Build yourself a cash cushion
Creating a cash cushion for yourself and your family is a good plan to start the new year.
This is a continuation of last week’s article, “Forget new year’s resolutions — just set one goal”.
A cashflow liquidity crunch, or a credit squeeze in industry vernacular, may be experienced at any time by capital markets, governments, states, businesses, investment funds, individuals, and their families.
Cash crises can be completely unpredictable, occurring spontaneously in volatile market environments, sudden individual illnesses, wholesale redundancies, natural disasters, government shutdowns, or simply a slow, docile drip as an obsolete industry slowly spirals down into negative territory.
We, individuals, often think that the working world should be a harmonious place where cash comes in as earnings, goes out as expenses with some saved in an ever-revolving circle. However, what appears to be a certain economic pattern lulls us into complacency. When a crisis disrupter occurs, it can impact a family’s world unexpectedly and immediately.
Individuals and their families know this problem much closer to the bone when there is no cash in the bank, no savings cushion, no relative or other back-up, nada.
Financial advisers, in concert the world over, consistently and persistently sound the cash cushion bell. So, I was curious to research just how ordinary families are managing their emergency savings plans in the three countries of our Great Atlantic Pond neighbours.
The thought was that their surveys would provide us with some interpolation of Bermuda residents’ budgetary challenges given that so many of us are adaptive consumers of western modern lifestyles.
Britain: 25 per cent of adults have no savings, while one in ten adults spend more than they earn: incurring high debt, buying things they don’t need, spending cash as soon as they get it, yet wishing they could save.
Canada: over half of adults have less than $200 for emergencies, while 31 per cent don’t make enough to pay all the bills each month. Both country’s residents expressed being uncomfortable with money concepts, debt, and particularly, interest rates. The Canadian Government website has even published a very helpful article on “How to set up an emergency fund”.
United States: one quarter of Americans, across all generations — 55 million people — have no emergency fund. “A single unplanned expense could trigger a financial tailspin,” CNBC’s Jessica Dickler said.
Further, according to Career Builder research, August 24, 2017, 78 per cent of American workers live from paycheque to paycheque as a way of life. More than half of these workers think they will always be in debt, while the same percentage of minimum wage jobholders have to work two jobs to make ends meet.
There is a common denominator here for all three surveys: individuals often lack understanding of basic maths and financial concepts, the urge to splurge is hard to ignore, credit initially is easy to obtain, it can be difficult, if not impossible, to raise ready cash on personal recognisance, and they often have little confidence in managing money.
Businesses plan better for contingencies, because they anticipate the unexpected. Plus, they can raise cash by borrowing against their business assets, reputation, assuming the debt responsibility against future profits.
There are myriad reasons for no extra cash, little reserves, restricted cash, and so on:
• Overspending, little incentive to budget.
• Easy access to credit encourage splurges.
• Hurdles to saving first.
• Inadequate skills/wages to generate adequate revenue — trending the paycheque-to-paycheque survival.
• Hardships, redundancy, health impacts, unanticipated family/business/government disasters. For example, Fukushima, the recent Paradise, California fires, hurricanes, conflicts of war, shutdowns, boycotts, other natural or man-made crises.
• Overleveraged and/or loans too restrictive.
• Insufficient buyers to absorb sellers in capital market activity.
• Inability to rationalise illiquid assets.
• Consumer trends generate indifference to certain products or services.
• Business reputation downgrades become prophetic.
• Budgetary constraints.
• Insidious inflation.
Whatever the reasons for the lack of ready cash, the fact remains that building a cash cushion, an emergency fund should be the first family priority, before spending on any unnecessary items.
The upshot: frustrating, challenging, yes — to turn your one new year’s goal into fruition.
But, people, I want you to try really hard to set aside some cash every week, even $20 a week (heck, that’s three beers) equals $80 a month equals almost $1,000 in a year. Put the money in, or transfer out from your chequing account to a savings account — and don’t touch it.
Learn: Bermuda is 95 per cent internet-connected. It was very clear in this research that individuals’ comprehension of money was “terrible, difficult, worrisome, and self-fulfilling”.
But, I know that you, readers, can learn much more about money. It puts you in control of your financial life.
That mantra has been my mission statement for many years, dear readers, to provide you with factual financial information and reference sources that will help you achieve financial independence.
And to harangue you, challenge you, and motivate you to do your very best to understand where you are, what your goals are, and what you can achieve in the future.
Readers, please write to me of your financial challenges. As always, all identities and facts are kept completely confidential.
Sources and references
“A quarter of British adults have no savings, study reveals”, The Independent, March 20, 2018, Emma Elsworthy, https://tinyurl.com/yaglg9pw
“Over half of Canadians are $200 or less away from not being able to pay bills”,
Erica Alini, National Online journalist, Money/Consumer Global News, October 12, 2017, https://tinyurl.com/ya8v8x53
CNBC: Personal Finance, “The first thing you should know about saving money”, Jessica Dickler July 6, 2018, https://tinyurl.com/y74l9dhc
“Living paycheque to paycheque is a way of life for majority of US workers”, CareerBuilder Survey, August 24, 2017, https://tinyurl.com/y7anpmbd
“Beginner’s guide to managing your money”, the Money Advice Service, https://tinyurl.com/mvghh58
“Nine basic financial skills no young adult should leave home without”, Money Management International, https://tinyurl.com/yd6zmaza
• Martha Harris Myron CPA CFP JSM: Masters of Law — international tax and financial services. Dual citizen: Bermudian/US. Pondstraddler Life, financial perspectives for Bermuda islanders and their globally mobile connections on the Great Atlantic Pond. Personal finance columnist to The Royal Gazette. All proceeds earned from this column go to The Reading Clinic. Contact: firstname.lastname@example.org
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