Old-Timers and Their Rolls of Cash

Back in the 1950s, 60s and 70s, it was commonplace for men who had lived through the Great Depression to keep rolls of cash in their pockets. Many carried $200 or $300, equivalent to $1,000 to $2,000 today. Usually, these weren't wealthy men. They were ordinary men who had learned from experience that life is unpredictable, usually in a bad way. In their time, banks had failed, the stock and real estate markets had collapsed, unemployment had risen to 25%, families had fallen apart, young people felt lucky to have a job--any job--and prosperity returned only after the world survived the crucible of a horrendous world war. Cash was their insurance policy against all kinds of hazards, including the uninsurable. Cash felt good.

We're now in another era of uncertainty. While government safety nets, stimuli and other measures have kept us out of a Depression, the unresolved debt crises in America and Europe, as well as depressed real estate and volatile stock markets, continue to inhibit recovery. Another downturn may be in the offing. Federal deposit insurance relieves us of the need to keep large amounts of paper currency on hand. But the value of cash is strongly correlated with increases in market volatility, and cash is getting to be extremely valuable now.

Safety nets are wearing thin. Government benefits for many have run out and there's no room in the budget for more. Many are one paycheck away from homelessness. Illness, layoffs, disability, a new roof, a major auto repair, and other unpredictable expenses wait in ambush. Credit is tight. The only people who can get loans are the ones that don't need them. Keep 6 to 12 months living expenses in an emergency fund that's FDIC insured. Then set aside some more money to cover hell and high water expenses. The chances of another worldwide financial crisis swirl like a morning fog that may not lift. All the newfangled financial engineering hasn't made the world a safer place. The old-timers knew one thing: cash is the best port in a financial storm.

In Your 20's: Money Matters When Time is Your Friend

When you’ve finished your education and are starting out in the work force, you have perhaps the best opportunity of your life to put your finances on a solid footing. Time is very much on your side. If you control your spending and start a savings program when you’re young enough to benefit from 40 years of compounding investment earnings, you’ll find retirement a lot easier to finance. If you’re like many people, you may not think much about next year, let alone your 60’s. Remember, however, that you’ll probably reach your 60’s (and the alternative is worse if you don’t). You’ll be happier then if you do some advance planning now. Take a few basic steps and you’ll be off to a good start.

1. Live within your means. Don’t try to emulate friends who can lease BMWs because they’ve moved back in with their parents after college. It’s easy to maintain a fancy lifestyle if someone is subsidizing you. But if you’re on your own, live carefully. You’ll become self-reliant, and in the end that will be worth much more than parental subsidies.

2. Build up an emergency cash fund of 6 to 12 months expenses. The emergency cash fund serves as a personal insurance policy against all the bad things that might happen to you which aren’t otherwise insured. For example, if you have a serious car accident, or a rock climbing accident, and can’t work for three months, where will you get money to live on? If you have health insurance (and you should get it, even if you have to pay for it personally), your medical costs will be covered. But you’ll still need money for deductibles and co-pays, food, rent, utilities, car payments, etc. An emergency cash fund may be $20,000, $30,000 or more. That looks like an awful lot of money to have sitting around. But all insurance looks like a waste until you need it. Then, you’ll be very glad you have it. Put the emergency cash fund in an account that is separate from your regular checking account, so that it’s not easy to spend. Good places include a bank or credit union money market account (preferably one that pays a decent interest rate) or a money market fund. Money market funds are actually pretty safe, especially ones that invest exclusively in U.S. Treasury securities, and tend to pay better interest rates than most bank accounts. Some online banks pay relatively high interest rates.

3. Start saving in a retirement account. Open a 401(k) account or other retirement account if your employer offers one. Otherwise, open an IRA. A Roth IRA is probably best if you’re young. These accounts are the best legal tax shelters available to most Americans, so be sure to have one.

4. Don’t run up your credit card debt and pay off any balance you’ve been carrying over from month to month. Credit card debt is expensive because the interest rates are high. Try to stick with just one or two credit cards. Bouncing from one card to another to another isn’t good for your credit rating. Keeping one or two cards for a longer period of time is better. If you consolidate your debt, use the cash flow you free up to pay down debt. Don’t use it for more lifestyle enhancement. The problem with debt is that it is supposed to be repaid, and the interest charges will eventually crimp your lifestyle. Why enrich banks? Pay off your debts and enrich yourself.

Strange News: Apparently the reason why Paris Hilton is going to jail is because she took legal advice from her publicist: http://www.reuters.com/article/wtMostRead/idUSN0339694420070506. Okay. Maybe in La La Land this makes sense. Have you ever heard the joke about asking two publicists the same question and getting three answers . . .

More money hints for those under 30 can be found at this blog carnival: http://howtomakeamilliondollars.blogspot.com/2007/05/festival-of-under-30-finances-june-1.html.