Every time you borrow money, you’re robbing your future self. –Nathan W. Morris
Never spend your money before you have it. —Thomas Jefferson
When the tide goes out you can see who was swimming naked. –Warren Buffet
Aside from it’s potentially (and looking ever more likely) high direct human cost, the Coronavirus epidemic is playing hell with our economy and society. Supply lines are cut, companies are collapsing, all sorts of economic interventions that may or may not make any difference are happening, people are being cut off from their support.
And this is showing the fragility and unpredictability of the system in a way that hasn’t been seen since the Great Depression. And this in turn illustrates, as nothing else could, just how dangerous it can be to build a life that depends on the best possible scenario. This is not a political commentary, since I cannot control politics and neither can you. Rather this is a comment on our individual lives and choices. It’s a comment on how we’ve all come to rely on the system always working and on our always having a place in it. Too many of us have built our financial lives to have no margin of error. Think about how many people have come to rely on restaurants and take out rather than knowing how to cook everything at home. This is even a comment on trusting the existence of medications and the healthcare system to keep us healthy rather than starting by being sure to maintain a healthy, strenuously active lifestyle and diet. It’s great to have all of these things, and they can help us do more than we could do on our own. But it’s also a limb that you can go too far out on without realizing it until you here the cracking noise.
Debit-financed lives are the norm
So many of us have made the decision that we can afford to finance our lives with credit card debt, our housing with massive mortgages, and our education with loans. Debt has replaced savings over the last couple of generations in this country. To afford something no longer means to have enough cash to cover it, it means to have enough cash flow to cover the payment. In many cases we’ve even done this with two incomes – the cash flow we need to cover all of our payments has to include both spouses or partners working, rather than just one. We’ve also made the decision to pay people for things we could have done ourselves, such as cooking or washing the car.
All of these decisions have one thing in common – they save time. You don’t have to put in the work right now or save the money first. But like all kinds of debt, the bill eventually comes due. Your greater freedom to do what you want right now has been borrowed from the future, and your reduced freedom might be hidden from you until you need it most.
The problem with all of this becomes terrifyingly obvious as soon as something goes wrong. Saving for purchases – or to make a large down payment – has flexibility. Debt is very unforgivably and definitively not flexible. If you saved to buy your car, you can’t lose the car when your income drops. And if you have two cars and are in extreme need of cash, you can sell one of them and you actually get to keep the cash. But if you owe money on that car and your income drops, then you are in trouble. You have to keep making the payment or you lose the vehicle. If you sell the vehicle then you still have to pay back the loan so you’ll take home less cash when you really need it.
Financial responsiblity is about building a margin of error into your life so you can be flexible when you need to
That’s really the whole problem with living with a low savings rate and high debt – or living so that you need two incomes rather than living so that the extra one is gravy. Having a low savings rate means that you have less of a cushion before you have to start making hard decisions. After all, some expenses can be easily cut, and some cannot. If your super-nice apartment is an expense that needs both of you to cover it, that’s hard to cut on short notice.
A mortgage is a huge example of this too. Few people can pay for a house in cash. But we can certainly save to put 30% down instead of 5%. The difference comes if you need to move because of economic problems in your area. If you have to sell the house to go where the jobs are, but the house has lost value, that can be a problem. You still owe what the purchase price was. If it’s now worth less than the debt you still hold, selling the house means you don’t have a place to live and you are still in debt. But if you put a lot down and have been paying it off, that’s less likely to happen. You can probably sell the house and get some amount of cash to help you start over somewhere else. It will still hurt a lot to get back less than you put in. But you won’t be trapped. The more you put down, the safer this is. If you only put 5% down, then the house only has to drop a little more than 5% in value for you to be unable to sell the house and get anything back.
Money isn’t the only way to do this
Skills and health are a part of saving because they also affect this. Restaurants – and processed packaged junk food in the stores – cost more than cheap, fresh vegetables and cuts of meat, especially if you don’t buy the pre-cut ones, or the one or two meat cuts that people know how to cook. If you don’t believe me, go to the store and look at how big the per-pound price range is on the different cuts of meat. If you don’t know how to cook these things, you have to pay more and it’s harder to really cut back in lean times. The same goes for basic home and appliance repair or car maintenance. It’s not possible to do absolutely everything yourself, but you can do much more than the average American and buy yourself some flexibility.
You’ll be glad you built a less fragile life in times like these
This is all depressingly common and I’ve made some of these decisions at times in my life too. But over the last few years my wife and I have tried to change that by raising our savings rate, getting better at buying cheap, healthy ingredients and cooking at home, and maintaining an active lifestyle as a priority. We have also been very conservative with our emergency fund and tried to keep 6-12 months of expenses around.
As Warren Buffet says, when the tide goes out you can tell who was swimming naked. You can imagine how glad we are that we’ve made these adjustments over the last few years. A month ago we got back from being abroad for 12 months and were immediately trapped by the Coronavirus lockdown. Our plan was to get new jobs when we came home to the States, and obviously that’s hard to do now. We may be in limbo for a long time. But it still feels like we dodged a bullet. Our emergency fund is good enough that we can keep going for at least a year while we try to figure something out, we own a very cheap condo that we paid off quickly, and we know how to cook everything at home with whatever ingredients are available. We can probably live very comfortably on about $20-25,000 a year if we have to really bunker down.
We don’t want to have to do that, of course. But having the option when you need it is far better than not having it. If we owed money on our home, or our car, or just in consumer debt it would;t be possible to reduce expenses like that. The same goes for if we didn’t know how to cook anything we find in the grocery store. If you’ve been caught flat-footed, I encourage you to try to make these changes in your life as well. You’ll sleep better at night. And try not to make the excuse that you don’t make enough or your area is too expensive. People pursue this kind of savings-led lifestyle everywhere in the country and with all sorts of incomes. I’ve tried to list some examples on this page here. There are dozens or hundreds of other resources out there and some of them will match your situation.