Personal Finance – Yes, Build the Buffer
I was riding home with child number seven after a basketball practice about four months ago — this is the child that if any of mine has the capability of taking over for me someday, this is the one. She said to me, “Dad, I always knew we were better off than most, but it finally sank home to me how much better off we are than most of the people we know.”
Me: “What do you mean?”
7: “I’ve been talking with my friends after basketball practice, after church, and other times, and I hear about what happens when their parents have a $500 surprise bill for a repair, and things like that. They have to scrape for months to deal with the added expense, and they can’t do a lot of things that they do normally while they rebuild their finances.”
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Me: “Okay, so what makes us different?”
7: “We just had three disasters hit us at the same time, and you just dealt with them for the long term without making a lot of noise about it. Had that happened to any of my friends’ families, they would not know what to do, it would be impossible for them to do it without help.”
Me: “Actually there are a few of your friends whose families would likely survive what hit us easily, but yes, you’ve hit on something that I think is the most significant initial lesson on finance for the 75% of the population on the low end of incomes. People need to start saving early, and build a buffer against disasters, etc. If I were going to give a talk at most churches on personal finance, I would talk only about that, and almost nothing more. Earn, budget, save, and be generous. After that, we can talk about investing, but it is only relevant to a minority of the population with enough discipline to save early and often, initially aiming for 3-6 months of expenses.”
7: “When did you and Mom finally have that much saved?”
Me: “Going into our marriage back in 1986. I had been a graduate student, and your mom a high school teacher in one of the poorest school districts in California, but we still both lived low on the hog, and saved money. That gave us enough money that we were able to buy a small house at an opportunistic time six months after we married. Within a year, we had rebuilt the buffer, and we haven’t been without it since.”
In personal finance, you have to develop good habits early, and learn that life isn’t about how much you spend. I try to teach my kids that — Seven understands it, as does three or four of her siblings. The other three or four don’t understand, despite my best efforts — some of it seems to be personality-driven, but I have seen one or two of them change and get better at money management. We’ll see… they are still developing.
In finance, you have to focus on what you can control. You have reasonable control over ordinary spending. You have less control over what you earn, and almost no control over accidents and investment returns. Thus the first bit of advice is to live below your means and save. The second bit is to plan against catastrophes on a reasonable level. Insurance can be useful to protect against some of the worst outcomes. Just remember, insurance is an expense and not an investment.
Along with the above article cited, note these four basic articles and one book review on personal finance:
- Got Cash?
- Got Cash? (Part 2)
- The Order of Battle in Financial Planning for Ordinary Folks
- Take Prudent Risk
- Book Review: Effortless Savings
The last one is useful for learning to live less expensively, while still having most reasonable comforts that others have.
Now, what I have written about above has been noted in the financial media lately regarding a study done by JP Morgan on how many people don’t keep a buffer around, no matter how much they earn. Here are two articles that talk about that study (one, two — good articles both, read them if you can). Personally, I’m not surprised having worked with people who earned a lot and spent to the limit. They lived far more opulent lives than I do, but decided they would save later.
If you want to save, start now. Most good habits have to be started now, or they won’t get started. Most good intentions don’t die from a frontal assault, but from the idea that you have plenty of time to change. As a result — you don’t change. And that is not just you, it is me in my life also. Change must start now, or it does not start.
Two more articles worth a read:
- Are You Overlooking Big Threats to Your Finances? (Jonathan Clements is always good), and
- Five Things New Grads Should Do When They Get Their First Paycheck
These largely follow my point of view on personal finances. Save, protect against bad risks, and take moderate risks to earn money both in work and in investing. You can do it too, but remember, it is not a question of knowledge, it is a question of whether you have the will to do it or not. I wish you the best in your efforts.
Now if you haven’t done it yet, go build the buffer.