Are Your Finances Fragile?

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Many households are just one layoff, one illness, one interest-rate hike away from financial catastrophe.

I know this is true — that as things are now, a perfectly ordinary bit of misfortune could easily ruin someone's life — and yet whenever I'm reminded (most recently by a "Daily Show" interview with Elizabeth Warren), my first reaction is always shock. Yes, things used to be like that, but we fixed it. We created a safety net. Right?

Upon reflection, what I find most striking is that the period when there was a real safety net that actually protected households was pretty brief. It started with the New Deal, grew a bit with the Great Society, and pretty much ended a couple of decades ago in the era of deregulation and globalization.

To someone my age, the current situation is kind of shocking. I grew up during that period when an employee could expect a job to last for decades. When most jobs included medical insurance. When most consumer loans were at fixed interest rates that couldn't be raised.

Someone who came of age in the mid-1990s or later would not be shocked. In fact, they'd probably be pretty puzzled that anyone was surprised. Younger workers know perfectly well that their job will disappear if there's a 15-minute period in which there's no work for them to do. They have no personal memory of the days when the whole point of a "layoff" was that it was temporary — that laid-off workers could expect to be called back when production started up again. (They quite likely have no personal memory of production ever starting up again — their experience is of production moving overseas.)

Because of this division, I want to present the strategies for making your household economy a bit less fragile in two pieces. (See also: The Second-Best Way to Make Your Household More Secure)

Twentieth Century Strategies

First, the ordinary strategies that have been the core of household security for most of my lifetime, the ones you can read about in any standard book on personal finance. I call them twentieth century strategies, although their heyday was really from about 1945 through 1990.

Emergency Fund

Have an emergency fund with six months minimum expenses. (Keep at least a little of it in cash.)

The main purpose of this money is to tide you over if you lose your job. It's also there so that you're not forced to take on debt to cover an unexpected expense.

In addition to a fund of cash, keep enough basic supplies on hand to see your household through a blizzard or a flood or a power outage that shuts down the ATM machines. (If you buy the supplies for this stockpile at a discount, you can also score some huge tax-free investment returns.)

Avoid Debt

I've written before about how debt makes your finances fragile. When you have specific dollar payments that you need to make, you're utterly bound to the money economy.

Especially avoid credit card debt. Although things are a bit better now thanks to a couple of new laws that restrict banks from changing the terms and conditions of a debt, credit cards remain a risky way to borrow money. If you really think borrowing is the right move, consider doing what people used to do — taking out a loan. Borrow money for a specific purpose at a specific fixed rate, with a specific fixed repayment schedule.

Limit Fixed Expenses

It's not only debts that crush you when there's an interruption in your income. Every recurring expense makes your finances more fragile. If you've never had to resort to emergency belt-tightening, you'd probably be surprised just how low you can get your spending on a temporary basis. But every fixed expense — rent, utilities, cell phone contract, fitness center membership — is a fixed-dollar amount that you'll need to pay out, even if you have a sharp drop in income or a sharp increase in expenses.

Buy Appropriate Insurance

If you can possibly afford it, you need to insure yourself against the risks that would otherwise ruin your finances. That means health insurance and liability insurance in particular. If you own a home or a car, and you don't have cash to replace them, you need to insure them as well.

In the United States, of course, health insurance is a huge problem. If you're old or sick, the only way to get health insurance is to work for a large company that provides it as an employee benefit. (This is scheduled to get a lot better starting in 2014.)

Nineteenth and Twenty-First Century Strategies

These additional strategies weren't so important during the decades of the New Deal and the Great Society. But they once again become important in today's world, just as they were in the early decades of the last century and before.

Improve Your Employability

Keep your skills up-to-date. Keep your documentation of them up-to-date. Stay in contact with your network of former coworkers, former managers, and former employees. Don't depend on your employer to do anything beyond paying you for the work you've already done. Take responsibility for your own career management.

Make the Things You Need

This used to be ordinary, but fell by the wayside as cheap shipping and specialization enabled much higher standards of living for people who worked for wages or a salary and bought everything they needed. Full-blown self-sufficiency was always a hard way to live, but a little strategic partial self-sufficiency can make your household much less fragile. Each little thing that you can provide directly (rather than buying it in the money economy) is one more area where your household doesn't have to depend on anyone but yourselves.

Have Another Source of Income

The idea that a single breadwinner following a one-job career path could provide a stable source of income for a family has been dead for a long time. Most households have long sent a second (or even a third) family member into the workforce.

I recommend having a little capital deployed to earn money — stocks, bonds, rental property, etc.

Having a hobby that can be scaled up to a small business during periods of unemployment is good. Perhaps even better is a family business (or family farm) that can be run by just one member of an extended family, but that can provide employment for any family member who happens to be out of work. (That's pretty much the way families were always run, from the dawn of civilization until well into the industrial revolution. It was a good strategy then, and I expect it will return as a key organizing principle of the economy going forward.)

Help Your Family, Friends, and Neighbors

This is really an extension of that last idea. Until the last century, this would have been everyone's default answer to the question of how to make your family more secure — when the people around you are more secure, you're more secure as well.

There was a brief window in the mid-to-late twentieth century when we thought we'd permanently moved beyond some of those concerns, but that turns out not to be true. Explore the strategies that successful people used in the eighteenth and nineteenth centuries to make their households more secure. Consider employing those same strategies once again.

Sadly, that seems to be what it's going to take to make your household more secure.