In an interesting story over at Business Insider, the owners of the U.S. treasuries are enumerated. I had always assumed that China was the number one purchaser of U.S bonds. It turns out that Uncle Sam is the majority holder. This is just like Japan who owns a majority of Japanese public debt. I learned of the Japanese holding in much the same way I learned of the U.S. percentages, In a time of crisis. The Japanese nuclear disaster highlighted their domestic vulnerability much like the U.S. debt ceiling crisis is shining a bright light on our vulnerability.
While China, Japan and the U.S. make up the top 3 creditors, we hold a lions share of U.S. debt:
Here is a breakdown of all of the creditors to the U.S. :
source: Business Insider
The Wall Street Journal has a live blog of the debt debate that is worth checking out.
Question: What changes have you made in your personal finances as a result of the ongoing debt debate?
I have reduced my exposure to equities recently and have increased cash. I could miss out on some gain and dividends but the market uncertainty leading up to the artificial debt deadline could precipitate a big correction or crash. Nobody knows.
I do hope they sort this out soon, though, it is really a dangerous political sideshow that is doing grave harm to our reputation around the world.
Do you have a well funded Contingency Fund? A Rainy Day fund? I would love to hear your thoughts on this subject.
Simply put, your contingency fund is money you have stashed away to protect you and your family from unforeseen circumstances (we all have these). This is usually the loss of a job but it could be a medical issue, legal issue or any other nasty thing that comes up from behind and bites you on your assets.
Having a contingency fund is the first step to building wealth. One of the major benefits I have noticed in my personal experience is that having a financial buffer actually helps me make better financial decisions. It’s as if just knowing there is a safety net helps me choose opportunities with clarity, take calculated risks and enjoy the process a bit more.
Now, you should not freak out and try to account for every awful possibility that could befall you but conversely you need to adequately prep yourself for life’s unexpected gifts.
Shouldn’t I pay off my credit cards or other consumer debt first?
No. (I am certain to get some hate-mail for this) Your contingency fund should be funded at the same time that your consumer debt is eliminated. You absolutely need to eliminate debt. That is a key component of any wealth plan. What is even more important is developing your Wealth Rituals. These are just habits that, over time, become part of the fabric of your life. Your financial success depends on the care and feeding of these habits. You should not have gotten into consumer debt in the first place but it will only be your rituals that get you out. Your ultimate goal is to form the rituals or habits that serve you and to eliminate those that don’t. If you have moderate debt (10% or less of your gross income) strive to go 70-10-10-10. That is, Give 10% to charity, pay down your debt with 10%, fill your contingency fund with 10% and live on the remaining 70%. Here is what I mean:
Adjust the percentages based on your situation. Maybe 97-1-1-1 is the best you can do at this point. Just make sure you do it. Lean heavily on getting your contingency fund up to your goal amount, though. maybe 70-20-5-5, with 20% Contingency.
Some questions that have come up in recent discussions are:
How much is enough?
This is obviously the crucial number. You want to have enough saved to pay your bills, fund your job search and possibly finance a bit of education if that makes sense.
The huge question here is for how long? 6 months? 12 months? 2 years? There is no single right answer to this. What is important to note is that you are not trying to replace your income. You are trying to stay afloat until you can regain full employment. Some things you spent money on while on the job are no longer necessary (Tolls, Parking, Gas, Lunches out) while some things might go up (beer, resume printing, beer). Up until recently, 6 months was proffered as a sufficient time-frame. I believe 6 months is still great for most people. Some executive level folks may need to have more of a buffer since the air is a bit thinner up there and it could take longer to land a comparable job. At whatever level we are, we need the assets in place to be able to bounce back from misfortune.
Here is the magic formula: My Monthly Expenses X 6 = My Contingency Fund
How much is too much?
After the bubble burst, for those who have been steadily employed and have drastically reduced their expenditures (mostly out of fear that they could be next in the unemployment line) They are finding themselves with huge bank account balances (an enviable position for many). Now that the recovery appears to be imminent, they want to make sure they are not missing key opportunities. Now is the time to max out your 401(k) and begin to fund a Roth IRA. I Recommend a mix of Extended Equity Index funds (Both domestic and international) and Bond funds in your 401(k). If you have some dough left to invest after the $16,500 maximum contribution, Call T Rowe Price or Vanguard and open a Roth IRA.
Some Q&A might be appropriate:
Q. What is my risk tolerance?
A. Personally, I think this should be based on dependents. The more humans(or animals) you have depending on you for survival, the lower your risk exposure should be. period. Going solo? No Worries! Have 3 kids, 2 cats and a spouse? Not so much. Make sure you can support you and all those who depend on you for a full year.
Q. Where should I put the money?
A. This is cash or cash equivalent. Ideally you should put this money into a FDIC insured account. What we have found is that many jobs are tied to the overall economy. When the stock market drops, companies tend to lighten their load (i.e lay people off). that is also when more financial institutions close up shop. If your contingency fund is in the stock market, you can lose your job and your money.
How do I do this, Where do I find the money?
There are essentially two ways to deal with this problem:
- Increase your income.
- Lower your expenses by trading down to wealth.
Increase your income
- Sell your stuff. Especially the stuff you have stored in a rented facility.
- Start a business based on your passion.. Follow your bliss! Your own home-based business can be a great source of income as well as a huge tax benefit.
Lower your expenses
By lowering your monthly expenses you drastically lower your risk exposure. This is an often overlooked benefit of a frugal lifestyle. How can I do this?
Trade down to wealth
- Buy used and invest the difference. Go to yard sales and estate sales in your area. Check out Freecycle and Craigslist. Above all remember that “New” is the most expensive adjective in the dictionary. What are you getting extra when you pay retail? A box? A tag? Not much!
- Eliminate debt. Consumer Debt is self-imposed slavery. Serfdom. No matter who you are it is stressful and painful. Get out of debt!
- Consolidate your fun. Stretch your entertainment dollar by looking at ‘experiences’ rather than ‘events’. A family trip to an historical park near you, for instance, is less expensive and MUCH more memorable than another trip to the multiplex. A little planning goes a long way.
- Be Healthy. Sounds silly, right? Walk, bike or jog every day or so and your outlook brightens while your medical bills go down. It’s a fact!
- Save on everything. The blogosphere is full of amazing resources to help you get the best deal on just about everything. Are you a mom? Check out Deal Seeking Mom. My favorite personal finance and frugal living blog has to be Wise Bread. Drive around your town on Saturday morning and take advantage of the yard sales & Estate sales going on. I have a very wealthy friend who loves doing this. Kind of like therapy.
Be joyfully frugal
Frugal living is not about sacrifice or pain, it is about wealth. You must free up your cash seeds to grow into cash oaks. Too many people eat the seeds! A reminder of what it is all about is probably in order:
Wealth is made up of the things that make life worthwhile
Only you know what these things are. These are the laughter of your kids, the smile of your spouse, the Saturday mornings with your family. These are the joy of a job well done or the feeling you get when you ‘nailed it’. Wealth is a personal, visceral, emotional experience that is unique to everyone. You must figure out your personal definition. Being disciplined with our money offers us these experiences. Frugality is money discipline and is the key to financial independence. Once we understand this and begin to see our seeds sprout into mighty trees, we can feel a sense of joy.
Frugality rule #1 : Spend money on things that go up in value. Be an investor, not a consumer.
Frugality rule #2 : The Joneses don’t give a rat’s nevermind what you drive or what you wear. Many are too self absorbed to notice. Buy, wear and do what is right for your family!
Having a 6 month fund based on conservative expenditures should be enough for most of us. If you are at the top of your earning pyramid, you should go for 9-12 months.
Building a 6 month contingency fund is the first phase of becoming financially independent.