King of Cash....ok maybe it is a self proclaimed title, but not untrue. With this title I do not profess to be financial wizard that makes money trading stock. I am person who understands trends and applies discipline to my life approach.
Never being a big user of credit cards and for most of my childhood being fascinated with stacks of cash, I always made sure I kept money readily available. Sometimes I wonder if I was born this way or if I learned the habit of saving. Like most talents, I probably have natural tendancies but over the years I have refined my discipline.
It was my junior year in college (2000) when I discovered how different I was from most people. I can remember having a debate with a classmate about what is the true definition of being able to maintain your lifestyle? My friend felt having a job that allowed you to pay your mortgage, stay current with your bills and establish modest savings (3 months) was sufficient. I quickly challenged his theory with my own. My thoughts of being able to maintain one's lifestyle is having enough cash reserves to sustain a life altering event, personal or global, where a person is able to satisfy all of their obligations without altering one's day to day habits.
After debating for an hour we agreed to disgree. My friend's mindset was based on the fact that as long as a person is employed or has some cash flow, modest savings were sufficient. In retrospect I dont' fault him! His rational was correct for the economy we were currently in. In 2000 most people who were laid off or lost a job could find employment within 90 days. With this mind set.....yeah things are ok and how bad can things really get that I would need savings beyond 3 months. Having studied the history of different economic cycles (Great Depression, The Crash of 1987, etc) I felt if a bad economic cycle hits a prolonged period of unemployment can occur. Knowing this, I always felt it is neccesary to prepare beyond what is considered standard.
Lets fast forward 8 years to our current economic cycle. Most corporations and some State Governments are down sizing 10%-12%, the housing and stock market are in the toilet, banks are unwilling to lend, and there is no turnaround forseeable. The only real access to capital is what is in our bank accounts (Thank you FDIC!!!!!!).
As a Commercial Banker I speak to all of my clients about what changes they are making to get through this current economic cycle. The first thing most business owners are saying is"I am cutting my staff by 10%-12%". You can see that the possibility of unemployment reaching 10% is very real. This global epidemic will not be fixed anytime soon and those who have lost their jobs should expect to be out of work for more than a year.
As a young man my father always taught me "Son, never put all of your eggs in one basket." As a banker I was taught the same in terms of analyzing companies. This lesson came in the form of "Stay away from businesses that have too much customer concentration". Taking both mentalities to heart, I began to analyze my own life. My household income is concentrated in the financial industry (My Wife is a very talented human being and Wall Street Trader. I do my best to keep up with her success.) I began to research how the financial industry fairs during economic downturns. I quickly realized the industry didn't fair well with massive layoffs as the trend. I understand it is not easy to just go out and switch employment to another industry for the sake of diversification, so I asked myself "what is the mitigant?" Understanding the industry ("Understanding your industry"future blog) we work in is what made me realize what we needed to do. If one or both of us could be unemployed during an economic downturn, the easiest thing to do is to accelerate our savings to offset any prolonged period of unemployment.
I must say it takes alot of discipline to aggresively save when there is no real evidence of an economic downturn. Many feel my agressive approach to saving (or conservitive approach to spending) is extreme. However, in this environment, you can quickly see that a strong financial foundation is never a bad decision. We are all learning that we cannot rely on others to ensure our financial stability. Investing in homes, the stock market, 401k, or simply having a job is not enough. "Cash is King"! Stack your Chips!!!!!
For some of you reading this, it may be too late, but for those of you who are blessed to still have employment I encourage you to start "tightening the belt". This is only the beginning and while you still can, please take control or your finances and prepare like each pay period may be your last.
Next Blog Title: Discipline
I will discuss the "checks and balances" my Wife and I put in place to began our financial foundation I will also share economic news that is impacting us all.
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1 comment:
First of all I would like to say great blog, Ben. Exactly what the doctor ordered. I am definitely a proponent of saving. But recently I have been in limbo between paying off my debt aggressively vs. saving aggressively. I came up with a plan to pay off a credit card bill with a 4.99% interest rate within 5 years while stacking my cash. I used the transfer balance offer to pay off a car loan that was at 7.99% interest. The 4.99% rate is indefinite as long as long as I pay the bill on time. I sat down one day and figured out how much interest I would have paid on the card in 5 years. I wasn't happy with that amount so I figured out a way to pay it off in 2 years. By doing this, it obviously reduced the amount of money I would save. I was just wondering your take on this. Saving as a priority vs. paying off debt. I think I have an idea of what you're going to say, but I don't want to be left to assume.
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