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Planning for the 'Boom' (and the 'Bust'): A Financial Framework for Cyclical Industries

Jeff Blomgren CFP® |
Categories
Risk Management
Retirement
Investments
Savings

In many professions, financial planning is based on a steady, predictable income. You get a 3% raise, your income slowly climbs, and you plan accordingly. If you work in a cyclical industry—like mining, energy, or even tech—that model is a fantasy. Your career is one of "booms" and "busts." There are years when commodity prices are high, projects are greenlit, and bonuses are massive. And there are years when prices collapse, projects are shelved, and layoffs are common.

A financial plan built for a steady income will fail you. You need a "boom-and-bust" framework that matches the reality of your career.

Rule 1: Define Your "Base" vs. "Bonus" Life This is the most critical rule. You must know, down to the dollar, what it costs to live your "base" life. This is your mortgage, utilities, food, and basic essentials. You must be able to cover this "base" life with your "base" salary. All "boom" money—the RSU vesting, the cash bonus, the overtime—is not for lifestyle creep. You cannot let your base life (and your new car payment) inflate to match your best year's income. That is a trap.

Rule 2: Build a "Surge" Fund, Not Just an Emergency Fund An emergency fund is 3-6 months of expenses. For a cyclical career, that's not enough. You need a "Surge Fund" (or "Bust Fund").

  • What it is: A cash-heavy fund with 12-18 months of your "base" living expenses.
  • Why: A "bust" in your industry isn't a 3-month emergency. It can be a 1-2 year downturn. This fund gives you the power to say "no." It allows you to ride out the downturn without being forced to sell your stocks at the bottom or take a job you don't want.
  • How to build it: In a "boom" year, your first dollar of bonus money goes to topping off this fund.

Rule 3: "Front-Load" Your Retirement in the Boom Years In a great year, don't just max out your 401(k). Do everything.

  • Max your 401(k) ($23,500).
  • Max your HSA ($8,550 for a family).
  • Fund a "Backdoor Roth IRA".
  • If you have kids, put a lump-sum into their 529 plans.

Use the "boom" to buy your future freedom. Doing this in 2-3 good years can put you so far ahead of schedule that you can coast through the "bust" years without stressing about your retirement numbers.

Rule 4: Attack Debt in the Booms A "boom" is your chance to eliminate your "base" costs. Use that big bonus to pay off a car, or even to make a massive principal payment on your mortgage. The goal is to lower your "base" living cost, which in turn lowers the amount you need in your "Surge Fund". Every dollar of debt you kill in a boom year is a dollar of stress you don't have in a bust year.

Living in a cyclical industry can be incredibly rewarding, but only if you plan for it.

If you work in a cyclical field, what's the biggest financial challenge you face?

Schedule a Consultation These are general strategies and may not be right for your specific situation. If you'd like to discuss how these concepts apply to your financial plan, please feel free to schedule a complimentary call: Click here to schedule