Posted by Lending Club :: April 8, 2009 @ 6:22 am

Regardless of the security of your financial plan, shoring up the weakest links will make it even safer. Many of us feel safe, despite our finances having multiple areas with single points of failure. Identifying and eliminating (or reducing) failure points will help to strengthen our finances.

A single point of failure is just that: it’s a situation where only one thing has to go wrong for failure to result. An example, typical in most households, is having income solely from your job. If you lose your job, all of your income disappears as well, leaving you vulnerable to financial ruin. To combat this possibility, you could diversify your income through alternative income streams, such as investment income through a P2P loan portfolio with Lending Club.

Many other single points of failure can exist that cause financial troubles. Having all of your bills paid automatically out of your checking account simplifies your finances, but a short-term cash flow problem in that account could disrupt payments and generate many different fees. It may be easier to have this single account and watch it very closely, but if your diligence fades, your troubles could quickly rise.

When some of these types of failures occur, you’re forced to take a more expensive route. Suppose you pay a neighborhood kid to mow your lawn while you are away on a month-long vacation. If you find out that the kid is unable to do the work, and you don’t have a backup plan in place, you may have to pay exorbitant rates to get a local landscape company to do the work.

In attempting to avoid single points of failure, you are constantly balancing low-cost redundancy and double coverage. The overhead to manage too many options may devalue the added protection, but having no alternatives could end up costing a whole lot more. Take a close look at your finances and imagine the results of any one aspect going awry. If significant damage would occur, this is likely a single point of failure that you should try to eliminate.

What single points of failure have you identified?