An Insurance policy can save you during the bad times as you contribute to it during the (hopefully) good times. You contribute to it in case you do need it. It’s like putting in the work and preparing for the next presentation or job interview. Preparation isn’t needed but if the spotlight suddenly turns to you, you’re prepared to capitalize and pounce on the opportunity. Without preparation or practice, there may not be a guarantee of success but there will be a guarantee of failure. Saving puts you up to succeed in the down times.
I’m a big fan of Mark Cuban. I’ve been following him starting 5 years ago and reading his story. He’s an inspirational figure who I really admire and jumpstarted my desire to put in the work. There’s one quote that he has in his book that particularly stuck out to me. He says,
Everyone has the will to win, but it’s only the ones who prepare are the ones who actually gets to win
Why do I quote him? To illustrate a point. Saving provides the preparation that you need for when the inevitable downturn happens. I’m predicting something will happen with 100% probability (I do want to be contacted if I turn out to be wrong). The prediction is that in the next 40 years, there will be AT LEAST one downturn where economic conditions turn sour. What I won’t make a prediction on, however, is when it will happen.
Saving is an Insurance Policy
An insurance policy pays out when something bad happens. Car insurance is needed in case of a crash, medical insurance for an emergency operation, or dental and vision insurance for unforeseen events. Unforeseen events. It’s powerful.
Unforeseen events have ruined financial lives before. The Great Depression, the Great Recession, the Tech Bubble. Yes, a few people have seen those events coming (The Big Short, anyone?) but for the majority of people, it’s hard to see black swan events coming.
However, they happen whether we like it or not. These events are out of our control and when these events happen, the probability of getting fired gets higher. The fact is, there is no business that sells insurance for when the bad economic conditions occur. There’s no product that you can buy that protects your downside during these times.
That’s why saving is paramount. Saving PAYS you out during the bad times. It only pays you 1 to 1 (what you put into it). However, if your savings is a high enough number, that payout ratio is all you need. You increase the payout ratio if you’ve put that money to work and invested in the stock market.
It’s the good times and raining money in the stock market. Near all time highs, baby!! I don’t know how much longer that it can last and it was a bumpy road to get here. I’m scared of the valuations set in place in the US stock market when earnings haven’t increased significantly to justify the increase. During these good times, it’s smart to capitalize on your surpluses by contributing to an investment account and living a frugal life.
I haven’t really experienced a bear market. In the tech crash and housing crash, my parents never really spoke about how hard it was. I don’t think they wanted my brother and me to worry about money so they kept it quiet. However, I worry all the time now because it’s relevant to me. I started my full time job a couple months ago and the thought that I could be let go any second (‘at-will’ employment) terrifies me.
It’s scary, to think that I will experience the consequences of a bad economy when I didn’t do anything wrong. To protect myself, I’m saving everything and anything that I possibly can. I practice discipline and frugality when I see something that I want to spend money on.
An Insurance Policy that Pays You Either Way
Saving money even pays me during the good times. If I save enough, I can finally declare myself to be financially independent and not worry about my financial life. It gives me the option to choose to be retired if I want to. The best commodity to have is optionality.
Right now, I have a 55% pre-tax savings rate that goes straight to my 401k. I switched yesterday to a 50% contribution rate because I want the increased cash flow to be able to put into my post-tax accounts. My 401k provider recommends a 10 – 15% savings rate but when I run the numbers, that would only help me if I want to be financially independent at 65. A savings rate of 50% buys me one extra year of retirement.
The idea is that if I spend 50% and save the other 50%, the 50% that I save will last me next year. Hypothetically, if I save 25k and spend 25k in a single year, then the 25k I saved will last me next year. Just by saving, I can save a whole year of not stressing about money. I can’t think of a better deal than that. Buying a year’s worth of time has unlimited potential upside. There’s no telling what you can accomplish if you were given a whole year’s worth of freedom!
There’s No Telling What Will Happen
Starting this blog lets me spend a lot of time on the internet guilt-free. In that time, I hop on over to personal finance websites (some I recommend are ThinkSaveRetire, BudgetsAreSexy, ApathyEnds, ThePracticalSaver, TheMillennialBudget, DebtDiscipline, 1500Days, and so much more). Some have quit their jobs by reaching financial independence and blogging full-time.
I’ve read some bad stories of how their employer either fired or mistreated their star employees and therefore are in a worse position. It could be completely out of your control. You can control your effort, but you can’t control the decisions of your employer.
It can happen at any moment even when the employee or the employer didn’t have any bad intentions. It could be an economic downturn that forces them to conserve cash that does it, which is something completely beyond their and your control (some exceptions are Wells Fargo’s recent scandal and Enron’s).
This doesn’t mean that you shouldn’t work to the best of your ability and deliver results. The employer did give you a chance. I want to provide value to my employer. I also will work long-term for an employer if the loyalty is returned. I’m setting myself up to be protected in case something bad does happen and they have to downsize.
Saving money isn’t just good for protection in a downturn but for upside in an upturn. It’s an insurance policy that you dictate the pricing (how much you contribute). A 50% savings rate is a great goal to shoot for.
That is why I recommend saving and living a frugal life to ease stress and risk. Saving money provides the insurance policy that pays you when you need it the most. So start today and your wallet will thank me tomorrow!
Readers, are you taking advantage of this insurance policy? Let me know in the comments below!
My goal is to enable your success in personal finance so that you can realize the American dream. The first step is starting today!
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