MoneySense Chapter 4: Saving, Still Essential in the MoneySense Strategy

“It is the savings of individuals which compose the wealth—in other words, the well-being—of every nation. On the other hand, it is the wastefulness of individuals which occasions the impoverishment of states. So that every thrifty person may be regarded as a public benefactor, and every thriftless person as a public enemy.”
– Samuel Smiles [From chapter one of Smiles’ book “Thrift.”]

In a consumerist, “I want it and I want it right now” age, why save anything?

Given the policies of central banks across Europe, Japan and the United States over the last few years—policies that can be described as cheap money and that are characterized by interest rates that are so close to zero as to be almost indistinguishable from zero; policies that are now starting to change—savers seem to have no incentive to continue adding to their capital pools. So why should anyone save a cent?

A couple years ago I parked a $15,000 check in my J.P. Morgan/Chase bank’s “high interest (sic) money market account.” This was an example of an account that was hardly providing me with any reward for thrift. So what did I have in my account at the end of the month? I received an interest payment of less than a dollar. I didn’t even receive enough in interest to buy a Sunday newspaper or even a weekday paper!

Our central bank, the Federal Reserve Board, has had a policy of dirt-cheap interest rates since the market meltdown of 2008 (Actually before the meltdown, the central bank also kept rates fairly low, which some people thought was the cause of the meltdown). [See “Greenspan’s Bubble” by William Fleckenstein (McGraw Hill, New York, 2008)].
The cheap money policy, endorsed with nary a peep by most major politicians, has been advertised as a way of rejuvenating the economy.

Easy Money

However, the cheap money policy is one that has had mixed results. Indeed, when I began writing this book the growth rates, the GDP numbers, were declining because of the Coronavirus. But even before this disaster, they were recently weak here until 2017. That was same in most of Europe, where many economies were stagnating. Yet, despite the poor results, the Fed, a couple of years ago, announced that the cheap money policy would continue. And with the Coronavirus still a problem for some, or maybe less of a problem depending on whose analysis you accept, the Fed’s dirt-cheap money policy will continue seemingly forever. But even when it does change, and that could be soon because inflation is again becoming a problem, the Fed’s policies always seem unfriendly to savers.

So I repeat: Why put money into a saving account? Why not spend every cent or put every dollar into investments that, in good times, would yield a healthy rate that can beat inflation and taxes?

It’s because having a certain amount of cash on hand, easily available, is something almost everyone should have, especially if you’re laid off in a time of crisis or during a recession.

In the previous chapter we discussed the advantages of being able to pay your bills, especially your credit card bills, on time and in full. I have said that avoiding the 20 percent interest charges is a tremendous plus in the short term. Actually, it’s a great advantage over any term. How many investments can guarantee you a 20 percent return?

Remember, stocks long term tend to return about nine and half percent while bonds, depending on the kind, generally return about three to five percent. Obviously, over the long term, this advantage of avoiding credit card debt just gets bigger and bigger.

Indeed, say you maintain an average card balance of $5,000 a year over 20 years. That means you pay $1,000 a year in interest, not counting the $5,000 principal, and that comes to $20,000 in additional interest charges. Can you use an additional $1,000 in charges that you sidestepped each year?

Paying your bills each month in their entirety is one of the characteristics of a MoneySense person. But there are other reasons to have adequate cash balances, cash balances that will carry you in an emergency situation, close at hand.

Can a Government Run Out of Money?

We live in difficult times. It is a time in which many nations are trying to recover from economic damage of long-term lockdowns. Governments are running up incredible amounts of new red ink. Previously, even in the “good times” the government was running in the red. And the same governments soon will be considering ways to raise taxes some more and cut welfare benefits so they don’t go broke.

The student of economic history understands it has happened before. This isn’t the first time this has happened. Other examples of government overspending are numerous.

For those who think I exaggerate here, I recommend a study of the history of Spain under Philip II—several times Espana’s king refused to pay his considerable debts—Germany’s Weimar Republic or the early years of the United States under the Continental Congress. In the latter, that’s when the overissue of the paper currency issued by Congress became worthless. “Not worth a Continental,” is what people said of Congress’ paper currency.

Some kind of paper money devaluation could happen today or in the near future as Congress and the president, creating money out of air, seem to be trying to spend us out of bad times. This is a dangerous strategy that has blown up in the past.

Again, I would like this book to focus on personal finances and how you can master them. However, it is necessary to keep in mind what the government is doing and how it can affect you in your efforts to achieve financial independence.

The General Accountability Office (GAO), in a new report on federal spending, warns that “this situation—in which debt grows faster than GDP—means the current federal fiscal path is unsustainable.” This government debt issue, which is hanging over all of us but especially younger Americans, is something I will discuss later.

The reason to have a substantial cash reserve at all times is that, no matter how well the economy can be doing at any given time, bad times will likely come again so one should be prepared. An old market adage is that “the time to prepare for a bear market is in a bull market. And the time to prepare for a bull market is in a bear market.”

That wisdom should apply to your finances. You seem to be doing well now. Prepare for bad times. They will come. Your cash reserve should be designed to withstand almost any economic climate because, if you live long enough, you’ll experience everything.

Do You Have a Reserve?

Even if you have a well-paying job, and both you and your employer are doing well—something fewer and fewer Americans can say today—it is best to prepare for at least the possibility of short-term unemployment at some point. This is something many workers, often through no fault of their own, will likely experience in their lives. There were times in my work life in which I was glad I had a part-time job to go with my primary work. In careers as in investing, it’s good idea not to put all your eggs in one basket. Jobs are more and more uncertain. This is true even for the best workers.

So most advisers I have known say that one should always have at least three months of living expenses in cash. This is an emergency fund to get one through hard times.

The fund should be easily available in a bank savings account or possibly a money market account with check writing privileges.

Given the unprecedented periods of long-term joblessness in the last recession some advisers say the emergency saving fund should cover six months. Today’s economic woes are one reason why. Many Americans and Europeans had previously lost jobs, but recently never have been unemployed for such long periods, with some workers actually giving up a job search temporarily or possibly forever given the extent of welfare benefits some governments provide.

By the way, the latter isn’t always terrific.

I know several workers who, in this economic crisis, had trouble obtaining unemployment benefits from the state in a timely manner. For instance, when the Coronavirus caused massive unemployment in New York, the state unemployment insurance hotline website crashed. It took many people weeks or in some cases months to get the unemployment insurance payments they were due.

So having at least three or possibly as much as six months cash reserve to pay daily bills is a sensible practice. Knowing that, if the worst happens, a person has cash resources to pay bills, you ensure that you don’t fall behind on credit card and other bills; that you don’t incur penalties.

Here’s another reason to always have a fair amount of cash on hand: if you have built up investment assets, it is frustrating to start running them down to pay day-to-day living expenses.

That means interrupting the compounding process. That is one of the biggest factors in building wealth. That means going backward in your attempts to achieve financial independence. And having an adequate amount of cash can be very important at various times.

Cash Is not Trash!

And there is another little-known reason to always have some cash. There have been short periods when cash, and cash equivalents such as money market accounts, have been the best performing assets; better than stocks or bonds. We’ll look at this odd happening later in the book.

So having cash on hand will likely be critically important at some time in your life, even though it often seems superfluous to many Americans, who see stocks and bonds as the better place to put money. Indeed, a recent published report detailed how about half of American households carry a credit card debt that exceeds their cash reserves. This is insane. They are playing with fire and do their best to remedy the situation as quickly as possible.

That recklessness will compromise one’s ability to protect oneself in bad times or to take advantage of unique opportunities to improve one’s quality of life.

Starting at Zero

For instance, my wife and I were married in 1987. At that time, we had just about nothing. I think we had about $1,000 in a savings account. Not much of a savings account; not much of a protection against hard times we were about to face. I still had a used car. Almost anything happening to that clunker could have eaten up our savings.

Still, we dreamed of having our own apartment, which would be the first piece of real estate either of us would own. Renting an apartment, which we had both done previously, meant getting no tax breaks and building no equity. However, owning an apartment or house, under the American tax code, provides tax benefits and the ability to build equity as one retires the mortgage. We wanted to own for myriad financial and personal benefits.

In the first year and half of our marriage we rented and lived with a budget. We saved as much money as we could—about $15,000—and made sure we had no debt. When we tried to get a mortgage for our dream apartment in a better neighborhood, we started with a considerable disadvantage: Neither of us had an above average income and we had no mortgage history. We were employed but neither of us was a star in our respective professions. Broadway wasn’t calling my wife. The New York Times wasn’t requesting my services.

On the other hand, we also had one great advantage: We had no debt. This was the result of sensible spending practices—we didn’t spend money we didn’t have—combined with savings to ensure that bills were paid off every month even if one or both of us had a bad earnings period. The bank, after long consideration, gave us the mortgage. Not having any debt saved us; it compensated for our lack of big incomes. Otherwise, we would have never obtained the mortgage.

Low Incomes but You Still Get the Loan

We had barely made it because the bank was concerned about our relatively low incomes and our ability to make mortgage payments. However, we got the mortgage, in part, because we had a good credit record. We paid off debts promptly and had no outstanding debt.

Finally, gracias a Dios, we owned some real estate. We owned a modest apartment in a nice neighborhood.

Don’t Worry about the Depositors; Worry about the Bank

By the way, the bank, which later went broke, got a good deal. We never missed a mortgage payment. Through pre-payments, we were able to retire our 30-year mortgage about six years early. That’s more than I can say about some of the financial institutions that handled our loan.

It’s ironic banks worry about people having trouble with their mortgages. In our case, it was the reverse.

We had two banks holding our mortgage, the Dime Savings Bank and Washington Mutual, run into problems! Later we had a third bank holding our mortgage, J.P. Morgan Chase. Here the mortgage was retired. We actually owned a piece of real estate for the first time in our lives. And later, because we had some savings, we were able to buy a second apartment with cash.

Sensible spending combined with saving ensured that we achieved a goal that had eluded us for many years before our marriage: owning a home. Systematic savings over the first 18 months of our marriage was a critical factor since we just had enough for the down payment along with the costs of moving to a nicer neighborhood.

There’s still another reason for saving, which may go beyond the purely private. The reasons for saving can also be cultural and even an issue of national security. Countries with low savings rates are often borrowing the savings of other nations to pay their bills. The foreigners often buy the treasury bills of other countries, which frequently must offer a high interest rate to attract their capital.

But what if, suddenly, these foreigners didn’t want to buy your country’s treasuries? What if they took their savings elsewhere? That could trigger a national crisis, which happened in Greece several years ago. Then Greece had to offer very high interest rates on their treasuries yet few people would buy them because of the default fear. Greece had to beg money from other countries to survive.

By contrast, nations that have high rates of savings usually have adequate amounts of capital because a large group of people are saving. That generates money for investment, creating more new jobs than in countries starved for capital.

Saving for Independence

But let’s get back to you. Why should you save? Why should you have healthy amounts of capital to shelter you and your family during hard times, which are usually times when prices advance at slow rates or, in extremely bad times, actually decline?

It is because the MoneySense culture is one of thrift. It is one in which a man or woman doesn’t want to be beholding to others. The person wants to pay his or her own way and never wonder what happens if a bank or a financial institution calls a loan or if an unexpected expense happens. The MoneySense person is ready for bad times. By contrast, there are countless stories of the millions of Americans who have nice life styles, who live in nice homes and drive cars, but they can’t even raise a thousand dollars on short notice. This is dangerous. What if your car or some vital asset breaks down? What if a loved one needs help immediately? Never let this cash poor situation happen to you. And, if it does, get out of it as soon as possible.

The MoneySense person can pay the emergency bill in cash or a credit card that he turns into a charge card. A charge card, unlike a credit card, requires that one pays off an entire balance each month by paying for the entire balance in the grace period.

This person then proceeds to re-build his or her saving. This kind of person believes in regular saving. That’s even if he or she starts with a modest amount because this person understands that the mighty oak tree grows from the little seedling.

A Little Is a Lot Better than Nothing

Even small amounts, consistently saved over long period, represent the first step on the road to independence. However, the person who consumes and consumes, with no thought of tomorrow, is on the road to poverty or a lower standard of living than if he or she had been more disciplined or more patient. This person may seem to have a bright future today, but tomorrow could actually be a disaster.

That is as true as when a Victorian philosopher quoted at the head of this chapter recommended this idea over a century ago.

“Society at present suffers far more from waste of money than from want of money”, wrote Samuel Smiles. “It is easier to make money than to know how to spend it. It is not what a man gets that constitutes his wealth, but his manner of spending and economizing”, Smiles wrote.

“And when a man obtains by his labour more than enough for his personal and family wants, and can lay by a little store of savings besides, he unquestionably possesses the elements of social well- being. The savings may amount to little, but they may be sufficient to make him independent”. [See Smiles’ book “Thrift,” Chapter 2.]

The next step to independence, after one has sensible bill payment practices and sufficient savings to back them up, is to start investing.

But investing isn’t the same as saving. Unlike saving, investing means putting money at risk, giving oneself the chance to make, or lose, a good deal of money.

How does one go about this?

How does one get started investing?