(Editor’s note: GregoryBresiger.com, in a serialization of a book, will present a series of articles over the next months. The book is about how effectively to save, invest and use credit. The series will detail the money problems of millions of average people but it will also explain how one can overcome them and achieve financial independence).
“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—savers seem to have no incentive to continue adding to their capital pools. So why should anyone save a cent?
Recently 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, or maybe less of a problem depending on whose analysis you accept, the Fed’s dirt-cheap money policy seemingly will continue forever. That’s a policy unfriendly to savers and one that risks another crash.
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? Savings helps ensure you pay off bills each month.
And 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 someday. Hence, 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 be ready 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. And this is true even for the best of 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. Indeed, people with cash can do very well at certain times.
We’ll discuss that in our next chapter.
