Living a Financially Sustainable Life

jehericobridgecrossSchadenfreude.  A word coming from the German that means “the delight at the misfortunes of others,” or literally, “harm-joy.”  I don’t quite have schadenfreude in watching the Greek financial crisis, but I’m not all that unhappy to see the whole system crashing down.  I felt the same way during the start of the housing bust.

I know that there are a lot of nice people in Greece who are undergoing a great deal of stress because they are finding it difficult to get their money out of the banks.  I feel for them.  Likewise, there were a lot of great people who lost their jobs or who lost their homes during the housing crash in the US.  I also wish they had not needed to experience the pain they felt.

Unfortunately, sometimes in life there will be economic cycles that build castles in the clouds.  Things are built on thin air and people start to believe they are real and to depend on them.  In Greece people are told that they can retire at 52 and they see others doing so and receiving a big check from the government each month.  They start to believe that they should be able to do so, even that it is their right to retire at 52.  They have built an unsustainable system, however, since someone needs to be producing the food and the housing and the clothing that they are using, along with the wealth contained in the check they receive from the government each month.  If too many people retire early and there are not enough children to take care of the retiring parents, there is not enough wealth being produced to sustain them.  They may be able to borrow money from other countries, but eventually they run out of people from which to borrow.  Now Germans, realizing that the loans will never be paid back, rightly see it as unfair that they need to work to age 67 or 70 to pay for the retirement of a Greek who gets to retire at 52.  The system the starts to collapse.

Likewise, during the housing crisis people were taking out loans that they could not afford to repay to fund a lifestyle well beyond their means.  Eventually they ran out of people from which to borrow and the loans came due.  During the boom there were all sorts of jobs created to provide services to the people who were financing those services with home loans (or selling homes to people taking out loans they couldn’t afford) and home equity loans.  When people stopped being able to borrow money, those jobs all went away.

In a financially unsustainable economy, people are using more than they are producing.  This can last for a while – probably a lot longer than most people would think – but eventually it comes crashing down when reality catches up.  I like to see this happen, even if it usually means a lot of pain for a lot of people,  because it means the economy is moving towards a sustainable state.  That is much more healthy and leads to real prosperity, as opposed to plastic prosperity.  It is like seeing a drug addict finally come clean and get a real job.  There is a lot of pain during the transition, but wise people know that you need to go through some pain sometimes to get to a better place.  Also, some people simply will not change their ways until they hit rock bottom.

Regardless of what others are doing, you can choose a financially sustainable life.  While it may seem like others living on credit are doing better, when things come crashing down you’ll be on firm ground while they will not.  So how do you lead a financially sustainable life?

1.  Live below your means.  If you make $50,000 per year, keep expenses down to $40,000.  Don’t take on expenses that you cannot sustain with your paycheck.

2.  Save for future expenses.  Many people pay off their credit cards every month and never miss a payment, but they don’t save for the new roof, the new car, or big things like college and retirement.  Part of financial sustainability is to save up for the big things too.  Save in a special account for retirement and college.  Put enough into investments to cover home repairs and new vehicles.

3.  Plan and save for disruptions in your income.  People lose jobs and have medical emergencies everyday.  Put away a little from each paycheck until you have enough reserves to weather most financial storms.

4.  Get insured for the unlikely things you cannot sustain.  People die young; get life insurance.  People get cancer; get major medical insurance.  People get injures; get disability insurance.  People experience fires, floods, and tornadoes; get homeowners’ insurance.

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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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