How to Estimate Risk & other stuff

If you have a goal that you want to succeed at, first know what “done” looks like. What will be measurably different in the world?

Sounds simple, and it can be. People like to skip this step, and it is unskippable if you’re estimating any project/budget/outcome/whatever.

So define done or do not pass go or collect $200.

After that, only THREE things are needed:

  1. The Minimum (Min)
  2. The Optimum (Opt)
  3. The Maximum (Max)

So here’s an example if you’re estimating your gross income:

  1. Min = What is the least you could possibly make? Hint: it’s usually $0 unless you have non-cancellable contracts stating otherwise.
  2. Opt = What is the amount you want to make, taking into consideration the actual life you live. This number is not so important, don’t spend too much time on it. Your gut reaction without any justification is fine. Hint: this is the number that you usually stress out trying to plan for.
  3. Max = What is the most you could possibly make? Hint: billing for more than number of billable hours in a day is exceeding your maximum.

I’ll use myself as an example. I know I have a decent contract going through first quarter of this year ($30K), but after that I have no idea where money comes from ($0). My Minimum therefore is $30K + $0, or $30K. I would like to make more money than I’ve ever made in a year, twice what I normally make, and though I have no idea how realistic that is, I’ll say my Optimum is $180k. And if I worked full-time all year on my maximum rate as a consultant (which never happens) minus the first quarter of work which is contracted well below my max rate, I can calculate my Maximum for this year, it’s $220K.

Min = 30K
Opt = 200K
Max = 280K

Therefore, I would be wise to keep my expenses below $30K/year until I know I’ll be making more than that. I may or may not choose to act that wise, but at least I know what the wise thing is. I don’t have to worry about starving this year, and it would be good to plan large expenses for after the large sums of money have come (if they come).

I also don’t have to bother considering any tax strategies that apply only to millionaires, as…clearly I ain’t one. But if there are decisions to be made that fall between my minimum and maximum, I would do well to pay attention. This applies well beyond finances, and can help us assess risk in a wide variety of arenas.

So what is your minimum, maximum, and optimum?