Boutwell’s take on…Financial Disaster.

Over at the Huffington Post, there was an article indicating how many people are just one emergency away from facing financial disaster (   I was recently asked what my take on the article was by Anonster on another thread, so figured that article would be a good backdrop to this post.

The article takes its conclusion from the Corporation for Enterprise Development’s 32 page publication “Assets & Opportunity Scorecard” which can be found here:

A few of the statistical points of CFED’s research:

  • Almost 44% of households, or 132.1M people, do not have a safety net that will help them with emergencies or future needs which include their child’s education or home ownership.
  • Approximately 14% (42.2M people) live below the poverty line which is about $23K for a family of four
  • Approximately 25% of households earning between $55K and $90K have less three months of expenses saved
  • Approximately 31% of households do not have a savings account
  • Approximately 8% have no traditional bank account such as a checking account
  • Over half of consumers have sub-prime credit scores
  • Approximately 26% of households have a negative net worth- liabilities exceeding assets
  • An average borrower has almost $11K of credit card debt

The report further defines “Liquid Asset Poor” (LAP) as the 44% of household who have less than $5,763 of savings which is three months of income at the federal poverty level.  I presume that this further clarifies the 44% referenced above in the first bullet point which not only includes emergencies but also future needs of education and homeownership.  Some other interesting selected figures about the LAP(there are way too many to list):

  • 83% of the LAP earn less than $55K
  • 75% are employed full-time; 88% are employed
  • 19% did not graduate high school while almost half have some college experience
  • 36% of the LAP have children while 52% of those who have kids married
  • Approximately 44% of Californians are LAP
  • Approximately 12% of Californian earn below the federal poverty level($23K for a family of 4)

I am not going to attack any of their figures as I don’t have any reason to believe that they are wrong.  I was surprised by a few of them though.  Surprised may not be a good term.  The ones that really stick out are that only 19% of the LAP did not finish high school and that 25% of those who earn between $55K and $90K have less than three months in savings.  The other confusing item is the high rate of the LAP we have in CA compared to those whose income is poverty level.

OK, back to the article which is about folks being one disaster away from financial disaster and my thoughts on the topic.  I know that people are staring over the financial cliff.  It is a huge problem.  I am angry and disappointed that we are in this situation.  We are full of smart people in the US.  We know that bad things are going to happen.  We want the best for ourselves and our neighbors.  Why do we let this happen? I am a saver, yes I spend a lot, but before I spend, I save.  I spend too much actually…it is a continuous struggle.  Obviously first before I can save I have to earn.  I personally am quite fortunate to be blessed with good earning power right now…I have no idea how long that will last.  Some folks plain just do not make much money for one reason or another.  Regardless, the steps are the same…they just may take a bit longer for some.  First, you have to have a job which most do even if they are LAP, so I am talking about the 88% of the LAP who are employed here (just like the family in the article).  This is going to be hard…hold on.

First, take care of food, shelter, transportation, and clothing needs.  These are absolute necessities.  You have to eat…you don’t have to eat well, Ramen can actually be pretty good.  You have to have a place to put your head…it does not have to be big and comfy.  You have to have some sort of transportation…it does not need to be a car.  You have to be clothed…for your sake and ours- used is fine, new is overrated.  These are necessities and they come first.

Then, comes a starter emergency fund.  Do everything you can to get your starter E-Fund funded.  This is $3,000 in the bank or in the cookie jar…as fast as you can…attack!  Fast, now- don’t wait. This is before any restaurant meal- not just no more splurging, I mean ANY RESTAURANT MEAL.  This is before a movie- even Netflix or a $2 show at Main Place Mall.  This is before a soda- even if it is just fifty cents.  Before you have internet, a cell phone, a gift for the teacher, a 25-cent newspaper, a magazine- you get the idea…live like you have nothing.  I told you it was going to be hard.

This is before anything else other than your four absolute necessities (food, shelter, transportation, and clothing) and commitments you have.  Commitments being contracts you have entered which have to be paid.  Keep paying your cell phone if you are in a contract and can’t break it, but cancel your phone if you are able to.  Cancel cable and internet if you are able to (i.e. you can often cancel with the cable company but not with a satellite company for example).

By the way, you no longer use credit cards…cash only.  By cash, I mean “cash”…remember the green stuff- yes, that cash.  No cards.  No reward points.  Nope…you will spend less and every time you hand over a dollar to someone you will make a painful decision on whether this is an absolute necessity or not.

Yes, garage sale.  Yes, collect cans.  Yes, sell your stuff.  Every extra dollar of income will help.  Do everything you can to get to $1K, then $2K, and then $3K.  This is still insufficient savings, but it will be enough so that when Mr. Murphy blows your tire out you can get it fixed.  People will find that just by having that first $1K saved, they will feel much better.  It seems like a lot right now and it may take a few months to get even that first $1K saved, but you have to commit to it, attack it, and you have to simply start.Now you have your $3K saved in your starter E-Fund.  You are still LAP.  You still have debt from decisions made in the past.  You are still not secure, although it feels good to have some money saved for a true emergency (take out is not an emergency).

Now you are attacking the debt with the same tenacity that you went after your E-Fund.  Still no restaurants.  Still no soda.  Still no new clothes.  Still no entertainment that costs money.  Still selling everything you can- stop when your kids think you will sell them.  Attack your debt.  Pay minimum payments on all debt to start.  Put every dollar extra towards the smallest debt.  Be done with that payment and roll everything you were paying towards that old debt and roll it into your next smallest payment.  Continue this until you are knocking off debt payments and you feel so good about it that you can see the light…this may take years.  Years of no new clothes, no restaurants, no entertainment, no new cell phone, necessities only!

If an emergency comes up, use your starter E-Fund…then work your E-Fund back up by backing off on your debt payments (remember, you are now paying more than the minimum payment on your smallest debt).  You are still larger disaster away from financial crisis, but at least you can handle something smaller.  You are still LAP- part of the 44%.

This may not be good for the economy, so don’t everyone go out and do it all at the same time…can you imagine if no one ate at a restaurant except for those who have 3 months saved up?  It would be painful for the economy.  Oh heck, everyone go for it…I know not everyone will, so we should be fine.

Now, you are debt free.  You have your $3K in the bank.  You attacked your debt like a lion.  You feel good about it.  You may have lost weight because you are not eating too much.  Your clothes are starting to wear down. You are not done.  Now, you have to get to 6 months of liquid savings…that is when you can breathe a sigh of relief and say that you are less likely to suffer a financial disaster from an emergency.  You no longer are fine with just a starter E-Fund, you need a full E-Fund.  You look at your own expenses and fund 6-months.  Still no movies, still no Starbucks, still no meals out, still not much fun that you pay for…yes, you are still on cash.  Don’t fall into the credit card cycle again.  You take all of that money you used to pay off your last debt with and you throw it to your E-Fund.  Funding a full 6-months of liquid savings.

Then, you save for retirement, then you get properly insured, then you splurge on a treat every once in a while, then you save for college, then you save for a home, then off your mortgage early, then you start giving it all away, then you can really live.  Not going into how to do those things because I really just want to back people away from the financial disaster that is one step away right now.  44%!  That is a lot of people especially with 75% of them having full time employment.  This will take YEARS for most people, but those years are going to pass by no matter what…you may as well get after it now.  And, no kids parties either!

We have to save, people!  We have to sacrifice today in order to have tomorrow.  We can do this.  Yes, it is hard.  Yes, you will get kicked and knocked down.  Yes, there are those out there who will take advantage of you.  Yes, yes, yes,…all of that which you are thinking- yes.  Yes, people (maybe you) are barely making it- nothing left over right now.  If you keep doing what you have been doing, you will keep getting what you have been getting.  We do not have to continue down this path.  We can do it…you can do it.

OK, OK, let me have it.  Tell me how unrealistic it is.  Tell me how someone making only $X amount can’t do this.  Tell me how it won’t work.  Tell me how it is someone else’s fault.  I am ready for it.  This is hard.  Not everyone has the desire to sacrifice like this.  I know a lot of people have it very tough and they have been dealt the worst cards in the deck.  I understand.  That is one of the reasons, not the only one, that we are in the situation.

As a coach told me, whether you think you can or can’t, you are right…so true.

Kudos and credit to Dave Ramsey at Financial Peace University for shaping a lot of my thinking…along with my parents.