Concept
Room for error
Room for error is Housel's name for the cushion that keeps you in the game: an emergency fund of several months' expenses, a plan that assumes lower returns than the brochure, and fixed costs with slack, so that a bad year is a bad year and never forces you to sell at the worst moment.
Getting wealthy and staying wealthy are different skills. Getting takes optimism and risk; staying takes humility and a kind of fear, the knowledge that what you have can be taken away and that the only unforgivable mistake is the one that removes you from the game. A great investor who is wiped out once has the same result as one who never started. Room for error is how you avoid that outcome, and Housel means it literally. A cushion of three to six months of expenses in a boring account means a job loss or an illness never forces a sale in a crash. Planning on returns lower than advertised means a disappointing decade is survivable. Fixed costs that leave slack mean a bad year is absorbed rather than catastrophic. Collins makes a related point: deep market falls are normal, and the damage is done by selling in them, not by holding through them. The cushion is not the opposite of investing; it is what makes investing survivable, which is why it is built first.
A real-life example
Two colleagues at a bank in Istanbul invest the same amount monthly from 2010. In 2020 one has no cushion; a salary cut that spring means he needs the money, and in the crash he panics and sells. The other has six months of expenses in a deposit account, feels the same fear, and does nothing. By 2025 her account is far larger than his, in the same funds.
How to use it
- 1Build three to six months of your enough number in a boring account before investing seriously.
- 2Assume the return will be lower than the brochure says, and plan on that.
- 3Keep fixed costs low enough that a bad year is absorbed, not catastrophic.