while for her income to grow, but we really kept that principle and wanted to just be able to survive on my salary, and then the next stage of trying to build financial resilience was to be able to survive on either of our salaries. So if one of us lost our job, then we could still at least pay our needs. We would obviously have to give up stuff, some of the wants that we have. So I think, you know, that’s one way.

I think I guess we’ve structured our lives to try to have some resiliency. The other thing I think a lot about, and we’ve mentioned it earlier, is, I think it would be very difficult for me to find a job. Like you would find a job in a second. So you would probably be employed. If you ever lost your job, you would be re-employed by the time you got down in the lift. And we’re on the third floor. And the lift’s very fast. So I worry, obviously I’m older. And I think as you get older, as we said in this podcast, it’s harder to find a job. So I worry about that. So what I’ve been doing over time is I’ve just been building my emergency fund. It hasn’t been something that I just created an emergency fund and stopped. I keep building it as I get older. So that’s what I’ve been thinking about. And I think, you know, as you hopefully I’m not that old yet, but I think as you get later in life, you know, there are a lot of people that don’t get to retire when they want to retire.

They get retired for some other reason. And so I think about that a lot. And so I think that’s why it’s important for me to continue to build my emergency fund and continue to build that buffer. So that my long-term goals, as we talked about, don’t get sacrificed because something happens. So that’s my story. No stress tests for me. But I do think about this a lot too. So, we do we do like to talk a lot about how you are anxious, but I get anxious about this stuff. But your anxiety and my anxiety are not the point of this exercise. The point is to think through these situations and expose the assumptions in your head and just make sure that you have a plan that you can pre-form so that when you’re doing it, when you’re stressed out in these situations, you are not trying to come up with this plan for the first time.

Jayamanne: And hopefully conducting this exercise may cause you to either top up your emergency fund or consider whether you can still achieve long-term financial goals with an increased allocation to liquid assets. It might reaffirm that you have a strong plan if your income stopped tomorrow. But it gives you peace of mind that you’re prepared.

LaMonica: And I think doing this type of preparation means that you should hopefully have more confidence in those long-term goals. You don’t want to set up a situation where any little hiccup knocks you off that long-term path. And that’s really the point of this. So thank you all for listening to the two of us go through our anxiety exercises. We really appreciate it. And if anyone’s still watching the video and you want to subscribe, we would also appreciate that.

(Disclaimer: Any advice in this podcast is general advice or regulated financial advice under New Zealand law prepared by Morningstar Australasia Proprietary Limited and/or Morningstar Research Limited without reference to your financial objectives, situations or needs. You should consider the advice in light of these matters and any relevant product disclosure statement before making any decision to invest. To obtain advice for your own situation, contact a financial advisor.)

Invest Your Way

A message from Mark and Shani

For the past five years, we’ve released a weekly podcast and written on morningstar.com.au to arm you with the tools to invest successfully. We’ve always strived to provide independent, thoughtful analysis, backed by the work of hundreds of researchers and professionals at Morningstar.

We’ve shared our journeys with you, and you’ve shared back. We’ve listened to what you’re after and created a companion for your investing journey – Invest Your Way. Invest Your Way is a book that focuses on the investor, instead of the investments. It is a guide to successful investing, with actionable insights and practical applications.

If anyone would like to support this project you can buy the book now. Thanks in advance!

Purchase from Amazon

Purchase from Booktopia