the long view: defining risk

Did you stop frivolous spending last week? Of course not.

Your training still holds true.  It feels too good to buy that new sound system or cute handbag.  There’s no real benefit to building an emergency fund. Most people would rather feel the pain of having too little than know the satisfaction of always having enough.

Policy conversations on the cable networks demonstrate this problem.  When an economist or financial analyst discusses “risk,” the average politician or sociologist understands the term based on access to shelter, food, healthcare, and education.  Yet this is not the same idea.  In finance, risk requires the presence of some asset – an account, a home, or a business.  Most people who experience hunger, homelessness, disease, or expulsion have no assets to risk in economic terms.

Despite protections like the Federal Deposit Insurance Corporation (FDIC) that are designed to encourage asset creation, the vast majority of Americans resist any substantial saving.  Many financial advisors also counsel against consistent saving behaviors because of perceived losses, relative to inflation.  Given these conflicting pressures and information, how can anyone save more?

Saving was nearly impossible at the turn of the twentieth century.  When most workers earned less than 300 USD a year, a family that held 30 USD in a personal account had completed a difficult achievement.  Today, for a household earning 50,000 USD ayear, a savings account with 8,000 USD is a sign of disciplined budgeting.  For the highest-earning households (earning 250,000 USD or more), a low-interest savings account would hold no less than 48,000 USD on average after a year. However, each of the cases described here would be substantially improved by increasing the number of income streams they maintained.  In the historical working-class scenario, a family with multiple income streams could save as much as 150 USD in a year.  Today’s working family could save almost 50,000 USD in the same time frame.  An affluent household’s average savings increase to nearly 340,000 USD for a single year.

These statistics do not offer a strategy, however.  The key is to begin saving like you have been trained to spend. Instead of knowing your car dealer or home electronics salesperson by name, befriend your banker.  Better yet, befriend a few bankers.  Instead of using several cell phones and email accounts, plan to open and hold multiple checking and savings accounts.  Every time you go into a store, make some time to stop into your bank.  Every time you spend 100 USD, be sure to deposit at least 20 USD more back into your accounts.  Over time, try to invert that ratio, so that every time you spend 20 USD, you have already deposited 100 USD.

There are several low-risk financial tools that banks offer customers who can maintain consistent savings behavior. Certificates of deposit, money market accounts, treasury bills, and various mutual funds provide stable rates of return with comparatively low risks of loss.  Once you have met your emergency fund goals, immediately shift your monthly savings into low-risk accounts.  In the historical example, 3,000 USD would have been sufficient to protect a working household against unemployment or displacement.  A working family today should protect against uncertainty with approximately 300,000 USD in a low-risk account.  For high-earning households, the goal should be approximately 4 million USD.

Achieving these financial goals is realistic, and it is the second rung on the ladder of economic advancement in the information-capitalist world system. With a solid emergency fund and a pool of low-risk resources, a family will be ready to investigate a range of more aggressive financial tools.  This point is the beginning of true competition in the global marketplace.

Dr. Walter Greason is the Chief Executive Officer of the International Center for Metropolitan Growth and author of Suburban Erasure: How the Suburbs Ended the Civil Rights Movement inNew Jersey.  Questions and comments are welcome on Twitter, Facebook, and by email (waltergreason@yahoo.com).

Author: waltergreason1

Public Figure.

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