Money Obedience

A good friend of mine is at the age that makes her eligible for full social security benefits at the beginning of next year. She is very much looking forward to that extra income since her current income does not quite meet her living expenses. (She does not have much of a rainy day fund, either.) One of her big monthly expense is her mortgage payment. That’s right. At her age, she is two years into a 30-year mortgage.

Apparently she used to have a pretty good income and – as it happens with just about everyone – her expenses kept rising along with her income. She never had more than a little savings. When she lost her well-paying job, she dipped into her savings to keep up with her expenses. She started spending the little bit she had saved up in a savings account and then dipped into her 401k account, again and again. Eventually she refinanced her house with a cash-out mortgage. Unfortunately, I think it took a long time for her to adjust her expenses downwards. I think that household expenses easily go up with our incomes but it’s not so easy to get them to go down.

Since that first time she got laid off she has had a few jobs with periods of unemployment between them. She has little real savings now except for some still in her 401k, so she is obviously not in a position to retire. Instead she hopes that she can retain her current job as she keeps getting older. Unfortunately, she’s not in a position to save for a time in the future when she will no longer be able to work. Instead, she’s working to keep that mortgage going.

My friend has in recent years been in the unfortunate position that she has had many periods of several months of unemployment. Those many months without an income would deplete even frugal saver’s money stash. There is not much one can do to prepare for such extreme cases of financial hardship. I don’t think it makes much sense to organize your life expecting to be able to survive any kind of calamity. You would lose out on enjoying many good years as you deprive yourself of joy in expectation of “something really bad happening”. Neither, then, would you take certain risks like furthering your education with a student loan – a very good investment to make in yourself in the expectation of getting a better paying job.

Anyway, I am talking about my friend’s financial situation just to remind you and myself that being prepared for financial hardship is an essential feature of good financial planning. Having a rainy day fund is one of the reasons why I am pretty vigilant with our family finances. In all honesty, I am not so sure that my family could withstand as many months of unemployment as my friend has experienced – I’m fairly certain that we’d no longer be in good financial shape after as many months without an income. Fortunately, my husband and I are lucky enough to be able to live on one of our incomes if one of us lost our jobs, but we would encounter serious trouble if we lost both incomes at the same time and we faced lengthy periods of unemployment where neither one of us could find a job that replaces our current incomes.