How to Build a Bulletproof Balance Sheet

7 min read
April 13, 2021

how to build a bulletproof balance sheet


Too often, we equate being conservative or risk-averse with missing opportunities, or missing chances to grow wealth.

While there is such a thing as being too hesitant or too cautious, there’s a good reason to lean toward less risk when doing long-term planning.

Even if you feel highly comfortable with risk or actively seek it out, there’s a difference between calculated risks you can afford to take and those you can’t bounce back from.

Good planning is centered around understanding how to build a bulletproof balance sheet.

What Does It Mean to Create a Bulletproof Balance Sheet?

A bulletproof balance sheet, or financial plan, is one that can take a hit from the unexpected (or just bad luck) and keep on going regardless.

It’s a financial situation that can withstand the realization of downside risk.

To build a financial life that’s bulletproof, you might have to hedge some of your bets. There may be times when you need to opt for safety over a moonshot that is going to cause you to crash and burn if you don’t land it perfectly.

That’s not being overly conservative: it’s good planning. It’s the awareness that if an event has an 80% chance of turning out in your favor, there’s still a 20% chance it doesn’t.

If someone gave you those odds, you might (rightly) feel pretty good about assuming the outcome with the 80% probability of happen will actually happen.

But a 80% probability is not a guarantee. Even a 90% chance isn’t guaranteed, either.

In either case, you still have to acknowledge there’s a 10 to 20% risk of the outcome you don’t want.

And if your finances can’t withstand the 1 or 2 times out of 10 that things will go wrong, then you don’t have a good plan in place.

Considering what happens if things don’t go your way isn’t pessimistic; it’s reasonable and a hallmark of sound planning.

Creating a bulletproof balance sheet means giving yourself a runway, or wiggle room, for the downside risk when it inevitably shows up from time to time over a period of decades.

Here’s what that looks like, and how it build it into your own financial life.

Don’t Max Out “Friendly” Numbers in Your Financial Planning

One of the simplest ways to create buffer room in your planning is to use the conservative or low-end range on numbers like income, bonuses, equity compensation, and investment returns.

If you could reasonably earn $250,000 to $300,000 this year, for example, don’t set a plan that requires you to earn the highest end of that range for it to work.

If you usually get a bonus between $10,000 and $15,000, don’t assume receiving the maximum is a certainty and make your budget based on that hope.

And if you receive equity compensation, don’t make long-term plans predicated on the stock price rising exponentially in the future.

Whenever you need to make an assumption around the numbers in your plan, you don’t need to assume the worst. It’s reasonable to assume you’ll earn something; however, it’s not rational to think you’ll earn the top-end range of a possible salary and receive the highest-possible bonuses for the next 30 years.

Simply using the lower end of identified ranges can help you build some wiggle room into your plan.

Consider a Range of Possible Outcomes

You can’t plan for every single possibility. The future is unknowable, and the longer your timetime, the more uncertainty you’ll face.

What you can do is develop a few different scenarios that range from best-case to less-than-ideal – and know how your plan will function under each.

If, for example, you want to sell your house in 2 years, you may want to look at a few different assumptions.

Perhaps in one scenario, your home sells quickly and for the price you want. In another, maybe it takes longer or the sales price is lower than you hoped. And in a final scenario, you might ask what it looks like if your home sits on the market for longer than you planned or you need to greatly reduce the price to get it to move.

In each case, you want to ask: can my finances withstand this? With selling your home, your finances are obviously going to be in good shape if your home sells when you want it to, for the price you asked.

But if you struggle to sell, then what?

If you need to move before you sell, an you afford your current mortgage and the rent on a temporary home in your new location? Do you have the flexibility to drop the price in order to sell? Are you banking on having a certain amount of equity in the home that might not be realized if you sell for less than you want?

Again, you can’t plan for every possible outcome. But you can look at a few broad examples and simply ask, “what if this doesn’t go exactly how I want it to?”

Asking the question gives you an opportunity to plan. If you acknowledge there are possibilities outside your dream scenario, then you can incorporate that into your planning ahead of time.

It can also highlight potentially risky behavior – like the fact that you might not want to buy a new home until yours is sold, just in case you get stuck with two mortgages for far longer than you expected.

The point is not to predict the future, but to consider Plans A, B, and C and how they each might impact your finances in different ways. That way, you can be better prepared to react based on what actually happens, and not just what you hope for.

Give Yourself the Financial Room to Maneuver Around the Unexpected or Unknown

One of the best-known ways to “expect the unexpected” is to build and maintain an emergency fund.

Your emergency fund is made up of cash reserves that you set aside to cover unforeseen, unexpected, and unplanned-for events that you couldn’t otherwise cover from your normal cash flow.

Reasons to use emergency funds include job loss (and therefore a loss of income), accidents that generate big medical bills, major car repairs you didn’t expect – the list goes on.

We usually advise clients to maintain about six months’ worth of “needs-based” expenses in cash reserves. This means keeping enough cash on hand to cover fixed costs and non-negotiable spending needs for six months.

Emergency funds are just one way to give yourself freedom and flexibility when it comes to navigating situations you couldn’t plan for in advance.

Other great ways to build in the ability to financially maneuver and stay agile:

Save more than you think you should. For me personally, this means saving 30 to 40% of my income each year. I contribute that money toward long-term investments for future asset growth.

Why? Because saving so much now gives me the flexibility to make more choices in the future. It makes work optional and provides the means for big spending goals down the road.

Diversify. When we talk about diversification, we usually mean investments – and that is true here. You don’t want to be overexposed to concentration risk, and lack of diversification can hurt your ability to earn returns.

But you can diversify in other ways, too: like your skillset, your ability to earn an income, or the types of assets you own. Don’t bank on any one thing being your sole ticket to achieving your goals and building your wealth.

Watch out for big fixed costs. One of the biggest mistakes I see people make is locking in massive fixed costs into their monthly budget. Whether it’s from the biggest mortgage payment they could possibly afford to taking on many liabilities at once, the more fixed costs you have – and the higher they are – the less room you have to maneuver.

A Bulletproof Balance Sheet Expects Some Things to Go Sideways – So That Nothing Derails You from Your Goals

When we talk about a bulletproof balance sheet, what we mean is having a financial situation that can take a hit or two and keep going… because it was intentionally designed that way.

A financial plan that only works if everything goes precisely how you want it to is not a plan at all. It’s a wish.

That doesn’t mean we need to do our best Eeyore impressions or expect the worst to happen to us. In fact, we want to facilitate conversations that capture hopes and dreams and really big goals!

And then, after understand what matters most to you and we know what your big dreams are, we want to build a plan that’s resilient enough to withstand potential setbacks along the way.

That’s the only way you realize a dream: to have a plan tough enough to roll with the punches and allow you to continue toward your goals even when the path to get there isn’t an easy one to take.

RobergeAbout the Author
Eric Roberge, CFP®, is the founder of Beyond Your Hammock, a fee-only financial planning firm based in Boston, Massachusetts that specializes in providing planning services and investment management to professionals in their 30s and 40s.


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