The Second-Best Way to Make your Household More Secure

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You already know the best way to make your household finances more secure: emergency fund, insurance, diversified investment portfolio, marketable skills. But once you're doing those things, you've got a choice to make: Do additional resources go toward more of the same, or do you opt instead to do something different?

I vote for something different.

The current conventional wisdom on household financial security is about two or three generations old. That list above would have made sense to someone back until about the 1920s or so. Before that, it would have seemed like a very weird list indeed. Ask someone from an earlier time what makes a household more secure and you'd have gotten a completely different answer.

From the dawn of man until at least the industrial revolution, the best way to make your own household more secure would have been to boost the security of others around you. Even after the money economy came to dominate — even after the organizational structures of tribe and clan gave way to more modern structures — everyone would have understood that boosting the security of family members and friends in nearby households, would boost your own security.

It would be your friends, neighbors, and relatives who would help out if a hailstorm ruined your crops, if a fire destroyed your home, if a relative got sick, if technological change made your job obsolete, if you got hurt and couldn't work, or if someone rich and powerful took a disliking to you.

That's not so true any more. Although people would be pleased to have friends and relatives who would help out, most people figure that they'd better arrange things so that they're relying on formal, rather than informal structures: insurance companies, banks, brokerage firms, a college degree, the rule of law.

In fact, people go beyond just preferring these structures — they look down on people who don't make use of them. And not just a little: Someone who has failed to avail themselves of these ordinary tools is scorned — treated as not worthy of support — because they haven't taken the ordinary, minimal steps to protect themselves.

I see this a lot, reading the comments to my posts here. Many people, having made difficult sacrifices to provide security to their families, are bitter and put out when friends and relations who failed to do so need their support. Some commenters say they provide it and others say they won't (refusing to be enablers of their loved-one's self-destructive behaviors), but they're all pretty unhappy to be put in that position.

Even so, after thinking about it a bit, I've about decided that the old ways have a lot to recommend them.

That's not to say that people shouldn't buy insurance, establish an emergency fund, and avoid debt — that's just ordinary good sense. But at some point — a point that's reached pretty quickly once you take those basics steps — you add more security to your household by helping your friends and relations than you do by shoveling another few thousand dollars into your 401(k).

There are two big reasons.

First, it's yet another form of diversification. During hard times, when people are defaulting on their formal obligations, sometimes they can still make good on their informal ones.

Second, legal obligations end at the boundary of your household. Your losses in a disaster — natural disaster, illness, stock market crash, job loss, disabling injury, lawsuit — are essentially unlimited. No amount of insurance can guarantee that you won't lose everything you own in a lawsuit. But no matter how far your assets fall short of covering what you owe, the court won't go after your friends, neighbors, or relatives to make up the difference.

That means that a network of related households — parents, children, siblings, cousins — is much more secure than any single household, no matter how wealthy or well-insured.

Of course, the nay-sayers aren't completely wrong when they worry that being too ready to support your relatives runs the risk of enabling improvident behavior, but that can be managed simply by paying attention. (Of course, this is easy for me to say, since my relatives are all doing pretty well.)

This is not to say that spreading cash around your neighborhood is the place to start. Rather, start by sharing stuff that you don't use all the time or that you have more of than you need. If that works well, carry on by coordinating purchases of items that you'll be able to share going forward.

Help out directly — carpool, run errands for one another, watch one another's kids.

Set a good example of frugal, sustainable living.

One of the most powerful ways to help — teaching one another skills — has largely fallen by the wayside, because everybody is too busy earning a living to be able to pick a new hobby. But learning how to garden, how to make stuff, how to fix things around the house makes everyone's household more stable. The more the skills spread among the people close to you, the more likely they'll be able to help you when you need help, and the less likely they'll be to need your help.

Over the last few decades the conventional wisdom has turned against this sort of direct help. Instead, every adult has tended to shift into the paid labor market — meaning that there's no one home at your neighbor's to help you or to be helped. Paid work brings in money which lets people boost their security, but it's a brittle form of security. The older forms of extra security — friends and relations who care about your success and will help out when you need it — are much more resilient.