Economics from a people first point-of-view

Perhaps you recall my first post about Suze Orman, “Broke and Broker: My Week at Suze Orman’s Merrill Lynch“? Well, here I go again.

TV personality, Suze Orman, is fond of advising listeners to keep enough savings in the back to live on for six months.

I think this is about the dumbest advice I have ever heard from such a smart person!

First of all, many American workers simply can’t do it. Why not? Because wages in the US have steadily declined over the past 40 years. Many homeowners are underwater; and some are unemployed or underemployed on top of that!

Small businesses have been dropping like flies over the past three years. Big corporations can get bank loans, but small businesses cannot, even if they had enough demand to dare to expand. Self-employed professionals and entrepreneurs are struggling too. Who can save six months worth of living expenses?

But here’s the thing. Even if you could save up for six months of living expenses and put it in the bank, why would you do that? Once you lived on that money for six months it would be gone! Gone! All gone! And you’d have nothing at all to show for it.

Spend down your savings, and you’d have to start all over from scratch to build up your safety net again. That’s why I think Suze’s advice is the dumbest I’ve ever heard.

I can see a better way that is still available to some of us 99% to build a safety net right now. First of all, calculate your “personal beta”. Second, calculate the size of your existing safety net. If it isn’t high enough, start spending on the right kind of assets to have for a financial emergency. We’ll cover calculating your personal beta today, and calculating your safety net in the next post.

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Part 2 Calculating your financial safety net

In part one, titled, “Don’t Just Save for an Emergency, Spend for an Emergency,” we covered how to find your personal beta. This is an estimate (a ballpark judgment) of how closely your job is related to what happens in the stock and bond markets (or the economy as a whole).

If you have a high beta (over a beta of 1), your financial well-being is in danger of sliding even faster than a down market. If you have a lower beta (under a beta of 1) your well-being will not be so adversely affected by a downturn. A beta of zero means what happens in the economy won’t affect you at all. A beta of 1 means you are likely to experience the same kind of thing financially that is happening to the stock/bond markets.

You can also follow Dr. Moshe A. Milvesky’s advice and figure out whether you, as a form of human capital in the labor market, are more like a stock or a bond. This little game too can help you begin to think about how much of a financial safety net you need to build for yourself. Once you know how likely you are to be impacted, and how heavily, by a downturn, you can estimate how soon and how much money you’ll need to have for your safety net.

Back to Suze Orman’s advice

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As Warren Buffett pointed out, the rich are paying more money in taxes because they are richer than the rest of us, but the rich are not paying as high a proportion of their income for taxes. Even their secretaries pay a higher proportional rate of income tax on what they earn than the rich do. Why is that?

Because, as F. Scott Fitzgerald once wrote, “Let me tell you about the very rich. They are different from you and me.”

For one thing, the rich can always move. Continue reading →