• If You Don’t Have Savings, You’re Broke

    by  • July 23, 2011 • Money Management and Planning • 0 Comments

    I hope that sounds obvious to you. I’m sad to say that it took me 30+ years to figure it out.

    Not only did I not have any savings, I had debt. But the light bulb never came on.

    Income doesn’t count

    I focused on the size of my salary. For a long time, I felt that while I was earning a paycheck, I was in the black. And I never really worried about a time when I wouldn’t be earning a paycheck. Retirement seemed too far away to even begin thinking about. I have good professional skills and work in a high-demand industry. I felt I would always land on my feet.

    The debt didn’t bother me either for quite a while. Everyone has debt, right? The average American household has $14,687 in credit card debt. I had far less than that for a long time.

    Everyone has a car loan to pay off, right?

    Everyone has a mortgage to pay off, right?

    WRONG!!!

    But I digress. The point is that all these bills I had committed myself to would still be there even if I lost my job. And then, all of a sudden, I would have been broke.

    Realization

    Nothing actually changed for me financially at the point at which I realized I was broke. I was still making a good salary at a good job. I still felt I had a good career ahead of me. I was in a good place with debt.

    What changed was that I realized that I didn’t actually have anything of my own. I was living paycheck to paycheck. And should the paychecks stop coming, I would be broke. In that scenario, any possessions I had could be taken from me and sold to the highest bidder.

    Luck favors the prepared

    “Going broke” or going bankrupt aren’t instantaneous or spontaneous events. I had always thought of bankruptcy as something that all of sudden happens. One minute you’re not bankrupt, then someone signs a piece of paper saying that you’re bankrupt and then you’re bankrupt. It doesn’t work that way though.

    Bankruptcy terrified me. “Going broke” terrified me. But simply living paycheck to paycheck and carrying some debt, that didn’t scare me nearly as much. The former two always painted a picture of an unwilling person being thrust into a situation as a victim (due either to the actions of others or as a result of their own bad judgement). But the latter, working to pay the bills and hoping for a better future seemed just the way things work. It’s what my parents did.

    The risk of cataclysmic loss goes down as you diversify. If your only source of income is your paycheck, then you’re significantly at risk. If you have no savings from which you could pull in the event of a major hardship, you’re further at risk. If you’re a parent, or even a spouse, in which case you have other people depending on your income, the potential downside in the event of an interruption in income gets exponentially more severe.

    Bad things happen to everyone. Prepare yourself for financial hardships. Reduce your reliance on your income by building savings.

    About

    I had an unhealthy relationship with money until my early 30's. I write about how I developed a healthy relationship with money. I share ideas about personal finance that have helped me to break the cycle of living paycheck to paycheck and achieve greater financial freedom.

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