This One Is Harsh

A few grim stories to dissect and hopefully learn from.  

A story getting a lot of consternation came from Bloomberg, titled A Third Of Americans Making $250,000 Say Costs Eat Entire Salary. The consternation I saw was not about the people making that much who run out of money each month but that the title of the article was sensationalized because the first people profiled are saving a healthy amount of money but are stretched due to home improvements. So they're fine. Later in the article though, Lending Club is cited as a source saying 61.3% (is that a Fibonacci number?) of all consumers are living paycheck to paycheck which might be a little more telling about the current state of the economy.

CNBC noted that 25% of Americans are delaying retirement due to inflation. The article attributes this to people saving less money due to extra costs for food, gas and anything else being affected by the increase in price inflation we're all going through. 

Then I saw this image on Twitter

 

I can't vouch for the accuracy but there are clearly serious things happening in Sri Lanka and it is plausible that access to medication is impacted. 

Part of the problem at home can be partially explained by this chart from longtermtrend.net.

 

 I write all the time about living in less house than you can afford. That appears to be getting harder to do, a lot harder. The above Bloomberg article notes the average house in Orange County costs $1.7 million resulting in a $100,000 annual mortgage expense which is 40% of a $250,000 salary. Having a smaller mortgage payment than you can afford gives optionality for all sorts of things related to being able to save more money leading to having more choices later in life. It can also make you more flexible in the face of costs for food, gas and everything else going up in price. 

That's a pretty obvious observation but let's dig in a little more. Get a 15 year mortgage. Mortgagecalculator.org says that borrowing $320,000 at 5.1% for 30 years, your monthly payment would be $2020 and you'd pay $305,000 in interest over the full 30 years. For 15 years, your monthly payment would be $2830 and you'd pay $138,000 in interest over the full 15 years. Do you live in an area where you can find homes for less than what you can afford? Telecommuting opens up some possibilities on this front that previously did not exist. 

Can you be comfortable staying in the home you bought and avoid trading up when your pay increases? Occasionally people have to move of course but buying a house, expecting to move in five years can reduce resiliency in circumstances like we're seeing now with inflation and that would be compounded by an unexpected job loss. If you're in your 50's or 60's, have stayed put and are now mortgage free, can you stay put and enjoy the financial benefits of being mortgage free? A 15 year mortgage that get you mortgage free at 50 or 55 can mean a good 20 years, hopefully more, of no payment. That's is some serious resiliency if you need it.   

I would encourage anyone and everyone to look ahead a little bit and take the time to understand your vulnerabilities, the things that threaten your stasis and that then set out to try to mitigate those threats. 

What does job loss do to you? At 30, how resilient are you to find something new? At 50, how long could you last financially because it might be more difficult for someone that age to find a new job. At 40 I'd hope someone could replace their job if they had to but that becomes easier for the 40 year old who is invested in improving and expanding their knowledge base. 

In terms of retirement planning, it shouldn't be a black swan that things might go up a lot in price or that the amount of money you thought you needed or the amount of money you wound up with will come up short. Start planning now for those types of outcomes. Planning before they happen greatly increases the odds of overcoming those outcomes.

I retweeted something other day about opting out of the healthcare system by cutting carbs and lifting weights. These actions are people's best chance to reverse chronic medical conditions requiring medications that appear to be in short supply in Sri Lanka. It is naive to think that can't happen here. We were low in meat and toilet paper two years ago, supply chain issues might be temporary but what if they are not? Not being temporary is the threat. You're not threatened by having all the insulin you need, you are threatened when you can't get any. You're not threatened by having more money than you need in the bank, you are threatened by not having enough in the bank. You're not threatened by leaving your job on your terms, you are threatened by losing that job for one reason or another earlier than you planned on. 

This message is important. No one will care more about your outcome than you. We cannot count on, or wait for the government to get things right. I get pushback on this whole idea but I want to reduce the list of things I am vulnerable to, I don't want to have to be at the mercy of a boss or at the mercy, any more than I have to, to the supply chain. I am apparently at risk of a bad diet causing Type 2 Diabetes. Knowing very little about diet, I ate myself prediabetic despite exercising vigorously and regularly. I got on the internet and in no time at all I found a couple of simple changes to make to eat my way (differently) out of being prediabetic. 

Not every problem/threat will be that simple to solve but plenty of them are. Knock out the simple ones and then try to tackle the bigger ones if there are any. And a further repeat here is to start early, start now if you haven't started already. The earlier you start, the more you develop, the more optionality you will have and the more resilient you will be in the contexts we're talking about in this post.

The reason to harp on this so frequently is to help avoid the situation for your portfolio where something can't come up, where you have no margin for error. You don't want to be 60, ten years into a forced retirement, facing a large drawdown in your portfolio, shelling out $2500/mo to manage chronic conditions.