Times are different since the age of knights, kings and castles. Things have changed — both for the better and for the worse. In terms of financial planning, many seem to have forgotten the old adage: “A man’s home is his castle.”
Most people no longer see their “homes” as their castle. Instead, security is seen as a “given” rather than something that must be constantly defended and, well, secured. The home is seen as a place where comfort is the ultimate goal, rather than security — security is often never even considered.
This is a dangerous mindset, and it has consequences.
A Culture of Comfort
I love talking to cab drivers — especially those who come from overseas. The more animated they are, the more fun the discussions become. The drivers are often extremely opinionated. Once, while in Dallas, a cab driver from the Middle East began ranting and raving about how lazy Americans are, and how he thought that the future of America lies in the immigrants.
“They are so used to their nice stuff,” he said, “that they just won’t do what it takes to do well. They just expect everything to be given to them! They have no clue! They have no clue!” He was obviously upset; he simply couldn’t relate to the notion that material success should be expected without being earned.
It’s hard to imagine poverty if you’ve never experienced it. It’s hard to imagine poverty once one has left it behind — humans have very short memories. Unfortunately, the more one expects comfort, the less one is likely to have it.
A quick review of history reveals that great civilizations always begin to implode and collapse once they “peak.” When the Roman Empire conquered most of the known world, the amount of comforts and successes found back in the motherland were staggering. The leaders could no longer relate to the real risks and dangers of the world. They became so focused on their luxuries that they lost everything.
Could the collapse of the Roman Empire have been prevented if the Romans hadn’t drowned themselves in luxury — or if, at least, they had remained conscious of real risks? Perhaps. We’ll never know. But we do know that this type of blindness to risk is one of the biggest causes of economic destruction.
In a sense, a healthy dose of “fear” or “caution” is wonderful for success. Complacency is the sure path of destruction; expecting a life of wealth without realizing that it must be fought for is the first step towards poverty.
This is one of the most important lessons regarding financial planning you can ever learn. If you want success, you must earn, fight for and create it. Otherwise, don’t expect it — because you won’t get it, unless by sheer luck.
The Need for Security
With millions losing their jobs, trillions being lost, businesses collapsing, and an entire global economy cascading into recession, financial security has never been more needed.
Unfortunately, the current crises that we see are just the beginning. Social Security is collapsing. Inflation is about to explode due to the government trying to fix for the “problem” of “deregulation.” India and China are exploding, slowly replacing us as the world economic leader. We’re running out of fossil fuels. Global warming is a distinct possibility, though there isn’t necessarily scientific proof for it.
Regardless, the financial risks should be evident. Even if things don’t “get that bad,” it’s not worth the gamble. Your life is too important to play financial roulette.
What You REALLY Need
In a world of consumerism, the lines between “need” and “want” are often blurred. I’m going to take a more “caveman” approach to the issue: the only things you need are those which provide for your survival. In other words, your most basic material and financial needs are:
This, of course, might fly in the face of everything we have been taught to believe. But it’s true. You don’t actually need a nice car, laptop, books, TV or magazine subscriptions. Yes, those can add value to life, and make life much, much easier — but they aren’t necessarily “needs.”
Financial security is primarily a question of maintaining and fulfilling the above needs. Everything else is secondary, and can be grouped under financial happiness and/or financial freedom. Financial security is all about the “basics.”
The 4 Pillars of Financial Security
One thing I have written repeatedly here is that extrardinary events call for extra-ordinary actions. In other words, during extreme times you should keep doing what you were originally supposed to be doing — only more so. The principles of rational financial planning are the same during a recession as during a bubble. If something works, it works — period.
This means that the below three general methods of achieving financial security work just as well for an unexpected lay-off as for a world-wide depression. When something works, it works — period.
- Income. Find a method of making money — do what it takes to “up” your overall net worth. This basically includes having a career or creating a business and getting out of debt. Getting out of debt is completely paramount when attempting to achieve any level of financial security. Having debt magnifies any short-term crises you might have.
- Storage. When a crisis occurs, you need reserves . Whether the crisis is the unexpected layoff, a market collapse, or political instability — you’ll need to rely own what you already own. At the risk of sounding absurd, sometimes you need to have think in terms of “worst case scenarios.” Save some cash. Store some food. Own some property. Get out of debt. If you actually own your possessions, your chances of success explode, because you are able to focus your efforts on planning for growth, rather than defense. Remember, an “income” is good — but it’s still based on some level of trying to predict your future — it’s a gamble, albeit a fairly secure one. Treat your income for what it is.
- Insurance. When the worst happens, insurance is your lifeline. If you have people you care about who rely on you financially, get life insurance. Make sure you get health insurance. Get home insurance. Yes, it’s a gamble. You’re gambling that you’ll pay less than you take out. With some luck, you’ll lose.
- Diversity. Investors constantly harp on diversity. Don’t put all of your eggs in one basket, they say. But unfortunately, most of us approach financial security this way. Many have insurance — few have large stores of food. Plenty of people have stores of food — few people try to generate more than one stream of income. If you diversify, your financial risk greatly diminishes. If I lose my job, I’ll have enough secondary incomes that I won’t starve. It’s a good feeling.
Final Words and Conclusion
The most important principle of financial security? You’re the one who dictates it. Just as a castle has it’s lord, your home has you. Don’t forget about the purpose of your castle. Don’t get consumed with minor luxuries. Remember that most people, including many financial planners, simply don’t consider financial security … at least not beyond the emergency fund. Don’t make the same mistake.
Of course, the above is just an introduction. Future articles here will explain exactly how you can find secondary streams of income, how you can diversify your entire life, how you can find cheap health insurance, how you can afford to store food and provisions and how you can do the “nitty gritty” details of financial security.