Back in early 2019, long before Covid, I wrote a post calling for a Personal Finance Revolution. After many years of writing about monetary collapses, my worry was catastrophe risk. In my head, I had a long list of countries where personal savings balances had been wiped out (or seriously dented) by some severe “tail risk” event – hyperinflations in Zimbabwe and Venezuela, the debt crisis in Greece, the bail-ins of Cyprus, the mortgage bubble collapse in the US, civil wars in Syria, a severe water crisis in Yemen (which has led to an intense civil war), et cetera, et cetera. Most of these countries had (semi-)functional economies and (mostly) comfortable middle classes until they didn’t. Some of these economies may eventually recover, but their middle classes will not.
The problem is that macroeconomic stability is not a given, by any means. And the “Personal Finance” movement should not be taking it for granted.
Of course, at the time, I wasn’t quite expecting the world to implode with a global pandemic, where most countries self-destructed in order to save lives at the expense of livelihoods.
But in the almost-aftermath of Covid, I think we can safely say that the assumption of general economic stability is now out the window. It was a lovely theory – yes. But many of us who had spent time carefully avoiding credit cards, and quietly budgeting towards a “4% rule” retirement, suddenly found ourselves cruising into our respective lockdowns with the credit cards at full burn and the investment accounts on notice.
In retrospect, that “4% rule” kind of financial planning all seems so unbearably old-fashioned and naive. Imagine believing that you could bank on economic certainty for the next 70 years or so?
And what I really can’t wrap my head around is that I still see the personal finance crowd banging on about their breaking-free-of-debt stories on Twitter today.
I mean, I spent my lockdown writing an entirely different kind of debt story (titled “Can you please increase my overdraft limit?”).
But my main point is: one big reason that I was calling for a Personal Finance Revolution two years ago is actually linked to the reason I needed more headroom on my overdraft. It’s all of my dependents.
Here’s the bad news: it’s not all about you
The traditional “personal finance” approach goes something like this:
- Check your spending habits;
- Find a side-hustle;
- Pay off your debt as quickly as possible with savings and side hustles;
- Save money for retirement with savings and side hustles;
- Retire and live off the interest.
The assumption of macroeconomic stability is of key importance here, because it means that:
- Your savings will have continue to have value in the future;
- Interest will be earned on them; and
- Once the kids are out of your already-paid-off house, you’ll be dependent free.
Putting aside the savings and the interest, that third one is the real problem, even if we do somehow manage to stabilise miraculously for the next 70 years. Because:
Greater Financial Wellness = Larger Circles of Dependents
There is an old idea in economics called Say’s Law, which basically says that “Production creates its own demand”. Whether or not that’s macroeconomically true, it seems to have a lot in common with our daily interaction with money. That is: the more money we earn, the more demand there is for it.
Just think of fund-raising – if you’re tasked with selling raffle tickets for a charitable cause, your first port of call is rarely a relative in financial difficulty. Instead, you look first to those relations with significant disposable incomes, ranked by order of their personal affection for you.
We ought to call it the law of disposable income: the more disposable income you have, the more well-wishers and distant relations there are to help you dispose of it.
Or: more wealth almost automatically translates into larger circles of semi-dependents. Unless you’re planning to be Ghost-of-Christmas-Past Scrooge once you’ve hit all your personal savings goals.
But quips aside, when I look around my peer group, many of my friends are now all stepping in to support their parents, grandparents, and siblings. The ones that aren’t are either in some financial difficulty themselves, or come from wealth (and have never had to set a savings goal in the first place).
There is also a third category of my peers who aren’t helping out family members yet. You’re the ones I’m worried about, because I don’t think you’ve realised what’s happening.
Some scenarios for you:
- Perhaps your brother has moved back in with your parents, and hasn’t found work for a while.
- Perhaps your parents have been retrenched recently.
- Perhaps your parents have had to hire a full time nurse for relative who needs care after a bad bout of Covid.
My question: where do you think all the money is coming from, exactly?
If your parents are dipping into their savings to fund themselves sooner than expected, or to fund a family member that’s down on their luck – then those funds are going to run out sooner rather than later. Or if they’ve dispensed with medical aid cover in order to cover their daily living costs, then there is a wall of medical expenditure pain looming somewhere in the future.
Those costs are going to fall on someone. And if you’re the one with a job, investments and an emergency cash reserve, it will probably be you.
Unless, as mentioned above, you’re Scrooge.
Which is really my first take-home message here: “Personal Finance” is only viable if you really are willing to cut everyone off.
If not, then it’s time for a rethink of your financial planning.
And this blog post is here to help.
A different approach to thinking about your financial planning:
Proposition 1: personal finance is really about safety nets
Proposition 2: because life is full of pitfalls
Proposition 3: and falling feels like flying until you hit the ground
Proposition 4: but it’s harder to fall when you’re holding hands
Proposition 5: because safety nets are always communal
Proposition 1: personal finance is really about safety nets
Most personal finance planning, apart from the all important “Should I rent or buy my home?”, ultimately reduce down to some kind of insurance:
- Medical insurance for future illness and injury
- Life insurance for sudden death events
- Income and disability protection for unexpected loss of work
- Retirement policies for planned loss of work
- Cash savings and investments for future planned/unplanned expenses
- Debt for future expenses not covered by cash savings
- Vehicle insurance for accidents
I would even argue that the home purchase decision is really a type of “shelter” insurance, where you’re trying to evaluate the most efficient way of avoiding homelessness.
The reason that we need to cover ourselves is…
Proposition 2: because life is full of pitfalls
Our daily task is to see to our daily needs: feeding, clothing, sheltering and enjoying ourselves.
Aesop’s tale of the Grasshopper and the Ant addresses the conundrum that we all face when it comes to these basic needs. The Grasshopper spent the summer eating the plentiful food, playing his fiddle and sleeping under the stars. The Ant spent his summer working to store up food and build his nest. When winter arrived, the Ant feasted and slept warmly at night.
The grasshopper died.
The moral of the story: in order to keep abreast of life’s seasons, we need to store up a few provisions.
But often, there are more obstacles than the changing of the seasons. There are unseasonal floods and droughts, and hurricanes, fires and earthquakes. Then there are wars and political experiments. And more locally, there are thefts and unexpected retrenchments.
Best store up some provisions for those events as well.
In its fundamental form, personal finance is about the trade-off between maximising our present enjoyment while minimising the risk of future loss (both expected and unexpected).
How do you know if you got the balance right?
Proposition 3: only, falling feels like flying until you hit the ground
The Grasshopper thought he was fine in summer. There was food enough, and warmth enough. His situation was precarious, but he didn’t realise it. Or refused to believe it.
This is annoying, because it means that you don’t know whether you’ve stored enough provisions until you run out of them.
But these is a solution other than self-reliance:
Proposition 4: it’s harder to fall when you’re holding hands
Imagine if the Grasshopper and the Ant were friends?
Proposition 5: because safety nets are always communal
A friend in need is a friend indeed, and all that.
Family, friends and communities – these are the true safety nets. And you see it in practice all the time – children moving back in with their parents; parents moving in with their children; the community fundraisers for a member’s medical bills; etc.
In fact, in the modern world, we have streamlined communal safety nets. All insurance policies are basically a group of people getting together, saving their money (through premiums) to cover the the small proportion of insured-against disasters (claims).
Of course, the streamlining has made the whole thing feel transactional, which is a great shame. The communal spirit is lost behind faceless corporates, who police the assistance with rigid bureaucratic hoops.
And worse still, the outsourcing of the more extreme disasters has eroded the communal base of support for plain old bad luck.
Unfortunately, it is more tricky to streamline insurance for more common problems like bad luck and unemployment. These issues are too widespread for the corporate world. In some countries, governments create social safety nets instead – like welfare and unemployment insurance.
But in other countries, the best a government can offer you is wishes for the best. And thus, you are forced to fall back on the more traditional communal safety nets – family and friends.
What does this mean for financial planning?
Well, two options:
- Move yourself and your at-risk dependents to countries with good social safety nets; or
- Invest in your community of fellow ants 🐜 , and budget extra for your fellow grasshoppers 🦗
The emigration option
I’m sure most readers will know people that have done this. Parents who have moved for their children, so that they can grow up in a country with fallback options. Or children who have moved their elderly parents to countries with better state-provided healthcare.
On paper, there is no doubt that dual nationalities (or more) is an extraordinary mitigation of risk.
But two key points:
- It’s not open to everyone; and
- I’m not really convinced that the benefit ends up being worth the cost.
Because this is a deeply costly exercise, both financially and psychologically.
And even if you do follow option 1, that does not preclude you from option 2. If anything, it may make it more necessary!
The “invest in your community” option
There is a school of thought that says “good luck” is correlated with the size of your network. For example, the more people you know, the more likely you are to get a job opportunity brought to your attention. It’s virtually a religion: there are countless courses and workshops devoted to the art of networking.
But networking is often confined to the business world – meaning that these transactional relationships are short-lived, and dependent on a narrow career-focused evaluation of “mutual usefulness”.
But investing in community is quite different. A chartered accountant is unlikely to have a professional networking relationship with a plumber – but if that same chartered accountant is renovating his home, having a good friend who knows about plumbing will make all the difference.
And yes, the relationship may be transactional in that particular interaction, but not so throughout time.
Is this too much Utopia?
It may seem like I’m talking about a kind of utopian idealism, but there is good evidence for this in practice. And if I can loop right back round to “the emigration option” above, immigrant communities are the classic case in point. A shared language and culture are the kind of community roots that long out-last the first generation of immigrants. And the practice of community-building last for multiples generations – schools, old age homes, parishes, mosques, shuls and temples.
In South Africa, first generation immigrants tend to source funding from their communities – like the Somalians who raise loans for their spaza shops from other Somalians. The Greeks and Jews did this in earlier generations here, as did the Lebanese, Indian and Nigerian diaspora communities.
And it’s not just immigrants who may have this communal advantage. Muslims and Mormons seem particularly good at building communities around their shared religious beliefs.
In the end, this is really just a game of stacking the odds in your favour. Because ants live in colonies, not in isolation. If I can repeat myself: that is the real safety net.
Financial Planning in community
In many ways, the process is mostly the same, but your perspective (and purpose) is different.
The compulsory homework is to mitigate the cost of potential dependents:
- You budget extra for emergencies that aren’t just your own.
- You pay attention, and step in to assist when really high future cost decisions are being made (like parents cancelling their medical aid policies to cut costs).
- Where possible, you help your people find jobs, opportunities and career paths.
- And we need to abandon foolishness like 4% retirement rule limits – you keep building
Then for extra credit (if you’d also like the option to fall back on), you need to help build your own communal safety net.
The shortcut version is to join a pre-existing community (such as a religious one). But if you’d rather build your own community, then you have to take a daily leap of financial faith, and give generously to those around you – not just time and effort, but also in financial terms.
For the personal finance crowd, you might call this “an investment in social capital”. You might also frame it as a screening process – a friend that cannot reciprocate generosity in times of plenty is much more likely to end up as a fairweather friend in your hour of need.
But rather than taking this as an invitation to scope out all the bad eggs in your friendship pool, rather focus on being generous across the board. That’s how the community will screen you.
Because in the end, if you really do want to have friends in your hour of need, then you have to be a friend indeed.
And that is a personal finance decision that is well within anyone’s control.
Rolling Alpha posts opinions on finance, economics, and sometimes things that are only loosely related. Follow me on Twitter @RollingAlpha, and on Facebook.
Brendon Versfeld January 17, 2022 at 14:11
A long time since the last post! I really like this one. Very thought provoking. I really like the idea of community investment.Reply
John February 15, 2022 at 22:16
I’ve read this post three times since it was published because it resonates with me. I think I don’t like some of the conclusions (not that they are wrong but that I don’t like what they are telling me). In general I have come to accept the concept of building while you can for when you can’t as well as for those occasions when you feel you need to step in.
I have a small objection to the conclusion to ‘keep building’. I want to stop. When do you have enough? Or do you just keep building indefinitely until you can support everyone you care about through the apocalypse, twice?
My other quibble is that emigration – at least in the South African sense – is often undertaken because many other more developed countries appear to have a much higher ant / grasshopper ratio. This may be a mistaken impression, however when 10% of the population is paying for all the others in good times, that does not bode well for bad times. Quality of life here for the price is excellent, however this comes with many potential and unknowable risks, particularly as far as that macroeconomic stability you were referring to goes.
My personal approach is currently to emigrate financially as far as possible, while still living and working here. My parents are too old to consider leaving and my kids not yet old enough to worry however that will change in the next few years. For now, I am researching but not acting on a possible Plan B, should anything change significantly.Reply