[Preamble: this blog is full of all the traditional personal finance questions: “Rent or buy? What kind of insurance do I really need? How can I save better?” There are calculators and graphs and plenty of words. But recently, I’ve been thinking about people in Venezuela, Zimbabwe, Argentina, India, Syria, Yemen, Haiti, and all those other countries that have recently experienced macroeconomic disasters. Spreadsheets and budgets are great – but they’re often redundant when a banking sector collapses, or if civil war breaks out, or if everything is destroyed by a hurricane. You can be living frugally and putting away savings – and then lose it all. This also got me thinking about more personal dramas. Savings aren’t ringfenced – they often get called upon for sick parents, strapped friends and the rainy days of all those we love and care for. So I think we need an updated version of Personal Finance. Something that steps beyond the myopia of early retirement. In this post, I’m making that first step.]
It’s a New Year, and the online air is crisp with the resolute status updates of people announcing on social media that they’re quitting social media, and signing up for Veganuary (although I do worry that if you can’t be vegan on Instagram, does it even count?). In the physical world, the gyms are moderately fuller. And I resolved to stop eating sugary treats – although the commitment only lasted the time it took me to walk to the fridge and help myself to ‘one last’ Christmas mince-pie.
The peculiarity of human time
But my personal failings aside, it always strikes me as curiously wonderful that we human beings have this capacity to take the continuum of time and methodically punctuate it with pivot points. After all, the difference between 2018 and 2019 was a Monday ticking over into a Tuesday – it should not be as meaningful as it is.
Or let me put it this way: I spent New Year’s Eve at a wedding in the Kruger National Park. In the Kruger, I saw many elephants, none of which paid any attention to the passing of 2018 into 2019, except perhaps to be irritated by all the extra revellers swilling about on the back of Safari tour trucks. Every elephant alive woke up in 2019, and continued to graze, drink and defecate as it had before, untroubled by the passage of the years.
I, on the other hand, am back at work now, picking up all those projects and tasks that I didn’t finish before Christmas. But somehow, I have this (mostly) fresh resolve to sweep clean the 2018 slate. Out with all the fail and fatigue creep! I’ve got a diary with some monthly goals, and a flurry of proactive emails in my outbox. It’s a New Year, after all.
And on reflection, we’re quite fortunate to have this particular quirk of human nature. Without it, we’d probably just drudge along, too distracted by the occupational hazard of daily living to ever consider changing anything.
And it’s moments like this when people make financial decisions. Some of them are big (January is famous for its wave of resignations). Most of them are smaller, like committing to packed lunches at work over visits to the cafeteria.
But for almost every thrift-oriented decision made, you’ll find a host of financial advice ready to affirm it.
The Personal Finance upside
To be clear, standard personal finance advice is absolutely sensible:
- The person that put money aside for a rainy day is almost always better off when that rainy day arrives;
- The person with the right insurance is almost always better off when a catastrophic event happens;
- And the person that saves for their retirement is almost always better off when they retire.
Most of this is just plain common sense. And you can summarise most of the modern thinking around personal finance as a single message: “Be mindful with your money and your money habits – if you’re not mindful with them, then you run the risk of running into a catastrophe without a safety net.”
I like that message. It’s why I write personal finance posts.
The thrift evangelism can only take you so far
Here’s a summary of the formulaic article of faith for the personal finance groupies of the internet:
frugal living + savings in a low cost index tracker fund + cheap car + crushing your debts + cut-up credit cards + 4% rule
early retirement and financial freedom
Which is solid messaging.
But it’s also flawed.
Here are some questions that I’m not sure this brand of personal finance can answer:
- Why aren’t the rich all that frugal? Sure, some of them may be thrifty with their money. But most of them fly first class and drive expensive cars. And the ones that don’t – well, they seem a bit stupid. Because what’s the point of being rich if you live like a Scrooge? But are you meant to be a Scrooge in order to get rich, and then decide to not be a Scrooge after that? Is that how it works?
- Is it only lottery winners that have relatives popping out of the woodwork? It seems to me that one of the unexpected (and unplanned for) consequences of ‘financial freedom’ is a wider circle of financial responsibility. I may see it everywhere, but I don’t really see anyone writing about it.
- What happens when the rainy day is a hurricane that destroys your bank? Perhaps it’s because I’m a Zimbabwean, and because I’ve watched the Zimbabwean banking sector be debased one and a half times now (and pending): but I am quite skeptical of any rule-of-thumb that relies on economic stability in the long-term.
Now I can only really speak for myself here – but I think that those questions are actually quite important. Perhaps not so important in the short term, while you’re taking those first steps toward being a more savings-oriented person. But over time…
When thrift goes too far: Scrooge and his ghosts
So you should know that “A Christmas Carol” by Charles Dickens feels deeply moralistic to me. But I arrived here by accident, realising that those three questions I asked above were somehow linked to it. In the story:
The Ghost of Christmas Past shows Ebenezer Scrooge how his tendency toward hard work and saving money had alienated his loved ones, which then created space for that tendency to grow into an obsession. And he became locked into a spiral that turned his thrift into miserliness.
The Ghost of Christmas Present basically asks “Does it not seem strange to you that you’ve got all this wealth saved away, while you’ve left your nephew and your employee (and his family) to suffer?”
The Ghost of Christmas Yet to Come shows Scrooge his (unmourned-for) death, when all the surplus is worthless.
Whatever your feelings on the moralizing, I think there are some truths here.
The trouble is:
- Thrift is a habit. It can be a powerful habit to begin with – but it is a habit that is built on the underlying belief in scarcity. And focusing on scarcity as a lifestyle goal means that you’re training yourself never to recognise abundance.
- The focus on scarcity makes it quite difficult to be generous – both with yourself, and with those around you. Thrift really thrives in the absence of obligation.
- Catastrophe is coming. The ultimate one is death. But in between, there are other events as well. Here’s a short list of countries where savers recently had their savings either completely or partially wiped out:
- Venezuela (hyperinflation)
- Zimbabwe (a cash crisis)
- Cyprus (a bail-in from depositors at the Cypriot banks)
- Syria (a civil war)
- Yemen (a civil war)
- Iraq (the ongoing effects of ISIS, etc)
- Iran (hyperinflation)
- Libya (the removal of the Gaddafi regime)
- Haiti (a hurricane)
- India (a bizarre demonetization)
- Argentina (a cash crisis)
And that list is incomplete, only recent, and ignores more localised disasters. Like those small towns in rural America that essentially died out once the main factory or plant in town shut and moved overseas*.
*Strong recommendation: you should read Janesville: An America Story, by Amy Goldstein. It was the FT Book of the Year in 2017.
Personal Finance 2.0: The Reboot
As I see it, we need to start developing a more holistic version of personal finance: one that is able to hold both “thrift” and “generosity” in balance; and see both scarcity and abundance simultaneously. And then be as aware as possible about what’s happening in the world around you: because it is changing without you realising it.
I’ve even got a loose suggested framework:
Step 1(a): be neither thrifty nor spendthrift – just be sensible, and err on the side of modesty.
Step 1(b): be generous as a rule, although always subject to the sensibility of Step 1(a).
Step 2: be aware of your macro-presumptions. It’s not going to be the ‘collapse of fiat money’ that will get you – it’s things like “Democracy is forever” and “My country is forever” (the current form of democracy is barely 50 years old, and most countries are younger than that – the long curve of history will no doubt judge modern democracy and today’s nation states as brief anomalies in the much longer saga of human history).
Step 3: be even more aware of your micro-presumption. The skilled artisans in Detroit’s car manufacturing industry undoubtedly thought they had a lifetime of work ahead of them: most professionals today assume the same thing.
Step 4: understand how ‘financial freedom’ really works. Somehow, we seem to assume that you can go from being a burden on society (or your parents), to the nirvana of having more money that you have needs. That nirvana has some fineprint: because the people around you will still have needs. Unless you are a literal island – the full transition is from “being a financial burden” to “being a financial backstop” (with a brief in-between phase of “managing to make those ends meet”). As with Brexit, that backstop part also requires some careful thought.
Hopefully, over the next few months, I’ll turn that loose framework into a less-loose one. So look out for those posts!
But in the meantime: happy 2019.